Digital marketing is a vast category that encompasses a wide range of channels and strategies designed to increase brand visibility, boost a company's reputation and, ultimately, convert leads into sales and then retain those customers.
Many business owners want to understand their return on investment (ROI) when it comes to digital marketing spend, but in some cases, this is easier said than done; in others, it might not even be relevant. This guide breaks down what you need to know about ROI in digital marketing campaigns.
What is digital marketing?
Digital marketing is the culmination of a company's branding and marketing efforts across all digital channels, including search engines, the website, email, social media, SMS text message marketing, affiliate websites and more.
A digital marketing campaign typically includes multiple channels. It can also include both paid and organic approaches to boosting visibility and converting traffic into sales.
Digital marketing campaigns tend to have many moving parts, some of which are inherently longer-term strategies by nature. As a result, it can be challenging to determine whether your digital marketing campaign is indeed generating a return.
How to determine your ROI for digital marketing campaigns
Unfortunately, plugging in some basic information to an online ROI calculator is seldom enough to fully understand the effectiveness of your digital marketing campaigns. It can be tempting to try and attach a simple ROI model to digital marketing efforts, but the nature of some marketing tactics means your overall marketing investment might not generate a tangible return for some time. Furthermore, a digital marketing campaign makes use of multiple channels and approaches, and it can be challenging to identify the net income associated with a single digital marketing tactic.
Determining ROI in digital marketing is all about tracking the various channels that comprise your overall digital marketing strategies. Of course, your initial investment matters; however, it can sometimes be beneficial to accept a short-term loss in order to generate long-term success. This can be done in a variety of ways depending on the precise nature of your campaign.
How to calculate ROI
Before we get into complex ROI models, it is best to understand a simple case. The basic ROI calculation is straightforward: You take the value of your investment, subtract its cost, and then divide by the cost of the investment.
In simpler terms, you take the change in your revenue after your marketing campaign has deployed, subtract how much you spent on it, and then divide by that cost. This will show you your return per dollar spent.
Increase in Revenue - Cost of Marketing
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Cost of Marketing
Let's look at an example. Say you invest $100 in a pay-per-click advertising program. Compare your revenues before the program deployed to your revenues after it took effect. Subtract how much you spent on ads. Let's say this shows a revenue increase of $1,000.
At this point, you can already see how much raw revenue you gained from the ad campaign. To see your return per dollar spent, simply divide your revenue increase by the cost of the campaign. That will show you how much every dollar you spent on the pay-per-click ads is really worth. In this example, your ROI is 10-to-1: You brought in an extra $10 in revenue for every $1 you spent on marketing.
Of course, this simple calculation has limits. It does not forecast long-term ROI on the campaign. It also can't measure indirect benefits of the marketing, such as a social return on your investment. Now we can get into more advanced ROI measurements. Here are three common tactics for measuring ROI:
1. Tag links with UTM parameters.
If you've ever seen a lengthy URL with a question mark affixed to it, you've seen an Urchin Tracking Module (UTM) link. These UTM links help track digital marketing campaigns in Google Analytics. When a user clicks a link tagged with a UTM code, Google Analytics tracks from where the user clicked the link as well as what campaign generated the lead.
"You have to make sure that the links you're promoting across each channel are tagged properly with UTM parameters. This is an essential step to both lead generation and e-commerce," said Jordan Schneider, director of digital marketing for stock music library Soundstripe.
2. Set up digital tracking pixels.
Digital tracking pixels are elements that can be added to your website to track where your traffic is coming from and how you can target those users again later on as part of your remarketing strategy. These tools are effective for tracking traffic and transactions taking place on your website.
"To be able to measure ROI across any digital platform, your website needs to be set up with all of the right digital tracking pixels – such as Google Analytics, Facebook Pixel or LinkedIn Insight Tag – to be able to identify who is visiting your website and where they are hearing of you as well as how can you reach them with further advertising later on," said James Cowley, digital strategist at Nashville-based entertainment marketing agency FlyteVu.
3. Use a customer relationship management (CRM) tool.
CRM software is helpful in tracking leads from first contact through the end of their buying journey. Using CRM software to track leads generated by your digital marketing campaign, and tagging them as such, is an effective way to see how many opportunities your digital marketing spend is creating for your business.
