Step 1: Define conversion goals
Before you can calculate the ROI (Return On Investment) of your online activities you need to define your online conversion goals.
Conversion goals are the “most wanted actions” that you would like your website visitors to perform. The types of action that directly or indirectly strengthen your business and/or improve your bottom line.
(In this blog post we will only discuss conversion goals in the context of your own website, but the concept also applies to your company’s non-proprietary digital platforms such as YouTube, LinkedIn, Facebook and Google+)
On an e-commerce website your primary conversion goal will nearly always be a completed online purchase as this usually equals money in your company’s pocket.
If you are primarily using your website for lead generation then a filled out contact form is typically a good proxy for something that eventually generates revenue and profits.
Relevant conversion goals can however vary greatly across different websites and industries.
Therefore, you need to sit down with your stakeholders and carefully determine the key reasons why your company actually has a website. The output of your discussion must be a selection of tangible conversion goals.
Examples of website conversion goals:
- Online purchase
- Filled out contact form
- Usage of online quote feature
- Click on link to dealer website
- Sign-up to newsletter
- Download of .PDF file
- Time spent on important webpage
- Social interaction (share/like/follow)
- View of video
Picking the right conversion goals is not an easy exercise. If your internal stakeholders are not aligned on the overall business strategy of your company, then you will surely discover it now.
The final selection of conversion goals should not be the responsibility of your online marketing assistant or the IT department. Senior management needs to be involved and sign off on the conversion goals. These conversion goals will set the path for your future online activities. Eventually you will discover that some of your selected conversion goals were irrelevant or slightly off-course. When this happens, reflect and adjust.
Step 2: Track conversions
Knowing your website conversion goals, you can start tracking them.
Depending on your technical platform and your choice of web analytics tools, there are a multitude of techniques to track conversions. Team up with your digital agency or in-house developer and get your tracking code set up in the right places. Unless you have chosen the wrong IT platform it is usually a relatively straightforward task to set up the actual tracking. The difficult part is deciding what to track.
If you don’t already have a suitable web analytics tool installed, I will recommend starting with the free version of Google Analytics. It’s simple to use and will cover 95% of your basic tracking requirement, even if you’re working in a large company. If your company eventually grows out of the Google Analytics tool, you will have a better understanding of your requirements to your new paid web analytics tool.
Step 3: Assign an average monetary value to each conversion type
To measure the ROI of your online investment you need to know both the amount of conversions and the approximate bottom line value of each type of conversion.
At first it might seem impossible to assign a specific monetary value to for instance an average customer inquiry through your website’s contact form.
Some typical objections are, that you don’t know …
- … what type of customer it is
- … what your average conversion rate from lead to business is
- … what your customer lifetime value is
These are relevant objections. But do your best to assign a monetary value to each of the primary conversion goals anyway. You need to get into the crucial mindset of assigning average values to conversions.
If you’re completely stuck and don’t know how to calculate the customer lifetime value, try asking yourself following questions:
A trustworthy person promises you 10 filled out contact forms from potential customers of average quality. How much are you willing to pay per filled out form?
A trustworthy person promises you 1.000 sign-ups (of average quality/relevance) to your company newsletter. How much are you willing to pay per sign-up?
Your answer will constitute a good alternative method for setting the conversion value for that type of conversion.
Step 4: Track incoming traffic
When you know the amount of conversions and the estimated value of these conversions, you need to map conversions to marketing channels. Your web analytics tool will help you map the tracked conversions to each source of traffic.
Example of traffic sources in Google Analytics: (terminology will be slightly different in other tools)
- Google / Organic (“Natural” search results)
- Google / CPC (Paid AdWords traffic)
- Direct (Visitors that type in your URL or use a bookmark)
- Facebook.com / Referral
- Plus.url.google.com / Referral
- YouTube.com / Referral
- Newsletter / Email
- E-mail signature / Email
- WebsiteXYZ.com / Referral
- Banner on WebsiteABC.com / Paid
- London Fair 2013 Campaign / Voucher
- Track.adform.net / Referral
- Maps.google.com / Referral
- Mail.google.com / Referral
- Images.google / Organic
Nearly all marketing channels can be tracked directly in your web analytics tool. Off-line channels can quite easily be tracked using campaign codes or easy-to-remember vanity URLs (eg. ThinkDigital.dk/Bonus2013). Phone calls can be tracked using call tracking software which can feed data into your web analytics tool. Traffic from links in e-mails can be tracked with for instance Google’s UTM Campaign Tracking tool.
