Digital marketing is a vast category that encompasses a wide range of channels and strategies designed to increase brand visibility, boost a company’s reputation and, ultimately, convert leads into sales and then retain those customers.
Many business owners want to understand their return on investment (ROI) when it comes to digital marketing spend. However, in some cases, this is easier said than done; in others, it might not even be relevant. This guide explains what you need to know about ROI in digital marketing campaigns.
Digital marketing is the culmination of a company’s branding and marketing efforts across all digital channels, including search engines, company websites, email, social media, SMS text message marketing and affiliate websites.
A digital marketing campaign typically includes multiple channels. It can also include paid and organic approaches to boosting visibility and converting traffic into sales.
Digital marketing campaigns tend to have many moving parts, some of which are inherently longer-term strategies by nature. As a result, it can be challenging to determine whether your digital marketing campaign is generating a return.
Unfortunately, plugging some basic information into an online ROI calculator is seldom enough to fully understand the effectiveness of your digital marketing campaigns. It can be tempting to try to attach a simple ROI model to digital marketing efforts, but the nature of some marketing tactics means your overall marketing investment might not generate a tangible return for some time. Furthermore, a digital marketing campaign uses multiple channels and approaches, and it can be challenging to identify the net income associated with a single digital marketing tactic.
Determining ROI in digital marketing is about tracking the various channels comprising your overall digital marketing strategies. Of course, your initial investment matters; however, accepting a short-term loss can sometimes be beneficial to generate long-term success. This can be done in a variety of ways depending on the precise nature of your campaign.
Before we get into complex ROI models, it is best to understand a simple case. The basic ROI calculation is straightforward: You take the value of your investment, subtract its cost and then divide by the cost of the investment.
In simpler terms, you take the change in your revenue after your marketing campaign has deployed, subtract how much you spent on it and then divide by that cost. This will show you your return per dollar spent.
(Increase in Revenue – Cost of Marketing) / Cost of Marketing
Let’s look at an example. Say you invest $100 in a pay-per-click advertising program. Compare your revenues before the program deployed to your revenues after it took effect. Subtract how much you spent on ads. Let’s say this shows a revenue increase of $1,000.
At this point, you can already see how much raw revenue you gained from the ad campaign. To see your return per dollar spent, simply divide your revenue increase by the cost of the campaign. That will show you how much every dollar you spent on pay-per-click ads is really worth. In this example, your ROI is 10 to 1: You brought in an extra $10 in revenue for every $1 you spent on marketing.
Of course, this simple calculation has limits. It does not forecast long-term ROI on the campaign. It also can’t measure the indirect benefits of marketing, such as a social return on your investment. Now we can get into more advanced ROI measurements.
Here are three common tactics for measuring ROI:
If you’ve ever seen a lengthy URL with a question mark affixed to it, you’ve seen an Urchin Tracking Module (UTM) link. These UTM links help track digital marketing campaigns in Google Analytics. When a user clicks a link tagged with a UTM code, Google Analytics tracks from where the user clicked the link as well as what campaign generated the lead.
“You have to make sure that the links you’re promoting across each channel are tagged properly with UTM parameters. This is an essential step to both lead generation and e-commerce,” said Jordan Schneider, head of marketing at Boombox.
Digital tracking pixels can be added to your website to track where your traffic is coming from and how you can target those users later on as part of your remarketing strategy. These tools are effective for tracking traffic and transactions taking place on your website.
Highly rated CRM software helps track leads from first contact through the end of their buying journey. Using CRM software to track leads generated by your digital marketing campaign, and tagging them as such, is an effective way to see how many opportunities your digital marketing spend is creating for your business.
“If transactions are not taking place on your website, and you’re just using it to generate leads, you’ll want to use a CRM like HubSpot to track your leads through to a closed/won customer, and make sure you’re pulling in UTM data to the CRM from your website,” Schneider said. “That way, when a contract is won with a given lead, you can track which channel that individual came from.”
With the data gleaned from these methods, you can calculate the value of your various digital marketing campaigns, whether your preferred key performance indicator (KPI) is an increased conversion rate or improved brand visibility and click-through rate. From there, it is as simple as finding the difference between that value and your overall digital marketing spend. [Read related article: 14 Tools to Track Key Performance Indicators for Your Business]
However, calculating ROI is not always the best way to tell if a digital marketing strategy is working. Instead, it is best to understand the goals of each arm of your overall strategy; for some, ROI should be clear from the start, while for others, it might take some time to see a positive return.
There is no single answer to this question. “Good” will depend on your goals, expectations and strategies, but a couple of examples can help you determine the ballpark of a good ROI.
Let’s say you spend $100 on improving your Facebook outreach. That $100 leads to a total sales increase of $200. You had a 100 percent ROI. Is that good? It depends on your overhead. You break even if you sell goods at a 50 percent profit margin. You spend $100 to sell $200 worth, but it already costs you $100 to produce that much in goods. You will need better than a 2-1 ROI ratio for your marketing to be profitable.
