What is ROI and KPI in Digital Marketing?
KPI and ROI in Digital Marketing are acronyms for Return on Investment and Key Performance Indicator. Key Performance Indicators is a term used in digital marketing to describe the marketing metrics that are used to measure the performance of a digital marketing campaign. Upper management does not understand digital marketing. That is why using KPIs such as return on investment, customer acquisition cost, cost per lead and customer lifetime value is important. Lower level management depends on these KPIs to communicate the success of marketing efforts in a language that upper management understands.
Return on Investment is a KPI used in digital marketing to describe how much money was invested and how much profit was made from that investment. If you do not know how much money you are making then you cannot determine what marketing channels deserve more budget and less budget. Most importantly you are not going to be able to communicate digital marketing success to upper management.
Is KPI and ROI the Same Thing?
Without metrics to measure the performance of a marketing strategy you would not be able to know if the marketing campaign is performing well. A key performance indicator is more than just ROI. These metrics could be anything that aligns with upper management goals.
Digital Marketers often underestimate how important it is to align the key performance indicators with the goals of upper management. Pay attention when speaking to upper management and listen for clues for potential vanity metrics. Often, upper management focuses on sales growth, roi metrics, and customer acquisition cost. Successful digital marketing campaigns listen to upper management and align the marketing strategy with their goals.
Types of Key Performance Indicators
Key Performance Indicators are used to measure the outcomes of progress and output of outcomes to upper management business objectives. An example of an upper management business objective is “increase company-wide revenue by 30%” annually”. Revenue growth would be an example of an outcome KPI. Another example of an outcome KPI is to “increase customer lifetime value by 20% annually”.
Output-based KPIs are used to set goals by lower-level teams to reach outcome KPIs. An example of an output-based KPI could be “grow website traffic by 20% annually”. Output KPIs are referred to as marketing metrics by the marketing and sales team.
How does Hitting Output KPIs Achieve Upper Management Outcome KPIs?
Let’s use the example above of “growing website traffic by 20% annually”. In order to determine website traffic growth is a great output digital marketing kpi to focus the marketing and sales team on. We would need to ask ourselves the following questions…
- How much revenue do we need to reach campaign success?
Ask this question to determine how much sales needs to be generated in order to reach upper management goals.
- Does the traffic generate sales?
Before we start mapping out digital marketing strategies to execute for increasing traffic to the website. Focus on determining if the website is even generating any sales. The answer could be no. This means you either need to generate more targeted traffic or you need to improve the website to increase conversions. However, there may be another channel that is already generating new revenue. In this case, the best option is to focus on the channel that will increase sales the fastest and as efficiently as possible since upper management focuses on sales.
- What is the average amount of sales generated from the website traffic?
Ultimately upper management cares about the growth of the company and a huge part of that growth is sales and ROI. Your digital marketing efforts are worthless if they do not communicate sales growth and ROI. This is why it is crucial to determine the average amount of sales converted from the website. Once the average amount of sales converted is calculated we could use it to calculate roi of the digital marketing campaigns. For instance, if you know that for every $1 of ad spend generated from traffic to the website the company receives $3 this is an ROI of 200%.
A great formula for determining market ROI is the following:
(Sales Growth – Marketing Cost)/ Marketing Cost = ROI
Since we calculated that traffic from the ad campaign to the website is an ROI of 200%. Then we could calculate the ROI of our other marketing strategies. The digital marketing strategy with the highest digital marketing roi is the most efficient choice.
Total revenue generated from website traffic is a part of important key metrics to focus on. For instance, if the total revenue generated from website traffic is lower than other marketing channels. Then it may be best to focus on increasing revenue from marketing channels that are generating more revenue. However, do not allow this to be the only metric that you base your decision on. Take into account all key metrics when making a decision.
- What is the conversion rate of the website?
The conversion rate of the website is a crucial metric when choosing where to focus your marketing efforts. Ultimately, return on investment is an important outcome KPI for upper management. Understanding how to interpret the rate of conversion for a website will enable you to achieve the most efficient return on investment for upper management.
Determine the average conversion rate for your website and industry. In cases where the rate of conversion is below average, there may be a great opportunity to increase ROI by focusing on improving the rate of conversion as opposed to increasing traffic. Although, the rate may already be at or above the average rate for your industry. When this occurs the best course of action may be to focus on increasing traffic to the website.
Understanding the information above allows you to choose output KPIs for your marketing efforts to achieve outcome KPIs upper management will love.
Marketing and Sales Performance Metrics
Here are some of the most well known and used marketing metrics for measuring output KPIs that achieve outcome KPIs.
Cost Per Acquisition
Cost Per Acquisition is a well-known metric commonly used to measure progress when running google ads. However, cost per acquisition is applicable to more than just website visitors from search engines. Cost Per Acquisition is the formula used to determine how much the company spends to acquire new customers.
A simple formula for calculating cost per acquisition is the following:
Total cost spent to acquire new customers
# of new customers acquired
Cost Per Acquisition
The rate of conversion is one of the best ways to measure the success of an advertising campaign like Google AdWords. Conversion rates are used to describe the effectiveness of your marketing at converting leads to paying customers aka the rate of conversion.
