ROI: What Is It, Formula & 5 Ways To Measure Your Marketing ROI
ROI. You’ve probably heard this particular acronym hundreds or even thousands of times. It’s one of the most important calculations in the business world.
It’s not just for Fortune 500 companies, either. Professionals in the Knowledge Commerce market need to know how to calculate ROI. They also must understand what it means and why it matters.
If you haven’t focused on ROI through your marketing efforts, maybe it’s time to start. We’ve prepared a detailed guide that will take you step-by-step through the ins and outs of marketing ROI for Knowledge Commerce professionals.
What Is Return On Investment (ROI)?
Return on investment, or ROI, refers to the amount of money you generate after making an investment in something.
Think of it in terms of real estate. Lots of people like to purchase houses that need lots of work, then rehabilitate them and sell them for a profit.
If you buy a house for $80,000, spend $20,000 fixing it up, and sell it for $140,000, your ROI is $40,000. You add the amount of the initial investment to any subsequent money you spend, then subtract that number from the amount of your profit.
It works the same way in online marketing. Your Knowledge Commerce business can generate ROI based on the amount of money you spend to market your products and the amount of revenue you bring in.
Many marketing strategies don't require any monetary investment at all. However, most entrepreneurs discover that they need higher-end tools to effectively market their digital products.
If you are using Kajabi, you already have many of those tools at your disposal. All you have to do is put them to work to attract your target audience and convert them into customers.
You might decide to spend more money on things like advertising to generate more profit. When you advertise online, such as through social media or the search engines, the money you spend on those ads becomes part of your total marketing spend.
Benefits of ROI for Knowledge Commerce Professionals
When you understand how ROI works, you can better manage your Knowledge Commerce business and make sure that you remain in the black no matter how much money you spend on marketing and advertising.
Many entrepreneurs make the mistake of blindly spending money, hoping that cash will eventually come back and multiply. Sometimes it works. Usually, however, the entrepreneur runs out of money because he or she didn't consider ROI.
Let's go back to the real estate example. What if you bought a house, spent thousands of dollars rehabilitating it, then realized that the house wasn't worth what you hoped because of the neighborhood in which it's located?
You just spent lots of money on an investment that won't pay off because you didn't conduct the necessary research. That's an uncomfortable position to find oneself in.
It works the same way for Knowledge Commerce businesses. If you spend money blindly, you won't know whether or not your strategy will pay off in the end.
That's why you need to understand ROI. When you spend money on behalf of your business, you need to track that money and know how much revenue it helped you generate. Otherwise, you might continue to throw money into a marketing strategy or advertising opportunity that doesn't help your business at all.
Understanding ROI and tracking it religiously has other benefits. Not only does it keep you from spending money unwisely, but it also helps you identify potentially lucrative opportunities.
Maybe you spend $500 on Facebook Ads. You track the campaign over several weeks and discover that leads from those Facebook Ads generated $10,000 in revenue. That's a massive ROI.
Now you know that Facebook Ads offer tremendous ROI. Next time, you might spend $2,000 on Facebook Ads to multiply the potential revenue.
Calculating Marketing Spend
To track and measure ROI, you first need to know how much you're spending on marketing your Knowledge Commerce business. The numbers can at first seem elusive.You need a sound record-keeping strategy and a way to monitor continual expenses.
Many entrepreneurs miss certain expenditures but should fall under the category of marketing spend. For instance, if you hire a freelancer to write blog content on your behalf, the money you pay the copywriter needs to fall under the expenditure category of the ROI equation.
Keep in mind that you might have many marketing channels working at the same time. You need to track each one individually to determine how they contribute to overall ROI.
In that way, ROI can have many different calculations. You can calculate overall ROI, which includes all marketing spend and all revenue generated from your marketing channels. You can also calculate the ROI from individual marketing channel.
Choosing Channels for Marketing Spend
You don’t want to spend money wildly when you start marketing your Knowledge Commerce business. That’s a good way to run out of cash quickly.
Instead, you want to identify the best marketing channels for your niche. Test them out to see if you generate good results, then try others. You’ll gradually rule out certain channels and discover others.
At least, that used to be the best solution.
