Why Should You Calculate ROI for Digital Marketing?
How often has this happened to you? You’re about to have a meeting with someone on the client-side who doesn’t have a direct line of sight into your project and they don’t speak sessions and conversions. This meeting can go two ways:
- Their eyes can glaze over as you speak sessions and conversions. They leave the meeting not understanding the value of your work.
- (Better) Or, you can speak their language of dollars and cents by showcasing your digital marketing campaign’s ROI.
How Do You Calculate ROI for Marketing?
The formula for calculating the ROI of a PPC or SEO marketing campaign is simple:
ROI = (( Gross Profit Generated by the Project - Cost of the Project to the Business ) / Cost of the Project to the Business ) x 100%
What is Gross Profit? Gross Profit = (revenue of product or service - cost to produce that product or service). We recommend using gross profit rather than revenue because gross profit pays for all additional line items, including marketing (i.e. your project).
For example, if your client produces a $5 product and it costs them $3 to create the product their gross profit is $2. If the PPC and SEO projects drove 100 sales of this product, they made the client $200 in gross profit. For this example, let’s assume that the cost of the project to the client was $75.
ROI = (( $200 - $75) / $75 ) x100% = 167%
When you have all the information, it’s pretty easy to calculate ROI for your digital marketing project. But, this information isn’t always readily available from clients. Often the equation looks more like this:
(( Unknown Gross Profit Generated - Known Costs) / Known Costs ) x 100%
That’s where 10-Ks come into play if your client is publicly traded.
Using a 10-K to Calculate Marketing ROI
We know that financial statements like 10-K’s have a lot of great information to inform your SEO strategy, but they can also be used to prove the return on investment (or ROI) of your digital marketing project.
Below we’ll walk through an example using SnapChat.
- For this example, the account team is having an important end-of-year meeting and the CEO will be there.
- The team has been tracking organic and paid sessions as well as organic and paid app downloads.
- The team knows how much money the project costs the client (the account team contract, the additional web dev, the content resources they hired to implement recommendations, etc.) but they don’t know how much money they’re making SnapChat to calculate ROI.
Please note that SnapChat is not a current Seer client. All information shared is publicly accessible for publicly traded companies and mandated by the SEC.
Use a 10-K to Find Gross Profit
Ctrl + F + Consolidated Financial Statement
As mentioned above, Gross Profit = Revenue - Cost to produce the product/ service.
- Some 10-Ks will tell you Gross Profit as a line up which is super helpful!
- However, more often than not, you’ll need to sneak out Gross Profit.
The cost to produce a product/service goes by many names -- some of the most common “Cost of Goods Sold” (COGS), “Cost of Sales”,and “Cost of Revenue". It is often the first line item under Revenue in the Consilated Statements of Operational Data.
Take Snapchat for example, they provided Cost of Revenue, so Gross Profit = $824,949,000 - $717,462,000 = $107,487,000.
Find Gross Profit Per 1 Unit
Ctrl + F + User
Now that we found a total for gross profit, we’ll need to drill it down to a per-unit basis. In this example our key performance indicators were sessions and app downloads, so we’ll need to find out how much an individual user or app download is worth.
With the information found under “User Metrics,” we now know there were 187 million users at the close of the fiscal year. SnapChat also included the average revenue per user. Don’t get pulled into the allure of using this revenue metric and multiplying it by the nroiumber of app downloads your efforts drove. Although interesting, we want gross profit because that’s what pays for the account team.
Knowing that there are 187 million users and that the total gross profit was $107,487,000, we can determine gross profit per user.
Gross Profit / User = $107,487,000/187,000,000 = $0.57 / user
Calculating ROI with These Metrics
With the gross profit per user we can calculate the amount of gross profit generated by the account team’s effort (to find the “gross profit generated by the project” portion of the ROI equation).
Let’s say the account team for SnapChat generated +800,000 app downloads year over year between both paid and organic channels, then the gross profit generated by the project was $459,837.43 ( 800,000 x $0.57).
This changes the ROI Formula from:
(( Unknown Gross Profit Generated - Known Costs ) / Known Costs ) x 100%
(( KNOWN Gross Profit Generated - Known Costs ) / Known Costs ) x 100%
Benefits of Calculating Your Digital Marketing ROI
You’ve demystified how much money your project is earning your client’s company. Hopefully, you’re profitable and can dazzle the executive in the room at an upcoming presentation. If you’re not profitable, then consider this an opportunity to revisit your strategy to better serve your clients and benefit their bottom line.
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