Therefore, a significant factor in determining good ROI is knowing your overhead. Your marketing returns must be high enough to cover operational costs with the new revenue they bring in. On average, a 5-1 ROI ratio will be enough to be profitable and is considered good.
That said, there are times when a lower ROI is still good, because it accomplishes a different goal. An obvious example is lead generation. Let’s consider the example of a property investor: The purpose of their digital marketing is to purchase properties. Their digital marketing will not generate any direct return on investment. Instead, it generates leads for property acquisition (which can later turn a profit). In this case, a negative ROI is acceptable if the cost per lead generates enough property acquisition to sustain the business.
In this way, ROI always has to be tempered by goals. If the goal is direct revenue increases from marketing, 5-to-1 is a ballpark goal, provided it covers your overhead in the process.
To understand when measuring for ROI is most relevant to your digital marketing campaigns, you should first understand the concept of the conversion funnel. The conversion funnel explains where a particular lead is in their buying journey. There are broadly three elements of the conversion funnel:
While these three components get to the heart of the conversion funnel, more detailed breakdowns could be employed to understand your lead pipeline better.
Understanding the conversion funnel can help you better tailor your digital marketing campaigns to reach the right audience member in their stage of the buying journey. Cowley said it can also help you understand when ROI measurement is relevant.
“ROI is important when focusing on lower-funnel marketing,” Cowley said. “Potential customers don’t just start in the lower funnel, though. They need to know and trust your business before they decide to give you their money. ROI should always be in the back of your mind when investing in any marketing, but it is not always so visible in top-of-funnel marketing.”
It might be immediately relevant to measure ROI when targeting low-funnel customers by running a sponsored advertisement across social media channels, for example. However, when engaged in content marketing efforts to boost your brand’s visibility, cement its voice and improve search engine ranking, it could be more effective to measure traffic and engagement in the short term.
“ROI shouldn’t be the primary measurement when it’s hard to calculate the exact impact of some channel or activity on the outcome,” said Inna Shevchenko, head of product marketing at Railsware and head of marketing at Coupler.io. “For example, SEO and content marketing bring results in the long term; therefore, trying to measure ROI only after a month or so won’t make sense. Similarly, the website’s impact is hard to measure because other channels are involved.
“On the other hand, for some businesses, their main goal is improving image and brand awareness by utilizing social media and video marketing. In this case, it’s nearly impossible to measure ROI,” Shevchenko added.
Now that you have an idea of ROI goals, you may want techniques and tips to improve your ROI. Again, the first step in enhancing ROI is to set specific ROI goals. These should be tailored to each facet of your marketing strategy (e.g., pay-per-click ads should not have the same goal as SEO investments).
Once you’ve set your goals, you can break each component of your marketing campaign into smaller details. You can look at lead generation, conversion percentages and conversion values. This lets you see how often a marketing component brings in a new customer, and then you can see how much they spend on average. That can help you funnel your marketing spending into the most efficient and effective channels.
Ultimately, investment in high-level analytics can provide advanced breakdowns of your spending and returns. It can provide predictive modeling that helps you time your spending better and ultimately empowers you to squeeze every last drop out of your marketing investments.
For strategies targeting high-funnel customers, or those geared toward bolstering brand authority, an initial negative ROI is to be expected, Shevchenko said.
“Acknowledge that the ROI of marketing activities will be negative in the beginning,” Shevchenko said. “However, as the business starts growing, they need to make sure that digital marketing ROI is positive and helps scale the business.”
To rely on ROI as the only measure of digital marketing success is too narrow a view, said David Azar, founder and CEO of digital marketing agency Outsmart Labs. Instead, consider the goals of each arm of your overall digital marketing strategy, and give each the necessary time to mature before expecting to see a positive ROI.
“ROI can’t be the only indicator of success. Impressions turn into engagement. Engagement turns into clicks. Clicks turn into sales. Measurements that show a campaign is trending in the right direction may be a stronger indicator of success than ROI,” Azar said.
Metrics besides ROI that could be used to gauge the success of early-stage digital marketing efforts include:
Realizing success through an omnichannel digital marketing strategy means investing money and time. Like a vegetable garden, digital marketing begins by planting seeds; some seeds land in fertile soil and flourish, while others won’t grow as quickly. However, with the right amount of time, attention and patience, many of your leads can be nurtured into sales, just as plants can be nurtured to bear fruit. Because of this, a more nuanced approach to ROI analysis can help you better understand what your initial investment in a marketing campaign is worth.
“Small business owners must be willing to make a realistic commitment to digital marketing if they want to see results,” Azar said. “The expenses come first. It requires investment and patience. Depending on the campaign, results may take months. To reap sales and revenue, small business owners must begin with the end in mind, have a solid digital marketing strategy, invest and stay the course long enough to reap sales and revenue. Along the way, they should track how the campaign is trending toward its desired goals.”
Skye Schooley contributed to this article. Source interviews were conducted for a previous version of this article.