There are output and outcome KPIs for measuring the rate of conversion.
Examples of output KPIs for measuring the rate of conversion are:
- Form fills
- Calls booked
- Online chats opened
- Inbound calls from lead generation
- Downloads of marketing materials
- Registrations on the website
- Email newsletter sign ups
- Website engagements for example time spent on site, pageviews, and number of pages visited)
Average Order Value
What is the average order value?
The average order value is an output focused ecommerce metric that measures the average value of orders placed on a business website or app.
Here is a formula for calculating average order value:
Number of Orders
Average Order Value
$100,000 in revenue divided by 100 orders equals an average order value of $1,000.
Cost Per Lead
Cost Per Lead is an output focused KPI used to measure the effectiveness of your digital marketing campaign at generating leads.
The percentage of visitors to a landing page that immediately clicks to leave the page is the bounce rate. The bounce rate is an output focused KPI that is used to optimize time on-page.
Click Through Rate
Click-through rate is another output focused KPI used to increase digital marketing roi of paid and organic search on Google.
Google has an excellent formula for calculating the click-through rate of a page. In a Google PPC campaign, a good click-through rate means more clicks on your advertisement and a higher digital marketing return. Marketers use google analytics to analyze the click-through rate of their paid lead generation from Google.
Organic traffic is traffic that is generated organically without from Google. The listings on Google search that are not highlighted with “ad” next to them are free organic listings. Organic traffic is output focused KPI that lower-level management needs to focus on. Check out our data driven page SEO to learn more about how to do SEO.
Similar to paid traffic Google Analytics is a tool used to analyze organic traffic correlated with digital marketing KPIs.
How Could Marketing Managers Use Digital Marketing KPIs to Reach Business Goals?
Cost Per Acquisition in Digital Marketing
Cost per acquisition is used by marketing managers to create more effective marketing funnels. A lower cost per acquisition means a higher profit margin for the company.
Conversion Rate in Digital Marketing
There are output and outcome KPIs for measuring conversion rates.
Examples of outcome KPIs for measuring conversions are:
- Paid subscription sign-ups
- Products purchased
- Calls converted to sales
- Service upgrades
Making a purchase of any kind is an outcome-focused KPI for measuring conversions. As a member of the marketing team, it is your responsibility to collect data and communicate it effectively to upper management.
Average Order Value in Digital Marketing
How to Tie Average Order Value to Outcome KPI?
- Lifetime Value Per Customer or LTV is an outcome KPI that upper management focuses on. Using the average order value upper management can calculate the lifetime value per customer.
- Profit Margin is calculated by subtracting the total money spent to acquire a customer and produce a product or service from the average order value. This would be the profit margin per order of service and goods.
Cost Per Lead in Digital Marketing
How to Tie Cost Per Lead to Outcome Focused KPI’s?
Digital Marketing ROI for digital marketing campaigns is calculated using the cost per lead. For instance, a paid advertising campaign using Google Adwords to drive traffic to landing pages and ultimately convert the average consumer to a paying customer.
Cost per lead is a measurement used to measure the effectiveness of an ad campaign. A lead could be described as each time a contact form is filled out for scheduling a call with a sales representative.
Marketing departments need to tie the number of leads generated to revenue generated from the leads. When meeting with upper management being able to explain how the increase of leads led to increases in revenue is a great way to demonstrate success.
Bounce Rate in Digital Marketing
How to Tie Bounce Rate to Outcome Focused KPIs?
Explaining bounce rates to upper management could be challenging at times. Upper management is interested in the growth of the company and the bounce rate is not even on their radar. Do not stress out over meeting with upper management, we have got you covered.
In order to tie bounce rate to outcome-focused KPIs, we need to begin with tying it to improving conversions. A high bounce rate is correlated with a page not resonating with the visitor. Often this has to do with either low-quality content, the layout of the page being unreadable, the page not loading quickly, and others.
Once the bounce rate is improved this may improve conversions at the same time. This means explaining bounce rate effectively to upper management is explaining how a lower bounce rate led to a conversion rate, lower cost per acquiring a customer, and increase of revenue.
Click-Through Rate in Digital Marketing
How to Tie Click-Through Rate to Upper Management KPI Metrics?
Upper management is focused on the increase of growth for the company and click-through rate is not a metric that they focus on. Although, this does not mean click-through is not important to measure roi and lower marketing costs.
Marketing departments need to focus on click-through rates because if they are paying for an ad that is not getting clicked on then they are pouring money down the drain.
Effective communication of the importance of click-through rate to Upper Management depends on marketing roi. Higher click-through rates equal a higher marketing roi because advertisers could spend less for the same clicks. Having this conversation with upper management and communicating this in the language that they speak is effective.
Organic Traffic in Digital Marketing Efforts
How to Tie Organic Traffic to Digital Marketing ROI?
Organic traffic is the highest converting lead generation channel based on marketing data that most companies could focus on. The average consumer trusts organic traffic more than paid advertising because they know the company cannot pay for organic listings.
Knowing that companies have to earn their listings disarms consumers from being on guard for an advertisement. Explaining that organic traffic has a high digital marketing roi is effective when communicating with upper management.