For decades, marketers crafted marketing campaigns but had only the most inferential tools to assess them. John Wannamaker famously said that he knew he was wasting half of his marketing budget but he had no idea which half. Today’s marketers don’t have to wonder whether their marketing campaigns are paying off because you can now assess the ROI of your marketing campaigns with much-improved accuracy. Armed with these insights, you can optimize your marketing campaigns to improve profitability. You can also use your metrics to compare how well your campaigns perform relative to other businesses. Below you can see industry average ROI stats for SEO (search engine optimization) campaigns based on industry, for instance. Tools like an online ROI calculator help e-commerce businesses measure the return on investment of their marketing and sales campaigns.
Why assessing the ROI of your marketing campaigns matters
ROI is a critical metric to assess performance and make decisions. Many companies only adopt tactics when ROI expectations meet a certain floor, like 20%. This allows companies to invest in programs that pay for themselves and deliver against the company’s goals. Because assessing the ROI of your marketing program was squishy (a very technical term) when investing in most traditional marketing tactics, marketers often didn’t have to prove the effectiveness of their programs. However, the inability of marketers to demonstrate the contribution of their efforts to the company’s bottom line also meant their funds were the first to go when the going got tough.
We also trained generations of marketing students who didn’t understand the impact of ROI, couldn’t calculate it, and devolved into creative slogans rather than getting into the nuts and bolts of marketing. We MUST change that or face decades where companies hire engineers and other quantitatively-trained staff rather than marketers who have the understanding to craft marketing campaigns that deliver.
Here are some of the ways companies can use ROI calculation in marketing decision-making:
- Resource allocation: Understanding the ROI of different marketing campaigns allows you to identify which strategies are most effective and deserving of further investment. This helps in allocating your budget more efficiently, ensuring that resources are not wasted on underperforming campaigns. For instance, studies show that Google Ads (and search ads in general) deliver a higher conversion rate than other types of digital advertising. This argues strongly for putting your budget into search ads and using ads on other platforms at lower funding levels.
- Strategy optimization: By analyzing ROI, you can gain insights into what aspects of your marketing strategy are working and which are not. With website metrics, you can follow clicks from any digital platform all the way to conversion. Thus, platforms that deliver a lot of clicks are less important and less deserving of a place in your marketing planning than platforms that lead to conversion. Website analytics allow you to break down your marketing campaigns to determine not only which platform but which messages perform best. You can test landing pages or any other aspect of your marketing campaign to make strategic decisions that optimize performance. This information can be used to refine and optimize future campaigns for better performance.
- Measurable success: ROI provides a concrete, quantifiable measure of a campaign’s success. This is essential for understanding the impact of your marketing efforts on your business’s bottom line. Knowing how much marketing contributes to the company’s profits makes it easier to argue for sufficient marketing funds to maintain or improve market performance.
- Competitive advantage: Understanding your ROI can also give you a competitive edge. By knowing what works and what doesn’t, you can stay ahead of the curve and adapt quickly to changing market trends.
- Long-term planning: ROI data helps in long-term strategic planning. By understanding which campaigns, keywords, calls to action, and targeting historically provided the best return, you can make more informed decisions about long-term marketing strategies and investments.
- Customer insights: Assessing ROI often involves analyzing customer engagement and conversion data. This can provide valuable insights into customer preferences and behavior, informing not just marketing strategies but potentially product development and customer service approaches as well. Developing a nuanced assessment of ROI, including factors such as AOV (average order value), allows you to target the most productive types of customers and gear your marketing campaigns toward addressing their hot buttons.
How to calculate ROI for any business evaluation?
By daily monitoring the ROI of your marketing campaigns, you glean insights that help you understand how much your investment generates revenue. In this way, you can also determine the sales efforts necessary to improve and compare your industry with others in the same sector. ROI is also an input into forecasting sales, which is the basis for the budgeting process.
ROI = (Net profit / Total investment) x 100
The amount of money that a business saves after paying all types of expenses like interest rates, taxes, employee salaries, etc. is known as net profit.
Net profit = Total revenue – Total expenses
Total investment is known as the sum of the enterprise’s equity and debt. In other words, for better understanding, It is saying that the value is known as the aggregate sum of registered capital and the sum of loans obtained for the operation of the enterprise.
But, most firms want more nuanced information. Hence, they break down the ROI of individual programs or campaigns so the decision makers can make informed decisions when evaluating projects or deciding the green light future projects. You might calculate the ROI of your Facebook campaigns (or even an individual campaign) to determine whether it’s worthwhile to continue investing in the campaign or increase/ decrease the investment.
For most marketing campaigns, we adjust this calculation of ROI using the term ROAS (return on advertising spend), since a marketing campaign doesn’t involve control of investments other than ad spend. Marketers still need to calculate ROI for other marketing programs such as new product development.
What is e-commerce ROI?
E-commerce ROI calculator:
The calculation of e-commerce is done by measuring the total profit generated from investments in things like advertising, SEO, and email lead nurturing, and then comparing those profits to the investment made to implement the program.
- A positive ROI indicates that the business strategies are financially successful. Again, a firm might only invest when ROI reaches a pre-determined threshold or only invest in programs with the highest ROI.
- A negative ROI or one below the threshold shows a poor investment. Although, there are times when a company might still invest in a project with a negative ROI. For instance, launching a new product might produce a negative ROI for some period before reaching its stride. Failing to invest in the new product just because it offers a poor return is deadly in the long run if the product opens new markets that will be desirable, keeps your existing product line from becoming obsolete, allows you to compete better in the marketplace, or a host of other reasons that must be evaluated with a long-term focus.
