“How much does digital marketing actually contribute to our bottom line?”

Early in my career, these were words that sent chills down my spine.

I was hardly the first marketer to be asked that question. And for decades, the answer has always been some version of John Wanamaker’s century-old quote about advertising:

“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.”

Ever since the very idea of selling goods in exchange for payment began, marketers have always been challenged with justifying their return on investment. But luckily for me, digital marketing makes it increasingly possible to establish and measure a tangible ROI.

We now have the tools we need to prove our contribution to revenue more precisely than ever before. No matter which tools you use or how much technology keeps changing, however, the basic formula for digital marketing success is always about measuring your marketing costs against your returns.

Here’s a crash course on how we do it.

The Core Digital Return Equation

Despite the different types of digital marketing channels and their corresponding key performance indicators (KPI’s), the basic equation for achieving your goals and measuring your revenue impact remains the same.

Expected Revenue ($) = Impressions x Click-through Rate (%) x Conversion Rate (%) x Marketing-Qualified Lead (MQL) (%) x Sales Close Rate (%) x Average Transaction Revenue ($)

If you’re not a math whiz, don’t fret. With the formula outlined above, you can easily establish a pre-campaign goal based on realistic target estimates, and then continue to change and optimize processes that lead to better results. What’s more, not only does this equation give you a baseline for measuring all of your digital marketing ROI, it will also provide you with outcome-based information and metrics you can use to make better forecasting decisions going forward.

Here’s a brief example of how the formula works in a typical Search Engine Marketing (SEM) ad campaign.

• Impressions are defined as the number of people who actually see your ad online. So, let’s suppose you want to launch a campaign that you expect will achieve 100,000 impressions (Google actually gives an estimate of this as well).
• Clickthrough Rate measures the number of people who actually click on your digital ad after they’ve seen it. Let’s say you expect 5% of the 100,000 people who actually see your ad to click on the link to it. That gives you 5,000 prospects who are now looking directly at your offer.
• Conversation Rate measures how many people accept your offer. An example might be an offer for a free trial of your online software for one month. Let’s forecast 10% as your expected conversion target. Based on the core equation, we’re now estimating 500 people out of 5,000 will take you up on your offer.
• Marketing-Qualified Lead is the term we use to describe whether the person who downloads your offer is a real target or not. In most B2B scenarios, the majority of leads that come in either won’t match your target or actually be ready to buy your product. If only one out of five people turns out to be a real marketing-qualified lead, now you’re down to 20% of the people who ordered your free trial. In this example, it means only 100 people who accepted your offer (500 x 20%) are actually worth pursuing.
• Sales Close Rate is the percentage of people who decide to buy your product or service. For our hypothetical software company, we estimate your sales team will be able to close one out of 10 qualified leads. The number of actual buyers is now down to 10.
• Average Transaction Revenue reflects the average projected income per sale, and our software company’s average price is $5,000 per package.
• Expected Revenue is the total amount of revenue you set as your campaign goal. Based on our sample scenario, 10 people are expected to make a $5,000 purchase, so the expected revenue you generate from this particular campaign is $50,000.

Now you have a baseline for measuring your ROI. If, for example, you spent a total of $10,000 for this campaign to run, your end result is $40,000 in net revenue.

Is a 400% return enough to greenlight the ad spend? It depends on each company’s circumstances. Most campaigns are nowhere near this straightforward, especially for B2B firms with multiple decision-makers and other variables involved in the purchasing process.

But what is important to the success of your digital campaign is the ability to identify and optimize the journey it takes to achieve your desired ROI. It all starts and ends with targeting and reporting your financial results. Just like the way every business measures its bottom line.

Ready to start your own digital campaign? Have any questions about how we can measure your digital marketing ROI? Contact us today.