At last week’s OMS shows I spoke about measuring ROI and building a business case to support your investment.  In the presentation I went through a case study showing how we calculated ROI (from in-store purchases) for a online marketing campaign.  For those seeking to better understand this subject, here’s a much simpler methodology for quantifying value.  

In this case, we’ll look at ROS (return on spend = expected revenue divided by cost of online media and web development fees) and ROI (expected net present value divided by investment) from online campaigns.  If you find it to be of value, or if you have additional questions, please comment below.

Steps to Calculating Value

1. Determine your average offline sale and present value of a customer.

Some companies look at revenue; others look at the lifetime value (profit) of a customer.  Choose the metric that is most used by your executives.   For this example, let’s assume your average offline sale is $500 and that the lifetime value of a customer is $2,000.

2.  Assign conversion rates that approximate your historical close rates.

Let’s assume 3% of visitors request more information (inquiries) and that 20% of inquiries purchase.  If you’ve done online campaigns before, you should have a basis for inquiry rates.  Hopefully your VP-Sales know how many leads convert to customers.

3. Determine what your cost or investment will be.

Let’s assume you will spend $5,000 in advertising this month.

4. Calculate ROAS:

Assuming your efforts drive 10,000 incremental visitors to your site, you should see 300 inquiries (3%) and 60 new customers worth $30,000 in near term revenue, or $6.00 ROS ($6 in revenue for every $1 spent).   Put another way, marketing expense is 16% of sales.   Note that this does not include revenue from future purchases.  If you expect repeat business, include that in your revenue numbers.

5. Calculate ROI: Using the assumptions above, 60 new customers are worth $120k ($2k each).  When divided by your investment, you’ll see a 24x ROI.  If you present these types of results to your CFO, you’ll quickly find a lot of interest (and dollars) in online marketing.

Another Metric: Value per Engagement

Another way to measure value is the value per engagement (visit, inquiry, etc.).  In the example below, each visit is worth $3 in revenue ($30k divided by 10k visits), whereas each inquiry is worth $100 ($30k divided by 300), compared to a cost of $0.50 per visit or $16 per inquiry.  It’s best to compare this to your gross margin vs. revenue; assuming your margin is 50%, you are making positive returns as long as your cost per visit is less than $1.50 or cost per inquiry is less than $50.

Caveat Emptor!

Please use good judgment when applying these methodologies to your own business. Again, these are not an all-inclusive for every situation.  But hopefully, they will give you some building blocks for quantifying the impact of your interactive marketing program.  If you have specific questions, please leave them here.  I can’t promise I’ll know the answer, but I’ll do my best to help you figure it out.

Happy number crunching!