Tracking the ROI of Agency Business: Essential Metrics
In digital marketing, it’s essential to focus on the KPIs that drive your bottom line. Amidst the myriad of statistics agencies present, some metrics shine brighter than others. Key performance indicators related to social media and email marketing, video and blog content, and lead generation strategies are crucial to monitor. They offer insights into the effectiveness of your campaigns, enabling informed decisions that ensure your investment generates tangible results and propels your business forward in the ever-evolving digital landscape. This guide will help you understand these vital metrics for digital marketing success and their direct impact on your bottom line.
Difference Between KPI And Metric
Sometimes KPI vs metric terms are used interchangeably, but they fundamentally differ. A key performance indicator (KPI) is a high-level measurement of progress in a digital marketing campaign or project. KPIs are what you intend to measure, such as your monthly website traffic.
On the other hand, a metric is a specific data point that quantifies performance. For example, web traffic metrics include traffic sources, page views, unique visitors, etc. Knowing the difference between KPIs and metrics helps identify the essential business data to track in your marketing strategy.
Calculating Agency Business ROI
To calculate agency business ROI, subtract the total cost of agency services from the revenue generated through agency-driven activities and divide it by the cost of agency services, then multiply by 100 to get the percentage.
To determine your digital marketing ROI, use the following formula:
ROI = [(Total Return) – (Total Spend) / Total Spend] X 100
For example, you invest $2,000 in a digital marketing agency in one month and gain $5,000 in sales. Your ROI is:
ROI = [(5,000 – 2,000) / 2,000] x 100 = 150%
This formula works best for long-term ROI, using the total marketing budget and revenue every quarter or year. However, as explained below, you need specific key metrics to calculate your short-term ROI.
Top 5 Key Metrics for Digital Marketing Agencies
Digital marketing agencies rely on key metrics to measure the success and impact of their campaigns. These metrics provide valuable insights into the effectiveness of various marketing strategies and help guide decision-making for optimal results.
Measure these KPIs for your digital marketing strategy:
Cost Per Lead (CPL)
The cost per lead indicates how much you’re paying for each lead. A high CPL means your marketing campaign is missing the mark and costing you more for each closed lead. Calculate CPL with the formula below:
CPL = Marketing Spend / Total Leads Gained
This is one of the most critical finance KPIs when working with a digital marketing agency. It helps you determine whether your marketing budget yields a healthy return and how to adjust your campaigns strategically to increase your return.
To calculate the CPL, divide the marketing spend ($10,000) by the total leads gained (500). In this case, the CPL would be $20. This means that, on average, you spend $20 for each lead acquired through your marketing efforts.
Cost Per Acquisition (CPA)
CPA measures the average cost incurred to acquire a new customer through marketing efforts. By calculating the CPA, businesses can assess the efficiency and profitability of their acquisition strategies.
CPA = Total Marketing Costs / Total Acquisitions
Let’s consider an example where your total marketing costs for a campaign are $5,000; during that campaign, you acquired 50 new customers.
CPA = $5,000 (Total Marketing Costs) / 50 (Total Acquisitions)
CPA = $100
The Cost Per Acquisition (CPA) would be $100 in this example. This means that, on average, you spent $100 to acquire each new customer through your marketing efforts during that campaign.
Customer Lifetime Value (CLV)
The customer lifetime value indicates how much each customer spends on your product over time. CLV is among the key metrics for subscription-based businesses that receive recurring customer revenue. Calculate CLV with the formula below:
CLV = (Revenue From One Customer X Duration) – Cost Per Acquisition
Suppose a subscriber purchases an annual software license for $300, costing you $1,000 in marketing spend to acquire this customer. To calculate the CLV over ten years:
CLV = (300 x 10) – 1,000 = $2,000
Include CLV in your finance KPIs to understand how to budget and target your customers for brand loyalty and repeat sales.
Note: Aim for a 3:1 ratio, meaning your customers bring in 3x the value of your acquisition costs.
Return on Ad Spend (ROAS)
Return on ad spend shows you how much revenue you get for each dollar spent on advertising. Calculate ROAS with the formula below:
ROAS = revenue from ad spend / total ad spend
Suppose you spent a total of $10,000 on advertising, and as a result, you generated $40,000 in revenue.ROAS = $40,000 (Revenue from Ad Spend) / $10,000 (Total Ad Spend)
ROAS = 4
In this example, the ROAS would be 4, indicating that for every dollar spent on advertising, you generated $4 in revenue. Achieving a ROAS of 4:1 means that your advertising efforts deliver a positive return, with each dollar invested resulting in $4 in revenue.
Note: ROI and ROAS measure two different finance KPIs. ROI includes total returns from your marketing campaign after subtracting total expenses, including turnover and operational costs. ROAS focuses on advertising only. Aim for a ROAS of 4:1 or $4 for each dollar you put into advertising.
The conversion rate is a key metric measuring the percentage of leads or website visitors who complete a desired action, such as purchasing, registering for a newsletter, or downloading an ebook.
The formula to calculate the conversion rate is:
Conversion Rate = (Total Conversions / Total CTA Clicks) x 100
For example, if you had 10 conversions from 500 CTA clicks:
Conversion Rate = (10 / 500) x 100
Conversion Rate = 2%
In this example, the conversion rate would be 2%. It means that out of 100 website visitors who clicked on the call-to-action, two converted or completed the desired action. Aiming for a conversion rate between 2% to 5% is generally recommended, although it may vary depending on the industry and specific goals.
Note: You can derive conversion rate KPIs from your marketing channels (email, social media, PPC) and end-user devices (desktops, mobile sites, smartphone apps, tablets). Your conversion rates for these marketing avenues can vary drastically, indicating that you should invest more in high-conversion platforms and optimize the poor performers for better returns.
By evaluating these crucial metrics, you can gauge your current finance KPIs compared to what a digital marketing agency can provide. However, it’s important to acknowledge that each company has its criteria for KPIs versus metrics, including the often elusive quantification of brand awareness and influence. Understanding these KPIs allows you to establish realistic expectations and allocate your digital marketing budget effectively. Select an agency that diligently tracks these KPIs and has a well-documented history of delivering exceptional performance results.
By Nisha Joseph, Content Manager, Profit.co