Any task or project undertaken by a business is ROI [Return on Investment] based including digital marketing. End of the day, any marketing practice should beget results in terms of the objectives it is intended for – be it selling products, signing up, downloads or whatever the business intends to practice digital marketing for.
Clarifying on the definition of ROI, it is term purely used in finance and not in qualitative terms/ results. ROI is definitely measured in monetary terms and not in terms of traffic, leads or conversions.
Traditionally ROI is calculated as
ROI = (Anticipated Revenue from DM efforts – Proposed Cost of the DM project) / Proposed cost of the DM project
As a marketer looking forward to a juicy contract, remember, before you sit down to calculate ROI, you will need to get a few questions answered.
- Current traffic (average monthly Y on Y)
- Present conversion rate.
- Average revenue per sale or average value of an objective.
Let us take an example where a business answers the above questions as:
- Current traffic (average monthly Y on Y) – 5000
- Present conversion rate. 0.5%
- Average revenue per sale or average value of an objective – INR 10,000.00
Let us assume that the said digital marketing exercise is going to cost the business INR 100,000.00. How do you justify this cost to the business? As this is an additional cost to business, you will need to generate this cost of marketing from this exercise itself.
You have to generate additional revenue of INR 100,000.00 from sales.
However, once you generate this, the business is at a breakeven point (no profit – no loss) situation. Hereon, to achieve a positive ROI, you will need to generate much more revenue.
The first step is to calculate the number of additional orders in order to get to the breakeven point.
So, number of orders required is
Proposed cost of DM / Average order value = 100000/10000 = 10
If you cannot generate these orders through the digital marketing efforts, there will be a –ve ROI which is a loss to the client. Now, let us calculate the additional traffic required to generate these orders.
This can be calculated as
Number of orders required to break even / e-commerce conversion rate
= 10/0.5% = 2000 visits
Therefore, if you can generate an extra traffic of 2000, your client business will break even on the digital marketing cost. Taking into consideration that your digital marketing efforts will improve the conversion rate, you may need lesser than 2000 visits to breakeven. However, let us keep the average figure as it is as a conservative effort.
Since, the idea is to generate a positive ROI, let us double the required visits, so 2000 X 2 = 4000 visits. Applying the assumed rate of conversion, we can generate 20 orders instead of 10, as we calculated above. Revenue generated from these orders will be 20 X 10,000 = INR 200,000.00.
Now, let us recalculate the ROI
ROI = (Anticipated Revenue from DM efforts – Proposed Cost of the DM project) / Proposed cost of the DM project = (200,000.00 – 100,000.00) / 100,000.00 = 100%
This means if the client business spends INR X, it earns 2X in return.
With some clarity, we can now assume that this ROI should be a standardized figure in the DM scheme of things because, if the client business earns the spending on DM or less, there is no point in having the exercise at all.
It is time now to take call on whether you can generate that extra traffic required to get the client business achieve 100% ROI. What are the steps you will need to take to achieve that?
Probably, you might look at changing keywords, a branding exercise, a PPC campaign and any other tools you may require. Do thorough research on all sub tasks you intend to take in the DM space. Get your costs clear and revise the proposal if need be.
End of the day, the only question a client business will ask is
“Ok I will give you INR X, how much I will get in return?”
Never reply with ranking figures and traffic in return. Tell the client, how much they will get in Rupee value so that the spending is justified.
Realistic or Actual ROI
Realistic or actual ROI is a little different from the calculations we did above.
This can be calculated as
Realistic or Actual ROI= ((Total Revenue generated through DM + Total Goal Value using DM) – Cost of the DM exercise) / Cost of the DM exercise
The calculation for Total goal value through DM is the sum of “Last Interaction Conversion Value” and the “Assisting Conversion value”. This is a part of Google Analytic s that can be setup to take these into account. If I were to explain the process here, it would take pages and pages.
Any DM exercise is not only about bringing organic traffic and ensuring conversion, but it also helps add value through direct traffic sales, display advertising, branding as well as PPC etc. In short, the figure you arrive at with the above formula will take into account overall conversions and not only the organic ones.
You should keep in mind that organic Digital Marketing not only helps complete a conversion but also initiates and assists conversions that are completed by other marketing channels (like display advertising, PPC, Direct, Email, Referral etc).
Of course, these are not meant for client businesses who are yet to take off in the digital space, where, a DM spend for the first 6 months should be looked upon as an investment in marketing than a cost.
As an experienced digital marketer, I look for a perfect blend of web, inbound and social marketing. Reaching a customer effectively by converting him into a customer is the objective. I believe in training and coaching my peers and juniors, since it enhances my own understanding and fortifies strategies through discussions and arguments. Pursuing my training or other numerous (range from cooking to para-jumping) hobbies, I am motivated by such pursuits which enables me to imbibe a lot of unwritten experience that I use in my profession.
In all my initiatives, my ideas are well supported by a capable and dedicated teams that build, execute and maintain planned development and marketing strategies.
Being an entrepreneur, I am always into a new business; however, I’m not new to business. I have marketed for a plethora of websites, helped build countless websites and helped online rock stars from all walks of life to label, brand, and market themselves. Still, the adolescent adrenaline-driven at heart, I have always been driven by my best friends – hope, determination and fear which I think every entrepreneur should keep close to heart.
Watching a teenage sensation create records of sorts, does not, for me, come close in terms of satisfaction, to the happiness of the little girl of a poor father who has bought home a Barbie made affordable through a coupon or a deal, otherwise ill-affordable. To my belief, my efforts at digital marketing create many such small pockets of joy across the demography. This belief, is what drives me and I am in my best element working with my colleagues, customers and providers who share my endeavor. I believe and expect that they contribute value to the society through which the world sees value in any business.
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