“Half of the money I spend on advertising is wasted. The trouble is I don’t know which half” – John Wanamaker
Tracking marketing campaigns and calculating return on investment(RoI) was virtually impossible before the internet boom. But now in the era of digital marketing it is quite easy to calculate your marketing ROI with the help of Analytics.
Before diving into the concept of Digital Marketing ROI, let me first clarify the confusion between Financial ROI and Marketing ROI.
Financial ROI measures the profit or loss generated on the overall money invested in the business and it is calculated every year. On the other hand Digital Marketing ROI measures the gain or loss generated on the amount of money invested in marketing campaign.
Why should you calculate Digital Marketing ROI
As long as you are not measuring what is working, you are burning money
It is evident that measuring marketing ROI is important to know the performance of your digital marketing campaigns. However, You can gain much more from those metrics than just tracking the performance.
You will understand which marketing channel or advertising campaigns are working best for you.
Let’s say you have done remarketing campaign on Facebook and Google AdWords. How would you know which channel has worked best for you?
By calculating ROI for both the channels and comparing them you will get a clear understanding of which one worked best for you and it will allow you to focus on that channel for all your future marketing campaigns.
You will be able to modify your marketing strategies based on the results of your ROI. You can stop focussing on activities which are not giving you results and concentrate on the ones which are doing well for your business.
Marketing RoI will also help you in creating future budgeting sessions and also gives you the clear overview of where to reduce costs and how to allocate your budget for various marketing channels.
How to calculate Digital marketing ROI?
Method – 1
Measuring your Marketing KPIs constantly throughout your marketing lifecycle is crucial in calculating the ROI. However, following formulae can be used to determine the Return on Investment of your marketing campaigns.
Incremental Gross Profit – Marketing Investment
The toughest part in the above formulae is to calculate the incremental gross profit. It is the profit generated because of the implementation of marketing campaigns.
To calculate incremental gross profit you need to know the gross profit before implementing digital marketing strategies. The difference will give you the value of incremental gross profit.
Marketing investment is the sum of labour cost, tools cost, and advertising cost.
Marketing investment = Labour cost + Tools cost + Advertising cost
Method – 2
Another way to calculate Digital marketing ROI is to replace incremental gross profit with customer lifetime value in the above formulae. This one works best if you are in a business where you get recurring income from customers.
Customer Lifetime Value(CLV) is the overall average profit generated from a single customer throughout his lifetime as a customer. First you need to calculate customer lifetime value before calculating Marketing ROI using the following formulae
(n × customer lifetime value) – Marketing Investment
Where n is the number of customers gained through your campaign