Where to find e-commerce ROI metrics
If you are also using an e-commerce platform, you’ll likely find key metrics such as the purchasing patterns of customers explained in the dashboard. To access the metrics quickly you can create custom dashboards and reports to meet your needs. For instance, you might split up your data by product line, region, or some other meaningful segment to glean more nuanced information.
The following are some things that are needed:
- Net revenue
- Orders number
- Customers number
Web analytics tools like Google Analytics (now GA4) automatically collect many common e-commerce metrics you need to calculate ROI (or ROAS). Once you install GA4 on your website, you can track a wide range of metrics that can help evaluate your campaigns including the ROI of your marketing campaigns. Here are some key metrics to track:
You likely want to track performance based on the source of traffic, including the breakdown below:
- Organic: Enlist it on the accordance of landing page to see how much each product or blog post revenue can generate.
- Social: Choose and sort a social network to see metrics for each; during the creation of an ad campaign or organic post, you have to set UTM parameters.
- Email: To find the best and top performance classified by campaign.
- Google Ads: To view the revenue and other results for the campaign of every pay-per-click (PPC) use Google Ads integration.
As I said earlier, you can gain a more nuanced view of your data by splitting these efforts further. For instance, you can divide sources by medium to determine which social media platforms are delivering for you. Since GA4 integrates Google ads, you get a more robust view of what’s happening by tracing clicks from your PPC campaign through to conversion.
Advantages of calculating e-commerce ROI
Measuring ROI is only the first step toward improving your firm’s performance. Knowing your ROI and how you achieved that level of performance also means you have the data needed to IMPROVE your ROI. Below are a few ways to use your new-found knowledge of how to calculate ROI to build higher performance for your business.
The more information you have to guide your decisions, the better those decisions will be. Metrics allow you to optimize the ROI of your marketing campaigns plus they improve the ROI of your entire operation by helping you spend your budget wisely on the actions that deliver the highest return, ensure you allocate a sufficient budget to meet your goals, and make decisions based on real returns rather than your gut or internal politics. In a pre-digital world, we didn’t have the metrics to make these decisions but we do now.
Making decisions based on ROI allows you to do more with less and that’s hard for your competition to match unless they also have access to key metrics and a team that can use these analytics to derive insights.
Improved customer experience
An often overlooked aspect of having in-depth metrics and calculating ROI is your ability to understand what your customer wants so you can deliver a better experience. For instance, look at the graphic below showing how your visitors move through the conversion funnel.
Note the large number of visitors that entered the conversion funnel and the much smaller number that completed the process. By the end of the process, 91.9% of the folks who started the buying process left before they finished. If you can fix the reasons why visitors left the funnel, you can convert more of them and increase revenue, potentially without spending another dime.
The first thing I would do if these numbers came from a client’s metrics (they didn’t although these come from the sample data provided by Google to help newbies learn the Analytics platform), I would look at where the visitors went when they left the funnel. As you can see in the first stage, over half of the visitors who put an item in their cart left before going to the next step. About a third of them left your website entirely. Why? We don’t have the data to answer that question but we can play some games to get more info. For instance, let’s send those who left something in their cart a coupon to explore the possibility that our prices are too high. The rest went back to other pages of our website. Maybe we could make a stronger call to action on the landing page so they don’t go back to find out more info before making a purchase. By proposing that pricing is for a limited time or only a few items remain, we can incentivize visitors to make the purchase decision now rather than exploring other options.
Web analytics is full of similar data to help you understand what your visitors want so you can deliver a better experience and convert more of them.
How to improve your ROI?
E-commerce ROI estimates the significance of marketing and sales actions on firm performance. It enables the owners of stores to track the losses and profits of particular marketing campaigns. In the earlier section, we discussed some ways to use this data to improve profitability. Here are some other aspects to consider as you work toward improving your ROI.
1. Optimized website with compelling content
In an e-commerce business, your website is the key aspect contributing to conversion. You’ll find a lot of help on this website if you want to optimize your website and post compelling content. The digital marketing strategy, SEO, and content marketing categories are the best places to start in your quest to learn more about how to improve your ROI with an optimized website. As you can see below, posting content frequently results in selling more customers.
2. Timely optimize product and landing pages
Landing pages are critical to the success of your e-commerce efforts. Test variations of your landing pages to get the best performance from them. Consider elements such as your call to action text and button color, images used, benefits highlighted, and other key decision variables when testing alternate versions until you get the best one. Even something as subtle as the angle used to photograph a product can have a big impact on your ROI.
Does ROI have to be monetary?
The classic measure of ROI is monetary value, there are many ways that can be alternative ways by which this can be quantified: saving time. Also, remember that ROI isn’t a metric that makes your decision for you. It’s a guide toward making better decisions. We already mentioned that sometimes you must sacrifice your short-term ROI in favor of profits in the long term. Social media strategy is a good example of this. You must post consistently over 6 to 12 months before you will likely see a measurable improvement in ROI. If you stop before you reach the inflection point between spending and profits, you’ve just wasted your money.
To run a successful online business, you need to calculate the ROI of your efforts and use that information to help you make better decisions about where to allocate your resources, increase your profitability, stay ahead of your competitors, and improve the customer experience.
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From the source Wikipedia: Return on investment, Marketing investment, Limitations with ROI usage.
From the source Investopedia: How to Calculate Return on Investment (ROI), Interpreting ROI, An Alternative ROI Calculation, Comparing Investments and Annualized ROI.