How to Measure Online ROI With a Sales Funnel
One of the most common questions we hear at 9 Clouds is: What is digital marketing really doing for my business?
Fortunately, nearly all online marketing services are measurable, trackable, and able to show value. Knowing the results helps you decide where to allocate your resources (most importantly, your time) — and what to get rid of or avoid.
Before you can create your digital foundation, it is essential to understand how to measure your return on investment (ROI) and set benchmarks to ensure consistent growth. To do that, we enlist the help of a sales funnel.
What Is a Sales Funnel?
A traditional sales funnel, like the one shown here, is the perfect way to visualize and set up measurements for your digital efforts.
The sales funnel starts at the top with prospects. These are the people who visit your website, see your message on Facebook, hear your name on the radio, walk by your store window, or in some way know you exist. They are potential customers who have yet to show real interest but could convert into someone who is more interested.
These “more interested” people are leads. Leads are people who have raised their hand to say, “I want to know more.” They may fill out a contact form on your website, call for a quote, download information from your website, give you their business card at an event, or tell their friend to tell you to call them sometime. You may have multiple levels of leads — such as a cold lead, warm lead, and hot lead — which help you decide which people are worth pursuing. Whatever the case, these leads are the people who later convert into sales.
Sales are the people who buy something from you or reach whatever your end goal is. It could be donating to a nonprofit, requesting a free ticket to a lecture, signing up for an email newsletter, or even hiring you.
You want to put a value to this sale, even if it does not have an explicit price tag. For example, if your goal is to get someone to subscribe to your email newsletter, you would then want to calculate how many subscribers purchase your product down the road. If 10% of subscribers purchase a $100 product, you could value an email subscriber at $10.
How to Calculate Conversions
Since almost everything online is trackable, we can automatically calculate our conversion rates from prospect to lead and from lead to sale.
For example, say you are an accountant looking for clients online, and your website attracts 1,000 visitors a month. Those 1,000 visitors are your online prospects.
If 100 people fill out your contact form, you can say that 10% of your prospects convert into leads.
Let’s say 10 of those 100 leads become customers and hire you for a payroll service at $50 per month. Your conversion from lead to sale is thus 10%.
If we look at the funnel as a whole, we can then calculate that 1% of all prospects become sales, from 1,000 visitors to 10 customers. You can see the conversion rates in the image above.
How to Improve Conversions
Now that you know your sales funnel, there are two main things you can do to increase sales:
- You can increase your number of prospects. So if you have a 1% conversion rate from prospect to sale, by attracting 2,000 web visitors instead of 1,000, you should be able to double your sales (as seen in the image above).
- Alternatively, you can improve your conversion rate. So instead of attracting more prospects, you can keep your web visitors at 1,000 a month and simply get more of them to convert. That might involve adding more call-to-action buttons or offering free information that visitors can download to more easily convert them into leads.
Even keeping our lead-to-sales conversion the same at 10%, a small increase in our prospect-to-lead conversion from 10% to 15% results in five more customers a month (as seen in the graphic below). If they are purchasing a $50 tax filing service, that’s an extra $250.
How to Calculate ROI
Now that you know the value and conversions of your online efforts, you can calculate the ROI of your marketing efforts to help you determine whether they are worth your time and money.
Digital ROI, despite what some marketers try to say, is a clear-cut mathematical formula:
(The gain from the investment – The cost of the investment) / The cost of the investment
Let’s put that to the test with our accountant example. Say your hourly rate is $50, and spending two hours a week on Facebook increases your website traffic from 1,000 visitors a month to 2,000 visitors a month. What is your ROI?
Based on our sales funnel, we know that attracting an additional 1,000 visitors to the website will lead to 10 more sales of $50 each. We also know that you spent two hours a week or eight hours a month, valued at $100, to get those new clients. So here’s how we would calculate your ROI:
(The gain from the investment [$500] – The cost of the investment [$800]) / The cost of the investment [$800]
Oh no! That’s a -150% ROI. If I were you, I would stop spending that time on Facebook or focus on selling a higher-priced product.
But what if those customers came back the following year for another tax filing? That would change your ROI equation, and you could say that the gain from your investment is actually $1,000. What is the ROI then?
(The gain [$1,000] – The cost [$800]) / The cost [$800]
Not bad. That’s a 25% ROI and a great start. It shows that your time on Facebook was worth it. We can then compare that to your ROI from newspaper ads, radio, networking events, other social networks, email, and more. Suddenly, you can make informed marketing decisions that increase your return.
How to Create Your Sales Funnel
To get started measuring your ROI, first create your sales funnel. What is a prospect for you? When do those prospects become leads? What is the value of your sale?
By answering those questions, you can draw your own sales funnel.
After drawing your funnel, you can start to collect data on the number of prospects, leads, and sales and the conversion between each step. To do that, we suggest using Google Analytics.
Once you’ve converted people into contacts and made a few deals, remember that your existing contacts can re-convert as leads later on. In fact, Invesp’s recent study showed that existing customers are 50% more likely to try new products from you, and existing customers will commonly spend 31% more than new customers.
Remember, there are two main ways to increase your digital ROI: increase your prospects or improve your conversions. (Or, preferably, both!)
Create Your Digital Foundation
Want to build a solid digital foundation for your marketing strategy? Start with lead tracking!