It is really important to measure digital marketing ROI across all the different channels that you’re working. It helps you to work out where to put your focus and where to put your budget in order to make the most profit. In this article, we will dive into what exactly ROI means and the most important key metrics of it.
What is ROI?
ROI, or Return on Investment, is going to measure the profitability of your marketing efforts by comparing how much you’ve earned versus how much you’ve spent in digital marketing. Roi is going to help you understand which campaigns are driving the most revenue and whether your ad spend is delivering a positive return.
Why ROI is important?
Firstly, this helps you measure Roi; it ensures that you’re allocating your marketing budget effectively. but then it also helps you identify which channels or tactics are actually providing the most value for your business. For example, if you spend $1,000 on a Facebook ads campaign and you generate $5,000 in Revenue. Roi here is 400%.
How to calculate ROI?
Breaking this down a little bit further from the definition of Roi, how do we actually calculate ROI? Knowing the actual formula is hard to understand!
As business owners, we’re looking at Roi as going to equal the revenue from the campaign minus the cost of the campaign divided by the cost of the campaign times 100.
Understanding The ROI Key Metrics
The key metrics of ROI are very crucial. Because if we are looking at ROI from a broad perspective, we’re going to see some high-level key metrics that we’re going to want to incorporate when we’re looking at ROI.
Customer Acquisition Cost (CAC)
CAC is the total cost of acquiring a new customer through a marketing campaign. The formula for CAC or customer acquisition cost is going to be the total campaign cost divided by the number of new customers acquired. This is important because lowering your CAC actually means that you’re acquiring customers more efficiently. which is actually going to improve your overall ROI.
Conversion Rate
What it’s going to do is it’s going to measure the percentage of people who take a desired action such as making a purchase maybe after interacting with your ad or your landing page, and the way that we calculate this is we’re going to look at the number of conversions divided by the total visitors × 100.
This matters because we know that if we see higher conversion rates, it typically leads to better ROI. because we’re turning more clicks into actual paying customers, which is really important.
Lifetime Value (LTV)
The definition of LTV is the estimated Revenue a customer is going to generate over the course of the relationship with your business. When we look at the actual formula, we can see the average purchase value × the number of purchases per year × customer lifespan. This formula can change depending on the business that you’re in. The reason here that this metric matters is that we know that knowing LTV is actually going to help you determine how much you can spend to acquire new customers while maintaining profitability, which is extremely important in this economy specifically.
Return on Ad Spend (ROAS)
The fourth metric that we’re going to look at, and probably one of the most important metrics is if you are spending money on ads. We’re going to look at the return on ads spend. which obviously measures the revenue generated from every dollar spent on Advertising. The calculation here is probably the most simplistic, but it’s the most important. We’re going to look at the revenue from the ads divided by the cost of the ads.
The reason why this is important is it gives you a clear picture of what ads are driving the most Revenue, which is going to help you allocate your ad spend more effectively if you work with an agency they’re going to do this automatically but if you’re doing this on your own it’s a really important metric to understand.
A Step-by-Step Process for Measuring ROI
1. Set Clear Goals for Your Digital Marketing Campaign
The first step is to set clear goals for the campaigns. We see this a lot on the agency side; our clients do not have a specific goal in mind. They want to make more money. which is all great in the grand scheme of things, but when you’re running advertising campaigns, when you’re looking at ROI and trying to improve it and measure it, the most important part here is that we need to define what success looks like for your campaign. Is it that you’re focused on increasing sales? generating leads? building brand awareness? Your goals are going to influence how you measure Roi from a broad perspective.
The tip is that it’s important to be very specific. Instead of saying, “I want more sales,” you need to set a goal like “I want to generate 100 new customers in the next month.” These tangible goals allow you to actually understand which campaigns are working and which aren’t. It allows you to measure benchmarks. The most important part of this tip is that sometimes we like to say that we want to generate 100 new customers, but our budget might only allow us to get 10 new customers. The important thing here is that we need to be realistic within our goal setting as well. because sometimes we like to think that it’s very cheap to acquire new customers, very easy because we’re able to deliver ads digitally. but it’s not sometimes the case that it’s as cheap. sometimes, it costs a little bit more money to acquire a customer.
2. Track your Costs Accurately
The important part here is that you’re going to include all the costs associated with the campaign. Let’s say you’re spending ad spend if you have agency fees. Let’s say you have software tools and any labor cost for creating content managing campaigns; all of these things need to go into the actual cost of the campaign so you can measure ROI.
The tip here is that, obviously you can use Google Analytics and Facebook Ads Manager to track your spending and performance metrics. Google Ads has its own backend that you can look at from a portal perspective. Additionally, for anything you spend, there are a lot of different tracking metrics.
3. Analyze Campaign Performance
The third step is to look at the campaign performance and actually analyze it. We’re going to look at Key metrics like conversion rate, customer acquisition cost, and return on ad spend to assess how well your campaigns are actually performing. The way that you should do this is by using A/B testing to understand and optimize your campaigns and see which versions drive higher conversions. It’s very important within AB testing to keep a very controlled environment but also allows for some variables to understand whether certain aspects of the copy are drawing people in, whether it’s your offer, whether it’s your creative, maybe you have um, a picture one doesn’t one performs better. It’s really good to understand all these different metrics because it’s going to help you understand exactly what’s going to drive traffic in.
4. Calculate ROI
You’re going to use this formula to calculate the return for each campaign, and then what you’re going to do is you’re going to compare these results across different channels. Let’s say we see Facebook ads, Google ads, and email marketing to see where you’re actually getting the highest return.
5. Optimize for Better ROI
We’re going to identify underperforming campaigns and make improvements. For example, if your conversion rate is low, make sure you that you test different landing pages or maybe adjust your ad copy or your creative to see if that drives better results. The tip here is that you can actually focus on lowering customer acquisition costs by improving targeting, increasing conversion rates, and optimizing your ad spend, which, in the long run, are very important things.
Improve ROI in Digital Marketing
- Improve you Targeting
First and foremost, you can improve your targeting. You can use detailed audience segmentation to reach the right people with your ads, and the reason why we would recommend doing this is that the better your targeting, the lower your customer acquisition costs and the higher your ROI. Sometime,s start with a broader audience and then what to do is we work our way into a detailed audience segment. sometimes go very detailed and then kind of work our way out if it’s too small of a pool. Facebook and Google have great tools. You can understand custom intent audiences to target high-quality prospects who are more likely to convert.
- Optimize Your Conversion
Small improvements in conversion rate can actually lead to significant boosts in ROI. If you optimize our landing pages, call to actions, and user experience, it’s very likely to increase conversions. The tip here is to try different headlines, different images, different calls to action, different click-throughs, and different offers, and you can actually use tools like Google Optimize.
- Focus on Customer Retention
Acquiring a new customer is actually more expensive than retaining an existing one. It’s important that as a digital marketer, build loyalty with existing customers to increase their lifetime value and improve all overall ROI. The tip here is that as businesses, you can implement loyalty programs, send personalized email offers, and even provide excellent customer service to keep your customers coming back. It’s extremely important.
- Reduce Customer Acquisition Costs
The Final step is to reduce the customer acquisition costs. You can find ways to reduce your customer acquisition cost by improving your targeting, using less competitive keywords, and focusing on organic channels like SEO and content marketing. Use Google Keyword Planner, Ahrefs, and SEMrush and find those low-cost, high-intent keywords for paid search campaigns. because, as you know, cost makes a big difference, and if you can cut costs in different areas, it’s going to drive better Roi and better results.