Using an accurate ROI formula to optimize digital marketing
Return on investment is one of the most discussed metrics in travel. With the ROI formula, businesses can measure effectiveness of an investment.
ROI is one of the most important measures of business performance. The formula is simple – just divide the outcome by cost, and the benefits of investment are clear. In travel, all companies analyze ROI data to manage investments. These data are used to measure the value of investments across the business, including development and operations. However, in tourism, one of the most important applications of the ROI formula is marketing. This article discusses how to measure the ROI of a website and how to distinguish ROAS and ROI.
The use value of a website
In the globalized economy, a company’s website is its most important sales tool. In order to measure the effectiveness of a website, a business needs to outline the aims of their online presence. Today, tools like Google Analytics have made it far easier to monitor traffic and conversion metrics. A well-planned tracking cycle allows companies to identify particular objectives and profit targets. For example, online marketing goals can include conversion targets, page views, location metrics, device usage, or downloads. The tracking process includes:
- Determining desired short and long-term sales goals.
- Defining a benchmark to compare annual data and seasonal variations.
- Capturing data over a given timescale to compare with the benchmark.
- Aligning strategy with intelligence.
Furthermore, Google Analytics has become increasingly sophisticated. Now, companies can monitor increasingly specific traffic, including acquisition metrics and social referrals. Once marketers determine their targets, timescales, and benchmarks, they can seek to continually refine their marketing strategy.
The ROI formula and its applications
The ROI formula is crucial to measuring the success of a business’s tracking strategy. When applied to digital marketing, it is a crucial way of measuring the success of a campaign. However, within this context, it is important to distinguish between ROAS (return on ad spend) and ROI, and in turn, how this accounts for a company’s cost of goods (COG). After all, ROAS cannot reveal everything about a business’s advertising investments. Therefore, it is important to compare the cost of production against the cost of advertising. To illustrate, a company whose ROAS may be enormous, might not even be breaking even when they calculate their margins. As a result, it is important to compare COG to ROAS in order to get a more detailed picture of ROI.
This concept is best explained through an example. Even a company with 300% ROAS may still be losing money once its total profit margins are calculated. So, if a company makes €1,500 on a sale, almost 60% of this sale will go towards the price of booking the ticket, whereas 6% will go towards commission. As such, the profit margin for the travel agent is 34%, or €510. To calculate a business’s break-even ROAS, they need to divide the profit margin by one – so in this instance:
1 / 0.34 = 2.9, 290%
Therefore, the business needs to ensure they earn €2.90 for every €1 spent on advertising. As such, ROI is not simply the cost of a single sale - there are several variables to consider. From ROAS to hourly rates, companies need to ensure that they are making money from every resource that goes into the sale.
Determining ROI in real terms
In all cases, analyzing ROI will determine whether or not a marketing strategy is viable. These calculations will enable companies to refine its advertising efforts and sales strategy. Although calculating wholly accurate ROI is challenging, it is certainly worth the effort. If travel businesses want to grow their operations, they have to implement an evidence-based approach. Therefore, whether a company is trying to optimize its marketing budget or effectiveness of communications, it is vital for the company management to pay close attention to the numbers.