Why is ROI necessary in Digital Marketing?
ROI is “a performance measure used to evaluate the efficiency of an investment or to compare the efficiency of a number of different investments” (investopedia.com).
It has been proven useful for many businesses throughout the years and, with the advent of digital marketing (and its strong measurement capability), ROI has also placed itself as a key figure to look in any marketing report.
In other words, if you want your CEO and CFO to understand that you’re bringing in profits or to stand by a campaign that you’re planning, you have to show them the money – and that’s where the ROI comes in handy.
Since it is crucial for any marketing manager to provide actionable and reliable data, it has become clear that such metric should be integrated in order to strengthen the relationship between Information & Decision.
How to incorporate ROI within Marketing
The idea is that you assign a ROI metric to your most important marketing reports. The same way you build your report for your Adwords campaign based on KPIs like CTR, CR or BR, you add one more calculation for the ROI.
You will need to get your Return (or Profit) and your Investment amounts and use the traditional formula of:
You will then get a percentage number that will tell you whether or not your campaign is being profitable.
For a better explanation of the concept and its interpretation, I have spoken with an expert on the matter (Tiago Salgado) and got some basic insights to share with you:
ROI results & their interpretation
- When the ROI is Negative (Ex: -50%)
It means that the investment was not covered by the results of the campaign. For every 1 euro invested we only recover 50 cents of it.
Note: when the ROI is -100%
This means that you actually got no return and had to bear all the investment cost.
- When the ROI is 0%
The return you get from a campaign was just enough to cover the costs of this campaign, contributing nothing to the company’s profitability. This result is what is called Break-Even point.
As a side note on this situation, one has to keep in mind that a business can not afford itself to have campaigns with ROI=0% as this would mean that none of them would be able to generate any return to cover any fixed costs (as the return itself would only contribute to pay for the campaign itself).
- When the ROI is Positive (Ex: 10%)
This means that the campaign generated a return that is higher than the investment, which is what you are looking for.
However, as mentioned above, this positive return may not have been sufficient to cover the remaining company costs. So, even with a positive ROI, the company may be at a loss (after consideration of the remaining costs). Nonetheless, in principle, if a campaign generates a positive ROI, then it should be kept active as at least it is able to cover some of the business costs.
The Future of Digital Marketing ROI
ROI has come to stay and it is up to the marketers to adapt its full potential to their reporting skills.
Obviously, given the nature and idiosyncrasies of the digital marketing landscape, it is often complicated to quantify costs and benefits of marketing strategies in areas such as Social Media, Content marketing or SEO. This will definitely be a subject for more articles where I will try to deconstruct the concept and its application in reporting and analysing marketing data.
The secret, I believe, is not to confine our reports solely to this metric, but rather customise it and utilise it together with other KPIs, to bring more and higher quality data that can drive more informed decisions.
If you want to understand more about this subject and get some useful materials, just check out the info @ Marketingmo.com.
PS: A special thanks to Tiago Salgado for the insightful contribution given on this article.