"If transactions are not taking place on your website, and you're just using it to generate leads, you'll want to use a CRM like Hubspot to track your leads through to a closed/won customer, and make sure you're pulling in UTM data to the CRM from your website," Schneider said. "That way, when a contract is won with a given lead, you can track which channel that individual came from."
With the data gleaned from these methods, you can calculate the value of your various digital marketing campaigns, whether your preferred key performance indicator (KPI) is an increased conversion rate or just improved brand visibility and clickthrough rate. From there, it is as simple as finding the difference between that value and your overall digital marketing spend.
However, calculating ROI is not always the best way to tell if a digital marketing strategy is working. Instead, it is best to understand the goals of each arm of your overall strategy; for some, ROI should be clear from the start, while for others it might take some time to see a positive return.
What is a good digital marketing ROI?
There is no single answer to this question. "Good" will depend on your goals, expectations, and strategies, but a couple of examples can help you determine the ballpark of a good ROI.
Let's say you spend $100 on improving your Facebook outreach. That $100 leads to a total sales increase of $200. You had a 100% ROI. Is that good? It depends on your overhead. If you are selling goods at a 50% profit margin, you just broke even. You spend $100 to sell $200 worth, but it already costs you $100 to produce that much in goods. You will need better than a 2-1 ROI ratio for your marketing to be profitable.
Therefore, a major factor in determining good ROI is knowing your overhead. Your marketing returns have to be high enough to cover operational costs with the new revenue they bring in. On average, a 5-1 ROI ratio will be enough to be profitable and is considered good.
That said, there are times when a lower ROI is still good because it accomplishes a different goal. An obvious example is lead generation. Let's consider the example of a property investor: The purpose of their digital marketing is to purchase properties. Their digital marketing will not generate any direct return on investment. Instead, it generates leads for property acquisition (which can later turn a profit). In this case, a negative ROI is fine as long as the cost per lead is generating enough property acquisition to sustain the business.
In this way, ROI always has to be tempered by goals. If the goal is direct revenue increases from marketing, 5-to-1 is a ballpark goal, provided it covers your overhead in the process.
Ways to improve your ROI
Now that you have an idea of ROI goals, you may want techniques and tips to improve your ROI. Again, the first step in improving ROI is to set specific ROI goals. These should be tailored to each facet of your marketing strategy (e.g., pay-per-click ads should not have the same goal as SEO investments).
Once you've set your goals, you can break each component of your marketing campaign into smaller details. You can look at lead generation, conversion percentages and conversion values. This lets you see how often a marketing component brings in a new customer, and then you can see how much they spend on average. That can help you funnel your marketing spending into the most efficient and effective channels.
Ultimately, investment in high-level analytics can provide advanced breakdowns of your spending and returns. It can provide predictive modeling that helps you time your spending better and ultimately empowers you to squeeze every last drop out of your marketing investments.
When should you measure ROI for digital marketing campaigns?
To understand when measuring for ROI is most relevant to your digital marketing campaigns, you should first understand the concept of the conversion funnel. The conversion funnel explains where a particular lead is in their buying journey. There are broadly three elements of the conversion funnel:
- High funnel: The high funnel audience member has a general, informational interest in a topic related to your business. They are unlikely to make a purchase in the immediate term and are primarily interested in information gathering and educational material.
- Mid funnel: A mid-funnel audience member recognizes they could likely benefit from your product or service but aren't ready to make a purchase just yet. They might require more advanced information, or they might be comparing you and your competitors. Mid-funnel audience members are moving toward a purchase but are not ready to commit.
- Low funnel: Low-funnel audience members are ready to buy a product or service; their online inquiries are often referred to as "intent traffic" because they have a clear intention to make a purchase. Similarly, low-funnel audience members are more likely to click specific advertisements for products or services they need, rather than query general information. Most of their research is done, and they are ready to be converted from lead to customer.
While these three components get to the heart of the conversion funnel, more detailed breakdowns could be employed to better understand your lead pipeline.
How the conversion funnel relates to ROI in digital marketing
Understanding the conversion funnel can help you better tailor your digital marketing campaigns to reach the right audience member in their stage of the buying journey. It can also help you understand when a measurement of ROI is relevant, Cowley said.