Today, you’re better off choosing a Knowledge Commerce platform that combines multiple channels into one convenient package. That’s what Kajabi offers.
You can start a blog, post on social media, host live webinars, record videos, build membership sites, and more. Since you don’t have to pay anything extra, you won’t have to worry about your marketing spend going through the roof.
It’s also a great way to control and calculate your ROI. Since you’re boiling down your marketing spend to one price, you can more accurately assess the among of money you spend versus the revenue you generate.
In other words, you’ll better understand your ROI.
Comparing Your Marketing Efficiency With Your Competitors'
One way to start calculating your marketing ROI is to compare your efficiency and effectiveness with your competitors’ marketing strategies. It’s not as difficult as it sounds.
Start by investigating your top three competitors’ websites. How many pages does each website have? How many people comment on their blog posts? Do they have social sharing buttons and counters? What do their engagement numbers look like?
From there, analyze your competitors’ social media presence. How many accounts do they have and with which platforms? Do they get comments, feedback, retweets, and other forms of engagement? How quickly do they respond to followers?
You can also compare your SEO, email marketing campaign, and content marketing efforts to theirs. How often do they connect with subscribers or readers? Do they dominate the social conversations in your niche?
The more you learn about your competitors and their marketing efficiency, the easier it becomes to rise above them.
Holding Yourself Accountable for Marketing Spend
When it comes to ROI, you always want your business to fall on the positive side of the equation. When you get into negative ROI, your business hemorrhages money.
That’s never a good thing.
You must hold yourself accountable to every marketing channel you target. Is it generating leads, conversions, and revenue? If not, can you tweak your approach to improve its performance? Or do you need to abandon it in favor of another strategy?
Let’s say, for instance, that your email marketing campaign suffers from low open- and click-through rates. You’re sending emails that get trashed or ignored.
You could stop emailing your prospects altogether, but the answer likely hides in your approach. To improve open- and click-through rates, you could:
- Adjust your subject lines
- Include more internal links to your website
- Provide more value in the form of actionable content
- Offer discounts and coupon codes
- Host contests
These strategies might boost your email marketing ROI and make it a reasonable channel for your marketing efforts.
You must also use analytics to track your marketing efforts. Raw numbers will tell you where to pin your focus. Use Kajabi’s built-in analytics to track your marketing efforts and to decide when you need to step it up or pull back.
The Difficulty of Measuring ROI
Unfortunately, many companies struggle to measure ROI. It’s not a simple equation that you can tap out on your calculator. Instead, you have to take numerous variables into consideration.
For one thing, you have to set a time limit when calculating ROI. It’s a constantly evolving number, so you must narrow down a specific period of time during which to measure marketing spend and revenue.
It could be two weeks or two years. Consider measuring ROI over both short- and long-term periods.
Then you have to decide what constitutes ROI. Is it the net revenue? Gross revenue? Average sale price? Customer lifetime value?
Each of these numbers has value to your business, so consider the metric that will prove strongest when it comes to evaluating your marketing strategies. What number matters most to you — and why?
There are also ratios to consider. You could, for example, compare the number of registrants to your recent live webinar to the number of people who actually attended. Take it a step further and compare the number of attendees to the number of conversions.
It can get complicated, but setting specific goals can help you narrow down the numbers that matter most to your Knowledge Commerce business.
What Should You Measure to Determine ROI?
The simplest way to determine ROI is to compare your revenue to your marketing expenses. But you’ll get more accurate results if you go a little deeper.
One of the best equations for calculating ROI looks like this:
(Revenue — Investment) / Investment
Let’s say that you’ve invested $5,000 in marketing spend and you’ve generated $10,000 in revenue from those channels. Your formula would look like this:
($10,000 — $5,000) / $5,000
You then multiply the answer by 100 to get a percentage. In this case, your marketing ROI is 100 percent.
To calculate this formula, you need to know that your marketing channels have actually generated the ROI. In other words, how did customers find your Knowledge Commerce products?
That’s where analytics come in. You can set up attribution to track how consumers have found your business.
How Many Touch Points Factor Into Your Equation?
We mentioned attribution in the section above. Attribution simply refers to the touch points that consumers used before finally buying your product.
