It is common practice for small businesses to do a lot of promotion, but not keep track of what that promotion means for them. Small to medium businesses are often really busy focusing on the delivery part of their business, and tend to slightly neglect their marketing efforts, or farm it out to someone else without much thought put into its effectiveness.
There is nothing wrong with getting a marketing company like ourselves to run your marketing for you, but you should always be very aware and keep close tabs on the no. 1 important thing in these marketing activities. That is, are you getting a return on investment?
What is ROI?
It stands for “Return On Investment” and simply means the value of money that you receive back from spending money on your marketing.
How would one calculate it?
In a service based business it can be a little tricky and getting accurate data might be time consuming, but it really does pay off in the end to do a little bit of digging and finding out exactly what is happening in your business when it comes to your sales, and where these sales are coming from.
Start with the leads. Find out exactly how many leads you get from your online marketing efforts every month. Most online marketing companies minimally will be able to give you this data.
Once you know how many leads you get in a month you should tally up how much exactly it is costing you to get these leads and work out the cost per lead. So let’s say that you spend on average R6000 per month on your online marketing and get about 20 leads from this, you can do some simple math and work out your cost per lead: R6000 / 20 = R300.
Now the next part is a little trickier to know and calculate, and you might need to use some estimations in the beginning, but want you want to calculate next is your own sales conversion rate. This simply means the number of leads you have to go through on average to get a sale. You might be able to look at historic sales data and compare it to your marketing data to get this figure.
Let us say, using the same example now as above, you looked back at your sales data and saw that you landed 7 deals last month out of the 20 leads that you got. Then you can make this calculation: 20 / 7 = 2.85. So for every 2.85 leads you get you would get a sale. This is your closing ratio then 1:2.85.
Now you are ready to do the most important part of the calculation and see exactly if your are making a good investment in your online marketing or not. The next thing you want to calculate is the average gross profit you make per sale. So let us assume in our example that the average value of a deal sold would be R10,000 and the cost to deliver that service is roughly R4000. You would make a gross profit of R6000 per sale and in the month on 7 sales you would have made R42000 in gross profit. Obviously you could get very very detailed here and really crank the numbers to get very specific info here, but the idea is to keep it simple enough so that it is an easy calculation each time you want to do this.
And now for the final calculation of the actual ROI:
Total Gross Profit / Total Marketing Spend = ROI
e.g. R42000 / R6000 = 7
your ROI ratio then is 1:7
or every R1 you put in you get R7 back basically
This would be an excellent return on investment would it be real data. Depending on your other costs in your business you would most likely want to have na ROI of 1:2 or more at least so that you know your are getting more money back continuously than what you are spending. Having a positive ROI is an extremely good thing and means that you can afford to invest more money into your marketing and scale it even further.
Knowing makes you cause
This is just one little thing that can help you understand your business better and if you know more you can make smarter decisions and do more ultimately. You could be sitting on a gold mine and not know it, or you could be wasting money on an ineffective marketing campaign and not know it.
I hope this article helps your business in some way and if you ever need help with calculating your ROI, feel free to reach out to us.