How to Measure Your ROI (Thar She Blows!)
For many business leaders, an accurate measurement of marketing effectiveness, commonly known as the return on investment (ROI), can be as elusive as that gargantuan leviathan in Herman Melville's classic novel Moby Dick. Too many companies begin their hunt for sales without understanding how much they need to spend on marketing in order to achieve their final sales goal. And not knowing exactly what it will cost your business to achieve a return is like trying to sail the ocean without a map.
If ROI is your company's "white whale," and your marketing reports have you "growing grim about the mouth," let's see if we can explain, in less romantic language, what ROI is, why it is so important and how it should be measured.
The What and Why of ROI in Marketing
The "return" in ROI is typically understood to refer to direct revenue, that is, a business' net income or profit after it has invested in various marketing initiatives, including content marketing, social media strategies and Google AdWords. Your typical C-level executive, or for that matter any small to mid-sized business owner, is going to want to see what exactly they are getting back from a marketing campaign in dollars and cents, i.e. how much money did it take to generate X number of sales?
Your online marketing ROI not only reveals how your marketing is driving sales, but how each individual marketing activity might be streamlined, augmented or even eliminated to optimize your company's resources and budget. But keep in mind ROI isn't only about sales. The "return" in ROI also includes a measurement of demand generation against lead generation against any other result or conversion you budget for in advance and track on your way to a final sale.
ROI should be measured from the earliest stages of brand awareness and on into lead generation and sales. A detailed marketing report that aggregates all of these marketing activities as they are aligned with each conversion will show you specifically what is working and what isn't, and how to better allocate your spending.
How to Measure ROI
Marketing without a pre-planned budget that specifically shows what you need to spend for the ROI you expect is like throwing harpoons in the dark: you might hit something, but probably won't.
Always begin the process of creating a marketing budget by first determining your revenue goal. Then work backwards to plug in the dollar amounts necessary to meet that goal. Ask yourself the following:
- What is your sales goal? (i.e. total marketing-generated revenue)
- What is the amount of a typical sale?
- How many sales do you need to reach your sales goal?
- How many qualified leads do you need reach your sales goal?
- How many total inquiries are needed to reach your qualified leads goal?
- How much do you need to spend on reach to get those leads?
Answering each question gives you the numbers you need to determine your ROI. Here is the same basic outline with numbers to give you an even clearer idea of the math involved:
- Sales goal: $10,000
- Amount of an average sale: $1,000
- Number of sales needed to reach the sales goal: 10 (10 x $1,000)
- Number of qualified leads needed to reach sales goal: 100 (One out of 10 qualified leads to a sale)
- Total inquiries needed to reach qualified leads goal: 1,000 (One out of 10 inquires turns into a qualified lead)
In this simplified scenario, the cost you spend to reach those qualified leads verses the total amount of your sales goal will give you your ROI. Your final marketing report should include not only the dollar amount of your ROI, but an explanation for and the cost of each marketing initiative that played a role in achieving that figure.
How Signet Can Help
ROI need not be as frightening a beast to face down as Captain Ahab's sailor-eating nemesis. Contact Signet Interactive to find out how budgeting for effective marketing can increase your sales and boost your ROI.