CALCULATING ROI IN DIGITAL MARKETING

The difference between “digital marketing” and “marketing” is both more than and less than “digital.”  

With the explosion of data and the pace of technological change, digital marketing has an “air of mysticism” about it. As a result, many SMBs (small to medium size businesses) delay tackling the matter. Others pursue new platforms or tactics simply hoping for the best. However, hope is not a strategy. 

To begin demystifying “digital marketing,” remember – the “digital” modifier pales in importance to the “marketing” core. Marketing creates awareness about your company’s solutions to generate sales. Years ago, if we were considering, say, a direct mail campaign, we would calculate Return on Investment (ROI) the following way: 

ROI = (Revenue from the mailing – Mailing Costs)/ (Mailing Costs) and convert that to a percentage 

Let us apply the same methodology to a Pay-Per-Click (PPC) campaign.  

ROI = (Incremental sales from Paid Traffic – PPC Campaign cost)/ (PPC campaign cost) 

The formula is straightforward and is easy to apply to an e-commerce site.  

• Traffic – total site or channel visitors 
• Conversion rate – # of buying customers compared to total site visitors 
• Average Order Value (AOV) – total sales divided by number of customers 

The metrics above could be for overall site activity or by channel – such as paid, social, or organic. For many businesses, conversion occurs offline – prompting the need for additional tracking systems. Also, attribution or timing can muddy the water. For example: 

• What if a prospect heard a radio ad before clicking on your paid ad? Which produced the sale? 
• What if a prospect does a modest oil change today but a big transmission job a year from now? How to account for the add-on sale? 

So, while a stand-alone review is not wrong, it may be less than complete. Let us try a more basic, but possibly more comprehensive approach. A well-structured website might have goals such as: 

• collecting an email  
• scheduling an appointment 

• generating a quote 
• prompting a call 

Using analytics, we would track these metrics in the current period and note changes over time. For illustrative purposes, let us begin with a site with: 

• 1,000 unique visitors per month 
• 20 quote requests from form fills per month 
• 10 contracts from the 20 leads 

Depending on how you run your business, you might focus on the close rate or the conversion rate. In this example, the closing rate is 50% (10 contracts out of 20 quote requests). The conversion rate is 1% (10 contracts out of 1,000 site visitors). 

A campaign would “move the needle” if any combination or any one of these three happened: 

• Increased traffic 
• Improved conversion rate 
• Higher average sales or add-on sales 

Quantitative Impacts 

Suppose a PPC campaign generated an additional 200 visitors who converted at the same 1% overall rate of the website. PPC campaigns are best optimized for a landing page. In other words, they have a negligible impact on the overall site content. 

200 visitors * 1% conversion rate = 2 incremental orders  

Your incremental sales would be a function of your AOV or your sales price if you sold only one item. For example, a trade school might only have tuition priced at $10,000 per session. Enrolling an additional student might cost close to zero if you had available seats. If you had variable costs, you could use incremental gross margin instead of incremental sales to calculate ROI.  

You would compare the revenue from incremental sales to the cost of your PPC campaign to calculate the ROI. (If you had variable costs associated with your additional sales, you could replace incremental sales with incremental gross margin).  

Suppose instead of PPC, your firm invested in SEO (search engine optimization). Not all SEO campaigns earn first page ranking. Even those that do often take several months before achieving success.  

With a PPC campaign, you only pay for success – in this case a click. With an SEO campaign, even if you achieve a first page ranking, it may take months to do so.  

The floor for SEO could be zero – but its ceiling is uncapped. In that sense, PPC has a higher floor than SEO. However, PPC’s floor is close to its ceiling.  

As an example, suppose your desired keyword has: 

Spending $1,000 per month would yield exactly 200 PPC clicks. Allocating the same $1,000 budget for SEO would generate anywhere from 1 click to 4,000 clicks. If you failed to rank on the first page of a search result, you would be closer to 1 click. However, if you ranked # 1 organically for the term, you could get up to 40% or 4,000 clicks every month. 

Ranking 10th organically garners about 2% of search traffic. In this example, the SEO campaign attracts 200 clicks, like the PPC campaign.  

Historically, SEO traffic converts at 2 to 7 times better than PPC traffic. For simplicity, apply the midpoint or 4.5x.  

200 visitors * 4.5% conversion = 9 incremental orders 

Besides quantitative results, are there other insights from this campaign? Can you do anything to impact conversion or AOV?  

Qualitative Impacts 

Why does SEO traffic convert better than Paid Traffic? Think about your own behavior as well as the search engine objective.  

Most consumers trust organic results more than paid links as evidenced by the click-through data in the table above. The search engine sells the prime slot at the top of a SERP (search engine results page) to businesses willing to pay the most that are still relevant. Search engines rank the organic results based on their algorithmic assessment of the “best answer”.  

It would be difficult to rank well for SEO without quality content. The content should ideally answer distinct parts of the customer journey related to problems, solutions, or providers. Content produced in “clusters” allow customers to self-select topics relevant to where they are in their customer journey. 

Content can be further leveraged – via direct targeting on, say, LinkedIn or your house file. You can repurpose content for social posts, downloadable newsletters, or email. If you segment your house file, you can ask your best clients for referrals, testimonials, or surveys. 

Relevant content answers your prospects’ questions, should clarify your brand, and sharpen your messaging – both on-site and off-site. Key elements on your site should serve as internal talking points to employees or the basis of your elevator pitch.  

Let clients testify as to what it is like to work with your firm. Your conversion rate might improve because of the confidence inspired by your case studies.  

The benefits of having a well-marketed, lead generation site go beyond the potential additional revenue. Consider that anyone under 25 years old in 2023 has grown up with the Internet their entire lives and are accustomed to using search engines to answer questions. What steps are you taking to future-proofing your business? 

As an SMB owner you may one day choose to sell or scale back your day-to-day operating involvement. Consider two businesses which we will label “A” and “B”.  The former depends exclusively on its CEO to land one $300K client every twelve months. The latter converts two $12,500 clients each month from its website and email nurturing.  

Would it be easier to sell or hand over a business that has a working lead funnel engine or one reliant on a sole rainmaker? Does the market value predictability and systems over personality? In our experience, related to marketing and sales, farming commands a premium over hunting. 

Review, Refine, Iterate  

The stylized examples above use simple numbers to facilitate basic calculations. Among the most important takeaways are: 

• You can use objective key-performance indicators (KPI) to track performance 
• If you do not know your metrics today, set up systems to begin tracking them 

• Select the metrics or measurements relevant your business 
• Some metrics emanate from your website 
• Other metrics, like Average Order Value, might come from your (analog) sales data 
• Monitor your (digital) performance over time 
• Appreciate the difference between lagging (sales) compared to leading (traffic) indicators 
• Refine your tactics based upon the trends from your metrics or customer feedback 
• Evaluate your programs over the short, medium, and long term 
• Intangible things might defy measurement 
• Considered qualitative assessments as well 

Digital marketing is still marketing, at its core. The digital part is more about the type of technological tools deployed and the increased measurement at scale. Too little data does not eliminate guess work. Too much data leads to analysis paralysis.  

Like Goldilocks, data and tools become “just right” when they improve decisions. It is important that the value of such an improvement exceeds the costs to procure. Some KPIs come exclusively from your website. Other metrics exist independent of your digital marketing campaigns.  

Calculating ROI can help determine when and how to invest in digital marketing. If possible, we make it a central objective of every project we undertake. Ready to engage in a dialog about how digital marketing could serve your needs? Call WSI Vital Marketing at (914) 348-9462.