Is There An ROI Calculation Formula For eCommerce?
As mentioned in Gertie’s previous rant about why ROI in digital marketing is bullshit, any one-size-fits-all ROI calculation formula that you read on a website is always going to be too general to offer real insight. Calculating your return on investment requires you to be very aware of the nuance and context around your business’ framework and goals.
A typical ROI marketing ‘formula’ you may have come across includes:
Return on Marketing Investment (ROI) = (Sales Growth – Marketing Cost)
x 100 / Marketing Investment
Ok, so you can measure the return on your marketing investment this way, but this formula can be applied to almost everything. Yes, it’s simple and gives you a quick insight to your marketing spend like Josh explained in his recent blog, but what about really drilling down on the detail?
To get something useful out of an ROI exercise, you need to:
- Think about what you are actually trying to measure. Specifically, which bit of activity are you trying to calculate the return on investment for?
- Work out which key metrics are important to measuring that activity
- Make sure you segment your data accordingly
- Understand the data that represents that metric: how it is collected, and how the nuances of the method of collection affect the result
Whether you’re B2B or eCommerce, a simple way to estimate your return on investment is to venture into Acquisition in Google Analytics. This categorises your website channels by the following:
This allows you to see where your visitors are coming from and how many of them are converting. In theory, this then allows you to deduce for example:
We’re spending £4,000 on PPC which is yielding 2,000 visitors via PPC who are then providing us with £8,000 of revenue
We’re spending £4,000 on PPC which is yielding 2,000 visitors via PPC and 40 enquiries, which turned into 8 actual new customers which are worth £8,000 of revenue.
We’re spending £2,000 total on digital marketing services, chiefly SEO, and we are seeing 8,000 visitors via organic traffic which is generating £16,000 of revenue.
You get the idea.
A simple ROI calculation formula might include assessing how much each visitor is worth per acquisition channel. Which - as you can see from above - lets you deduce that a visitor from referral is 11.8 x more likely to make a purchase than one from email.
Does that mean that referral visitors are 11.8 x more valuable than email visitors? Or does it mean that your emails are rubbish and a decent email might have yielded a more similar return? Is one referral website generating all the ‘hot leads’ or is it across the board? Was that referrer a solicited placement (part of another campaign) or impromptu coverage?
What Does Google Analytics Actually Measure?
The biggest pitfall with this line of thinking is that it is based on a lot of assumptions. Google Analytics doesn’t measure revenue, or leads. It measures something very specific – visits to an “order complete” page or “form completions which triggered a ‘successful submissions’ message”. What is the relationship between Google Analytics and real life? Do some customers pick up the phone (excluding themselves from the measurement framework?) And what about the “organic” channel – is that all thanks to your SEO department? Or is a lot of that traffic comprised of people that saw your print advertising and then Googled your brand name? Those people will be counted under “organic” too.
Channels in Channels
You need to be a lot more specific in your measurements to actually get a grasp on how much your marketing efforts are worth. You need to consider the channels within the channels, and continually monitor and track (e.g. make annotations in GA) when specific events took place.
One of the most valuable ways of calculating ROI is by making sure you tag things correctly in Google Analytics. By using tracked links on a blogger's post mentioning your product (for example), you can assess how much traffic is coming directly from this page, and track how much revenue is being generated as a result. Hence, if the blogger's post cost £250, but you are making an average £100 a week from the page, then this will quickly become profitable...😉 (congrats).
But always take care to understand the limitations of this framework – maybe that same blogger will also mention you in a tweet that doesn’t use a tracked link (putting their traffic via the social channel) or mention you by name prompting a flurry of Google searches (putting their traffic via organic or paid channels). Not only does this cause you to undervalue the investment in the blogger, you may even overvalue a channel that is actually underperforming and reinvest in those channels over and above working with that blogger again. Oops.
Conversion Rate Per Device
Speaking of channels within channels, you might also choose to segment your audience browsing via mobile, tablet and desktop devices.
What would the return on investment be for developing the mobile UX of your site such that it converts at the same rate as your desktop site? You can do those sums, work out what you stand to gain in monthly revenue, and weigh that against quotes for development.
OK so we’re straying from the topic at hand – calculating ROI – but it’s worth labouring the point. When trying to get your head around whether you’ve seen a return on your investments in marketing, you’ll inevitably end up tracking KPIs and ‘measuring success’. It is so so vital that ‘measuring success’ is done against a logical framework and not a freewheeling “so I guess we’re up so we must be doing something right” kind of mentality.
It is vital that you are tracking your progress against custom set business goals - and these need to be SMART:
S - Specific
M - Measurable
A - Accurate
R - Relevant
T - Timely
Here is an example of a SMART goal for eCommerce:
“I want to increase the number of organic visits to my pink slippers website from 1,500 to 2,550 (a 70% increase) in six months”.
Setting SMART targets helps you to establish concrete and achievable goals, which can be set across different tools (Google Analytics, HubSpot, or Native Analytics) and within different channels. These are key in helping you to align your marketing efforts and assessing your performance - identifying the who, what, where, why and when.
Spanners In The Works
If what you're measuring is in anyway related to the collective behaviour of your human customers, calculating ROI perfectly is impossible.
Something nominally very simple, such as calculating the return on an increased PPC spend should be relatively simple. Right?
Check out 'Top Conversion Paths' in Google Analytics (Conversions > Multi-Channel Funnels > Top Conversion Paths) and you’ll suddenly start to realise how the metrics related to your top level acquisition channels are flawed.
So, looking at no. 2. you can see that visitors attributed as 'Direct' by Google Analytics, actually first turned up via 'Organic'...and for no. 10 those registered as 'Direct' actually originally found you via a social network, and likely returned at a later date via directly typing your name directly into their browser.
There is also a time frame problem; conversion paths are always constrained by a time frame (in GA the default is a 30 day window). So, a user may have originally found you two years ago due to PPC, but only decided to look you up again yesterday. These users will be attributed as direct - when they're actually PPC! You can see how this nuance of data collection affects accuracy of your measurement if - for example - your products are a considered purchase that people typically mull on for 6 months before buying.
That’s just for something easy, like PPC - measuring your organic SEO efforts?! You may not see the benefits of an SEO project for 3-6 months! Measuring the ROI on that campaign, if it can be done at all, requires very thoughtful and premeditated tracking and measurement.
IAR, not ROI
I’ve always felt that calling it 'return on investment' puts these concepts in the wrong order. It should be 'investment and return'. First comes the investment in activity, then comes the return. When you’re investing in lots of things at the same time, whilst also tolerating our hellish reality that insists on an endless parade of random events that also affect your business’ trading, it can be very difficult to tie each transaction or lead to an original investment, comprehensively, at scale.
This doesn't mean you can't get close though - you just need to be aware of the limitations of your calculations, and so give your ROI formulas a certain 'weight' - a sort of scale behind it demonstrating how confident you feel in its accuracy.
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