In a recovering economy, there’s an understandable focus on justifying every marketing dollar. For companies that are in survival mode, increasing revenue as quickly as possible is the order of the day. Many of these companies are looking at increasing their online marketing budgets as a way of maximizing their returns. There are good reasons for this strategy shift. These are dollars that can get you more for less, are more trackable and easy to adjust if initial results fall short of expectations – all factors for generating superior return on investment. But what is ROI really, and how is it calculated?
Consider this scenario of ROI as applied to a typical interactive project:
New Sounds, a manufacturer of fashion audio headphones, wants to re-develop their “homegrown” website. They’re looking to increase brand awareness and start a dialog with their target demographic. They have budgeted $25K for their new site and after getting recommendations and viewing the portfolios of a few agencies in their price range, they choose Acme Creative to develop their website.
The three elements of ROI are:
- the revenue generated by the project (the return) over a set period of time
- minus operating expenses
- divided by the projects budget
This is then expressed as a percent by multiplying by 100. Let’s break this down further:
- Online, the revenue generated by a project can be easily trackable through the use of digital product or offer codes or through site tracking if the site is eCommerce enabled.
- The operating expenses of a website or web application should be negligible aside from hosting and any adjustments that become necessary.
- ROI will be expressed as a percentage gain over a period of time. This can be a little abstract. One way to clarify this is to convert this number to the following statement: “For every $1000 we spend on this project, we get back $X (where X is our ROI number divided by 100)”.
Now let’s get back to New Sounds.
Their site came in on budget and launched with support from a solid marketing plan. Their site hosting is $240/year and they spend $10k on outbound marketing efforts. They estimate direct sales by tracking click-throughs from their store locator to their on-line distributors, pick up two new distributors from leads generated through inquiries from the website and generate “soft metrics” by assuming that 2% of all visitors that spend five minutes or more on the site will eventually make a purchase. They calculate the total sales from direct referral, new sales channels and increased brand awareness to be $250k for the year.
(250,000 – 10,240) / 25,000 = ~ 960%
A more meaningful expression of this is that for every $1,000 New Sounds spent on their website, they got back about $9,600.
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