The calculation of Return on Investment (ROI) is one of your most important responsibilities as an agency marketer. When you properly calculate your agency ROI, you’re doing more than just helping your clients measure the overall health of their business — you’re proving the value and efficacy of your work.
But just as there are many different ways for agencies to earn and keep the trust of clients, there’s an equally diverse range of ways to calculate ROI. Depending on the size and scope of the specific campaign (or the wider time period you’re measuring), ROI calculation can require anything from simple arithmetic to juggling more complicated sets of equations.
With a full understanding of the different methods you can use to calculate ROI, your agency can earn new customers, build trust with your current clientbase, and keep your revenue in the black.
At the root of things, ROI is derived from a pretty simple equation:
[Revenue earned] – [Cost of investment] = ROI
For example, if you buy a piece of property for $100,000, spend $15,000 refurbishing and marketing it, and then sell it for $150,000, your total ROI for the venture is $35,000.
This kind of basic ROI equation is commonly known as a ‘financial value’ measurement, and it represents what you’re ultimately trying to get at with any kind of ROI calculation — the overall dollar value returned by an initiative. But modern marketing techniques involve dozens and dozens of interlocking initiatives and touchpoints, so your ROI calculation will almost never be this straightforward.
First, you’ll have to decide whether you’re looking to determine ROI for a specific campaign (a relatively narrow timeframe), or whether you’re trying to establish ROI for a wider period of time encompassing multiple campaigns and initiatives. Then you’ll need to figure out how your current ROI compares to previous measurements, in order to gain a truly complete picture of how your agency is performing.
It sounds complicated, and it’s a lot to keep track of, but we’re here to help: Here are three surefire methods you can use to calculate ROI, and the scenarios in which these differing approaches will be most useful.
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1) ROI by project / campaign
As an agency, marketing expenses are necessarily going to be baked-in to any kind of ROI calculation. That means that it’s critical to properly account for all of your marketing costs when calculating ROI, which is why measuring agency ROI on a per-project basis is such a useful starting point.
There’s lots of data to consider when calculating a project’s ROI, so it’s easy to find yourself drowning in analytics. Keep it simple by sticking to the following mission-critical variables for your initial ROI calculation:
- The type and quantity of personnel required by the project
- The number of work-hours required to complete the project
- Personnel costs and wages
- Capital costs (i.e. equipment/hardware costs and software costs)
By breaking down your expenditures for personnel and equipment — and then weighing that against an itemized list of the tasks required to complete a project — you’ll have a good understanding of just how much your campaign has earned. (For this, it’s very helpful to use something like the Gantt Chart methodology to properly organize and streamline the project-management process.)
Start by listing out the individual tasks in a campaign, and then assign each task its overall cost, like so:
– Task 1: Paid display ads ($5,500)
– Task 2: Web redesign and landing pages ($3,500)
– Task 3: Email marketing blast ($500)
– Task 4: SEO optimization ($1,500)
In this example, the total expenditure for the project was $11,000. If there’s any ambiguity about how much something costs, always estimate higher in order to avoid unpleasant surprises down the road.
From here, we take the overall revenue the campaign has brought in — let’s say $55,000 — and then use that to determine your overall ROI. According to these figures, our campaign earned a $44,000 ROI, or a 500 percent return on investment. (That’s squarely in the middle of the 5:1 sweet spot recommended for marketing ROI.)
Hammering out these figures can be one of the toughest parts of measuring overall ROI, which is why we put it first on the list. Per-campaign ROI is useful on its own, since it allows you to show clients how much value your initiatives are generating. But it becomes even more useful when you expand your analysis, and use campaign ROI to inform deeper and more complicated ROI calculations.
With ROI for an individual project as your baseline, you can then expand your forecast to include multiple marketing initiatives, or a wider timeframe. Which brings us to…
2) ROI by Customer Lifetime Value
This is where things start to get granular — every data-driven marketer’s dream, right? Now, we’ll start digging into your client’s average Customer Lifetime Value (CLV), or the average amount of revenue an individual customer will generate for the entire life of the business.
With this data, you can achieve an alternative (and potentially eye-opening) view of your agency’s overall performance. But first, you’ll need to figure out exactly how much you’re spending to attract paying customers — your Customer Acquisition Cost (CAC) — which is part and parcel with calculating your per-campaign ROI.
Start by taking your overall expenditures for a campaign, and then divide that figure by the total number of new paying customers earned by that initiative:
[Marketing spend] / [Total number of new paying customers] = [Customer Acquisition Cost]
For this hypothetical, we’ll take the $11,000 in marketing spend from our previous calculation, and then divide that by the 200 new paying customers the campaign earned for the client. And when we plug those figures into the above equation, it works out to a $55 CAC.
Now comes the tricky part: Figuring out the average lifetime revenue that customer will generate for your company. This can be a complicated process, since the ins-and-outs of CAC will be a different for every company.
As a general rule though, you can use the following figures in order to calculate CLV:
- Average purchase value per customer over a given period (usually yearly)
- Average frequency of purchases in that period
- Average customer value (avg. purchase value multiplied by avg. frequency)
- Average customer lifespan (number of years a customer makes purchases)
You can then calculate your CLV by multiplying the customer value by the average lifespan. So, if your average customer value is $50, and your average lifespan is 3 years, we can calculate CLV as $150.
And when we subtract CAC from CLV, we’ll have a great yardstick for measuring the effectiveness of your client’s marketing efforts, and the overall health of their business. Taking our previous example of a $55 CAC for our campaign and subtracting it from the $150 CLV figure, we can see that our client is making $95 in profit from every customer.
Proper calculation of CLV is the kind of careful analysis that establishes your agency as a trusted strategic partner — one who truly understands what makes their clients tick, and is worth keeping around for the long-haul
3) ROI percentage over time
Armed with your per-project ROI, plus your CAC and CLV, you’ll have the data you need to do all kinds of ROI calculations to drive home your agency’s value to clients. Now that we’ve done all that number-crunching, the final frontier in ROI calculation is (relatively) easy to figure out — the total ROI earned for a given period of time.
Basic ROI calculation can give us bottom-line figures for a specific campaign, but it’s less useful when you want to compare historical trends and see how your current efforts compare to your previous work for the client. (Or better yet, how your work compares to the period of time before your client signed on with your agency.)
Let’s say that a client has been running Campaign A for two years, and has earned an eye-popping ROI of 750 percent. Those are impressive figures, which might make you think that Campaign A’s methods should be replicated across all of your other initiatives. But also consider Campaign B, a newer initiative that has only been running for 3 months, and has earned a somewhat more modest ROI of 250 percent.
On a purely surface-level analysis, Campaign A appears to be the clear winner, since it had a nearly 3 times greater ROI percentage. But when we consider that it took Campaign A 8 times longer than Campaign B to achieve those ROI figures, that accomplishment suddenly looks less impressive. Depending on your outlays, Campaign B may actually be a far more cost-effective use of your marketing dollars than Campaign A!
This is just one example of how careful analysis of your marketing data can yield surprising insights that have a big impact on your bottom line. By taking this broad and all-inclusive view of ROI, you can see where our clients are succeeding, where they’re struggling, and exactly where your agency fits into the picture.
That’s the sort of big-picture thinking that ensures your agency will be maintaining close ties to your clients for many years to come.
Interested in seeing the benefits that advanced call tracking and analytics can bring to your agency? Begin your 14-day free trial of CallRail or request a personalized demo.