Eventually you should end up with an overview in your analytics tool like the following table that shows you how many conversions each marketing channel generated and what the estimated total values of those conversions are.
Step 5: Your costs
Now that you know the value of your various online channels all you need to calculate your ROI, is adding costs to the equation.
Most web analytics tools allow you to import cost data, meaning that your dashboard or report can do the total math for you. Costs for Google AdWords campaigns are automatically shown in your Google Analytics reports. Alternatively you can use an Excel sheet to combine conversion data with costs.
At this stage you might discover that your organization does not have a detailed mapping of expenses for your various online activities or marketing campaigns. If you don’t have this information, then you need to gather it.
Step 6: Analyse and take action
With access to data about both your income and your expenses, the ROI calculation is simple. There are obviously uncertainties attached to your ROI figures, especially if this is your first shot at trying to calculate ROI in a structured manner. Your data will be challenged fiercely – especially by people responsible for marketing activities, which turn out to have a poor return or is a direct loss.
Engage with your unhappy stakeholders and let them help you validate the way you have set up the tracking and the assumptions you have made along the way.
Sometimes the dialogue will prompt you to change tracking methods or conversion values. Alternatively further research will support the validity of your ROI data.
Having fairly reliable data about the ROI of your different marketing channels allows you to make sound decisions and reallocate your marketing spendings. Expect a major shift in your budget allocation. Many companies doing their first structured ROI analysis eventually end up closing many of their current campaigns and activities and giving a significant financial boost to other activities.
Your current external vendors will be watching your every move and the suppliers responsible for initiatives with poor ROI will be preparing an extensive slide deck with fancy graphs and silly excuses.
Listen to them, and ask them to help you refine your ROI assumptions, but don’t allow them or internal stakeholders to shift the discussion back to impressions, cost per click, opens, bounce rates or page views. You want to talk conversions, conversion value and ROI. And you can only speak that language like a native when you know your conversion goals and track them.
Seven hopefully helpful closing remarks
- Accept the fact that you will be using a lot of averages and assumptions during the first phases of adapting to the ROI mindset. This is perfectly ok. Even if your numbers are pretty off target, the discussions towards your first ROI data will give you important insights into what is really driving your business. This is a journey that can take several years.
- Be wary of external consultants that recommend you to buy an expensive web analytics tool too early in the process. If you are unsure what you need, then you often need a tool that is easy to implement and easy to use (such as Google Analytics).
- Don’t be too conservative when setting the customer lifetime value. In my experience 4 out of 5 companies that were established in the pre-online era initially set their conversion values too low.
- Keep a record of dates where important changes to tracking methods or website pages were implemented. In Google Analytics you can add dated notes directly in the system. These annotations will help you understand jumps or drops in online ROI next time you analyse your figures.
- Keep your framework for measuring ROI simple, at least in the beginning. You’re doomed to fail, if you try to build Rome in a day. Start out with 1-2 conversion goals. Feel free to pick the ones that are the easiest to track and define a value for. You need some quick-wins to prove the business value of your ambitious long-term plans for ROI measurement.
- Broadcast the results of your ROI calculations within your organization. You need to weed out wrong assumptions as quickly as possible and you need to build awareness of why you are closing down some marketing initiatives and boosting others.
- Don’t panic. Your industry peers probably still don’t know how to track conversions and measure marketing ROI.
What are your challenges?
It would be interesting to hear about your experiences with calculating ROI of your marketing activities. Share your thoughts below and feel free to get your network to chip in as well by sharing this blog post on Twitter, Google+ or LinkedIn.