The business metric ROI involves revenues. Alas, becoming famous online isn’t a traditional part of ROI; it might have a public relations value and affect business results, but fame doesn’t necessarily make you rich. This chapter examines the cost of acquiring new customers, tracking sales, and managing leads. After you reach the break-even point on your investment, you can (in the best of all worlds) start totaling up the profits and then calculate your ROI
Preparing to Calculate Return on Investment
To calculate ROI, you have to recognize both costs and revenue related to your social media activities; neither is transparent, even without distinguishing marketing channels.
Surprisingly, the key determinant in tracking cost of sales, and therefore ROI, is most likely to be your sales process, which matters more than whether you sell to other businesses (business to business, or B2B) or consumers (business to consumer, or B2C) or whether you offer products or services.
For a pure-play (e-commerce only) enterprise selling products from an online store, the ROI calculation detailed in this chapter is fairly standard. However, ROI becomes more complicated if your website generates leads that you must follow up with offline, if you must pull customers from a web presence into a brick-and-mortar storefront (that method is sometimes called bricks-and-clicks), or if you sell different products or services in different channels
Accounting for Customers Acquired Online
The cost of customer acquisition (CCA) refers to the marketing, advertising, support, and other types of expenses required to convert a prospect into a customer. CCA usually excludes the cost of a sales force (the salary and commissions) or payments to affiliates. Some companies carefully segregate promotional expenses, such as loyalty programs, that relate to branding or customer retention. As long as you apply your definition consistently, you’re okay.
Comparing the costs of customer acquisition
You may want to delineate CCA for several different revenue streams or marketing channels: consumers versus businesses; products versus services (for example, software and support contracts); online sales versus offline sales; and consumers versus advertisers. Compare each one against the average CCA for your company overall. The formula is simple:
cost of customer acquisition = marketing cost ÷ number of leads
Often, your social media or web presence generates leads instead of, or in addition to, sales. If your sales process dictates that some or all sales are closed offline, you need a way to track leads from initiation to conversion. Customer relationship management (CRM) software helps you track prospects, qualified leads, and customers in an organized way. A simple database might allow different managers, salespeople, and support personnel to share a client’s concerns or track the client’s steps within the selling cycle.
Understanding Other Common Business Metrics
Computing the break-even point (the number of sales needed for revenues received to equal total costs) helps determine when a product or product line will become profitable. After a product reaches break-even, sales start to contribute to profits.
To calculate the break-even point, first you need to figure out the cost of goods (for example, your wholesale price or cost of manufacturing) or average variable costs (costs such as materials, shipping, or commission that vary with the number of units sold) and your fixed costs (charges such as rent or insurance that are the same each month regardless of how much business you do). Then plug the amounts into these two formulas:
revenues – cost of goods (variable) = gross margin
fixed costs ÷ gross margin = break-even point (in unit sales)
Net profit margin is defined as earnings (profits) divided by revenues. If you have $10,000 in revenues and $1,500 in profits, your profit margin is 15 percent (1500 ÷ 10000 = 0.15).
Revenue versus profit
One of the most common errors in marketing is to stop analyzing results when you count the cash in the drawer. You can easily be seduced by growing revenues, but profit is what matters. Profit determines your return on investment, replenishes your resources for growth, and rewards you for taking risks.
Determining Return on Investment
Return on investment (ROI) is a commonly used business metric that evaluates the profitability of an investment or effort compared with its original cost. This versatile metric is usually presented as a ratio or percentage (multiply the following equation by 100). The formula itself is deceptively simple:
ROI = (gain from investment – cost of investment) ÷ cost of investment