It’s all about the buyer’s journey.
For instance, a buyer might have discovered one of your blog articles through organic search, then signed up for your email list, attended a webinar, and converted on the webinar’s offer. In this case, there are three touch points.
If you’re using Google Analytics or other analytics software, you decide which touch points matter and how much weight each one deserves. We’ll get into that in more detail later.
What Influences Total ROI?
Your total ROI should encompass every marketing channel that you use. Otherwise, you risk missing important data that could point toward ways to improve your marketing strategies.
You might not spend any money on certain marketing strategies. However, you might want to take into consideration non-monetary resources, such as your time.
For instance, if a certain marketing channel is taking up the bulk of your time and is not generating any revenue for your business, you might want to consider switching tactics.
Keep in mind that advertising should also come into play when you're calculating your ROI. Advertising is part of marketing and often serves as the bulk of marketing spend for many businesses.
Have You Considered Extraneous Variables?
Extraneous variables can drastically impact ROI, especially if you aren't aware of them. For instance, what if your website goes down for an entire day when you're measuring ROI for the month? An inactive website will reduce your ROI because potential customers can't reach your sales pages and landing pages.
Other extraneous variables could include economic trends, changes in your industry, a new experiment that you’re running as part of your marketing strategy, and more. If you can identify these variables, your ROI calculations will become far more accurate. More importantly, you won't discount effective marketing strategies that had been impacted by variables that are beyond your control.
How To Calculate ROI For Knowledge Commerce Marketing
The best way to calculate ROI for Knowledge Commerce marketing depends on your specific goals. Early on in your business, for example, you might want to focus on brand awareness. In that case, your ROI has nothing to do with money.
Instead, you want to get eyes on your website and other online channels. You'll calculate ROI based on factors like website traffic, email sign-ups, and social media interactions.
When you're ready to calculate ROI based on revenue, you need to decide on the most important metrics for your business. This has much to do with the touch points we covered earlier — each of those touch points leads your customer closer to your business and the eventual conversion.
No matter the marketing channels you use to measure ROI, you can use the formula we described above. Subtract your total investment from the amount of revenue generated, divide the number by your total investment, and multiply the result by 100.
That gives you your ROI percentage.
The short-term impact of ROI should help you steer your marketing efforts in the right direction. Look for patterns in the data that suggests that you should change course, but don't give up on marketing channels just because of a brief drop in engagement or ROI.
Instead, short-term ROI should serve as a roadmap that will lead you to the right marketing channels. You'll look for patterns in multiple short-term stretches, and these patterns will tell you where to focus your attention in the future.
In other words, you don't make any major changes based on short-term ROI. It's a long-term game. Something that doesn't work this week might bring in hundreds of customers next week.
ROI is meant to inform your long-term marketing strategy. Over several months, you might notice that one marketing channel brings in far more revenue than the rest.
Based on those observations, you'll know where to focus your time and energy to boost conversions and increase revenue.
Ideally, you want your ROI to increase steadily as your business gets older. Stagnant or declining ROI likely suggests that you're not reaching your target audience or that you aren't speaking to your audience in language that resonates with them.
Ignoring problems with ROI can have long-term consequences for your business. You don't want to ignore any red flags that might suggest that you need to change course.
Methodologies To Measure Marketing Program ROI
We discussed attribution earlier in this article, but let's explore in more detail. Attribution refers to the process of assigning weight to certain touch points along the buyer's journey.
Your customers might interact with your business in myriad ways. They can learn about you from a friend, interact with you on social media, leave a comment on your blog, sign up for your email list, or attend one of your webinars.
Most consumers don't buy from a business the first time they interact with it. Instead, they need time to research their options and to better understand the products you offer.
In a single-attribution model, you give all the credit to either the first touch for the last touch. This means that you will calculate a marketing channel's ROI based on whether or not it was the first or last touch point on your buyer's journey.
Most marketers agree that first- and last-touch attribution models are severely lacking in accuracy. They don't take into consideration the other touch points that your buyers make with your business.
If you're using first-touch attribution, for example, and one of your customers visits your blog for my organic search results as his or her first interaction with your business, that blog post will get all the credit for the eventual conversion.