"ROI is important when focusing on lower-funnel marketing," Cowley said. "Potential customers don't just start in the lower funnel though. They need to know and trust your business before they decide to give you their money. ROI should always be in the back of your mind when investing in any marketing, but it is not always so visible in top of funnel marketing."
It might be immediately relevant to measure ROI when targeting low-funnel customers by running a sponsored advertisement across social media channels, for example. However, when engaged in content marketing efforts to boost your brand's visibility, cement its voice, and improve search engine ranking position, it could be more effective to measure traffic and engagement in the short-term.
"ROI shouldn't be the primary measurement when it's hard to calculate the exact impact of some channel or activity on the outcome," said Inna Shevchenko, chief marketing officer at rental management SaaS company iGMS. "For example, SEO and content marketing bring results in the long-term, therefore trying to measure ROI only after a month or so won't make sense. Similarly, the impact of the website itself is hard to measure because other channels are involved.
"On the other hand, for some businesses, their main goal is improving image and brand awareness by utilizing social media and video marketing. In this case, it's nearly impossible to measure ROI," Shevchenko added.
Other digital marketing metrics to use as key performance indicators
For strategies targeting high-funnel customers, or those geared towards bolstering brand authority, an initial negative ROI is to be expected, Shevchenko said.
"Acknowledge that the ROI of marketing activities will be negative in the beginning. However, as the business starts growing, they need to make sure that digital marketing ROI is positive and helps scale the business."
To rely on ROI as the only measure of digital marketing success is too narrow a view, said David Azar, founder and CEO of digital marketing agency Outsmart Labs. Instead, consider the goals of each arm of your overall digital marketing strategy and give each the necessary time to mature before expecting to see a positive ROI.
"ROI can't be the only indicator of success. Impressions turn into engagement. Engagement turns into clicks. Clicks turn into sales. Measurements that show a campaign is trending in the right direction may be a stronger indicator of success than ROI," Azar said.
Metrics besides ROI that could be used to gauge the success of early-stage digital marketing efforts include:
- Cost per lead: Cost per lead examines how much it costs to generate one lead, bringing an individual into your conversion pipeline. It is calculated by dividing the total expense of the digital marketing campaign by the number of leads generated over time. A low cost per lead is beneficial.
- Cost per acquisition: Much like cost per lead, cost per acquisition measures the expense associated with securing an individual paying customer. It is calculated by dividing the total campaign cost by number of conversions attributed to that campaign.
- Impressions: Impressions refer to the number of times an advertisement or call to action (CTA) was viewed. Impressions grant insight into how many users are coming across your placement. The higher the number of impressions, the more visible your ad or CTA.
- Click-through rate: Click-through rate, or CTR, refers to the rate at which users who see an advertisement or call to action decide to click through to the landing page. CTR is calculated by dividing the number of impressions generated by an advertisement or CTA by the number of times it was clicked. A higher CTR means users are not only seeing your ad or CTA but also clicking on it.
- Engagement rate: Engagement rate is a metric used in content marketing that demonstrates how much interaction the content is receiving from audience members. Engagement rate is influenced by factors like comments, shares or likes. A higher engagement rate means your audience is actively grappling with your content and supports brand recognition and authority.
- Customer lifetime value: Customer lifetime value, or LTV, is a metric that describes the long-term value of a converted customer. A recurring customer will have a much higher LTV than a one-time shopper, for example. Measuring the LTV of customers acquired through a digital marketing campaign could reveal a longer-term ROI associated with your digital marketing strategies.
To realize success through an omnichannel digital marketing strategy means investing money and time. Like a vegetable garden, digital marketing begins by planting seeds; some seeds land in fertile soil and flourish, while others won't grow as quickly. However, with the right amount of time, attention, and patience, many of your leads can be nurtured into sales, just as plants can be nurtured to bear fruit. Because of this, a more nuanced approach to ROI analysis can help you better understand what your initial investment in a marketing campaign is worth.
"Small business owners must be willing to make a realistic commitment to digital marketing if they want to see results," Azar said. "The expenses come first. It requires investment and patience. Depending on the campaign, results may take months. To reap sales and revenue, small business owners must begin with the end in mind, have a solid digital marketing strategy, invest and stay the course long enough to reap sales and revenue. Along the way, they should track how the campaign is trending toward its desired goals."