5.3 How do I prove Return on Investment (ROI)? - Video Tutorials & Practice Problems

<v ->So what is return on investment, ROI?</v> Well, it's actually not a marketing formula at all. It's a financial formula that you can apply to any investment in a business. And you might guess from the name that it depends on knowing your return, so how much money you're getting back from something, and the investment, how much you spent to make it happen. Neither of these numbers, the return or the investment, are always that easy to calculate in marketing. So it's not easy to always know what the investment is because do you count the salaries of all these people that worked on the project? How about the technology and your Martech stack? Are those license fees counted as part of the investment? Or are you just going to do the direct campaign costs? Maybe just the ads that you bought. So different organizations have different rules for how they do return on investment, and the same thing's true for the return. Do you measure revenue or profit? Do you measure lift? So it's new revenue, or shift where maybe it's cheaper revenue, where you used to have revenue coming in from phone calls, and now you have it coming for eCommerce. It's the same revenue you had, but you're spending less to get it. A lot of times they call that the shift in revenue rather than a lift in revenue. But do you actually know that the thing you did caused the return on investment? That's back to our causation and correlation problem. How do we know that the thing we did actually worked? And so it's not always easy in marketing to know what the investment is, nor what the return is. But we do have a six step process that helps us measure return on investment. And we're gonna go through each of these six steps with you right now. So step one is to pick a time period. So when did the investment start and when does the return end? You might want to consider longer time periods for high consideration products. So if you have a sales cycle that lasts for months, it doesn't make sense to calculate your ROI over weeks. But if on the other hand, you've got a fairly simple product that's on eCommerce, you might put ads out today and see business come in tomorrow. So think about what the right time period is between the investment and the return. Step two is to decide the basis for your return. That's the question we asked earlier. So in marketing, the return is usually based on revenue, but it's also possible that it could be based on profit. Your question is, how is it done in the organization that your solving your problem for? Whatever they do, just do that. And if you stick to what everybody else does, what that'll do is it'll allow financial people to compare your ROI metrics, to other's ROI metrics. So that helps you to both make the business case to be funded the first time, but it also helps you to show that your project is succeeding because you can compare it to everybody else's. The third step is to choose a target segment. So your segment can be based on visitor metrics like demographics, firmographics, et cetera, or on anything that your analytics can provide. So when you're returning your investment, you have to know where it's being returned from. So what audience is it that is really the one that you're targeting. Now for some projects you don't need to take this step. For some projects it's not important to know what target it came from, but for most projects, there's something about what you're doing that is aimed at a certain target segment. So for example, if you're trying to calculate the ROI for an advertising project, what is the segment you're buying ads for? Doesn't make sense for you to be counting sales from other segments that didn't see the ads. So think about your target segment, if it applies to the project that you're trying to calculate return on investment for. Step four is to choose the starting point for the return. So how do we know when your investment really should begin to create return? So a lot of this has to do with the sales cycle, as we mentioned earlier. So if you have a product that it takes months and months for your audience to make a decision on, doesn't make sense that if you planted some awareness ad on Facebook yesterday, that a sale of your product today could in any way be related to that ad. So you have to choose the starting point. Then you could have a known point, a known point means that you have specific analytics that tells you the revenue at the beginning of the period. And a special case of a known point is zero. If you started a completely new business or new product or new market, your revenue before that was nothing. And so you definitely got a known point. You could have an estimated point. You might know the revenue, but maybe you are estimating what percentage of that revenue is actually being driven by digital. And so that's a way of estimating what the starting point is. You could have a historical point. So you might know what the typical revenue is for this period, maybe this season every year, or this month from last year, and you're going to give credit for revenue above that historical point. Any of these are ways of understanding your starting point in your calculation. The fifth step is to calculate your investment. So basically this has to do with how ROI is calculated at your company. So what do they count? Do they count direct campaign costs? Vendors like an agency or a consultancy? Do they look at their Martech stack, personnel and their salaries, overhead? What are the things that go into a return on investment calculation at your company? Whatever those investments are, those are the ones you should use. The last step is actually to perform the calculation. And the calculation is actually fairly simple once you've gathered all of the numbers. So the traditional way of calculating ROI is to take the revenue minus the cost and divide that by the cost, and then multiply that by a hundred percent. So suppose you had revenue of $800 and a cost of $200. When you subtracted that you would get 600, and then you would take 600 divided by the cost, which is 200, and that'll give you three. And you multiply that by 100%, and that gives you a return on investment of 300%. This is the classic way of calculating ROI. It's probably how most of your companies do it. It's in Wikipedia, so I know it's right, but what we really need to know is how does your company calculate ROI? The company that you chose for your marketing problem, how do they calculate it? Some companies use that classic ROI calculation, some have something custom, some have a slightly different calculation called return on advertising spend R-O-A-S, which is basically revenue divided by cost, and it gives you a ratio. So you might have 100 hours divided by $20, that gives you a $5 to $1 ratio. So pay attention to what your company does, the chosen company for your problem, what did they do to calculate ROI or return on advertising spending. Whichever they do, that's what you want to do so that your calculation for your project can be compared to everything else.