Similarly, with last-touch attribution, a customer who eventually converts via an email with a coupon will be considered an email marketing conversion.
Other attribution models give you a better overall picture of your marketing strategy as well as your ROI. However, single attribution models are the easiest to calculate.
Another way to measure ROI is through multi-touch attribution. In this model, you assign weight to each of the touch points your buyers hit on the way to a conversion.
For instance, you could give equal weight to each of the touch points. Alternatively, you might give more weight to the first and last touch points, then equal weight to the touch points in between.
The advantage of this attribution model is that you get a more holistic perspective on your marketing plan. You'll note each of the touch points as well as the one that introduced your brands to the customer and the one that resulted in a conversion.
Marketing ROI Formula
Now that you are well-versed in ROI and attribution models, we can come up with a marketing ROI formula that will meet your needs and help you design the ideal marketing strategy for your Knowledge Commerce company.
First, set up your attribution model. You can use Kajabi or Google Analytics to accomplish this.
If you're using first- or last-touch attribution, the first or last touch point will get 100% of the credit. If you're using a multi-touch attribution model, you have to assign percentages to each touch point. That's how you will calculate ROI for each individual marketing channel as well as your overall ROI.
Let's say that you want to calculate ROI for your latest online course. You have just launched the course and you've decided to use a multi-touch attribution model that gives the first and last touch points 20% weight and each touch point in between equal weight.
Over the lifetime of the course, you'll track each marketing channel and the revenue that it drives. Use the formula described above to calculate both individual ROI for your marketing channels and overall ROI.
You might discover, for instance, that email marketing is the most popular conversion channel. In that case, you'll want to ramp up sign-ups for your email newsletter and continue testing email formats to find the perfect formula.
You could also discover that one of your marketing channels, such as social media, almost never appears as a touch point. From that data, you'll know that you either need to change your marketing strategy on social, switch social platforms, or devote less time to social altogether.
How To Track Your Marketing Performance
It's easy to track your marketing performance if you have a powerful platform at your disposal, such as Kajabi. We provide internal analytics for all of our customers that allow you to track your marketing spend as well as your ROI.
That's the best way to figure out which of your marketing channels are most effective without having to leave the Kajabi platform.
Generate heatmaps, learn how many times your videos have been viewed, measure engagement levels, and more.
You can also set up a Google Analytics account and track your attribution model as well as your ROI the of that platform. Google Analytics has become one of the most popular ways for businesses to keep track of their websites' performance.
Use Kajabi To Turn Your Knowledge And Content Into Products You Can Sell
Now that you know how to track and calculate ROI, you are well on your way to creating a successful Knowledge Commerce business. Kajabi can help.
If you haven't already, sign up for a free trial with Kajabi and start testing out our extensive features. Familiarize yourself with the process of setting up a blog, creating an online course, and integrating any outside tools you might already use.
Of course, you can't calculate ROI unless you have a product to sell. You can use Kajabi to sell multiple Knowledge Commerce products, from membership sites to full-fledged online courses.
The sooner you create additional products for sale, the faster you can generate revenue and start tracking your ROI.
ROI is not a simple concept. It can incorporate numerous variables and result from several different equations or formulas.
The most common formula involves subtracting your total investment in marketing from your total revenue, then dividing the number by the total investment. Multiply the resulting number by 100 to get your ROI percentage.
The higher the percentage, the better your ROI.
Keep in mind that multiple touch points can be involved in calculating ROI. You can decide what type of attribution model makes the most sense for your business.
A single-touch attribution model is easier to calculate and to track. However, considering multiple touch points will give you more accurate data.
Make sure that you start with marketing channels that are likely to help drive revenue. As you track ROI, you can adjust your marketing strategy based on the amount of revenue you generate for each channel.
Over time, you will learn which marketing channels are most effective and where you should spend more of your time and money. That's the point of calculating ROI. You don't want to waste time on marketing channels that don't help you convert prospects into customers.
Have you calculated ROI for your Knowledge Commerce business? What is your favorite attribution model? And have you used Kajabi's analytics to better understand your marketing spend?