The Return On Investment calculation answers the question: How much money do I get back relative to what I invest?
It’s performed over a fixed timescale, such as a year. The simplicity of the calculation means it’s suited to investments whose outcome and value are uncertain. It gives a rough idea rather than an exact figure.
To calculate the ROI of your website or social media platform
1-Work out the net gain (or loss) over a fixed period of time
2-Net gain = increase in sales+cost-savings – cost of investment
3-ROI = net gain / cost of investment
Be careful. Calculating the ROI of a website or social media channel requires careful consideration of costs, cost-savings and increase in sales. There is no one size fits all.
How to calculate additional sales
The real problem for businesses is working out the increase in sales and the costs saved as a result of an investment in a website or social media presence. It is even trickier when trying to predict whether an investment in the internet will pay off in the future.
Volatility and lack of data
The difficulty in working out the value of an online presence in monetary terms is inevitable. Websites and social media haven’t been around for long enough to provide statistically significant data.
And unlike investing in a newspaper advert – where business owners can examine circulation figures and subscriber profiles – it is hard to estimate who and how many people are actually going to visit a company’s website or social media platform. A simple change to Google’s search algorithm can knock a website off the first page of search results for a particular keyword, leading to a dramatic drop in visits. Social media is particularly volatile. Some YouTube videos go viral, others flop. And it’s tough to predict which they will do!
Some benefits of a website or social media channel are intangible. How do you estimate the value of increased awareness and brand reputation? For instance, how do you put a monetary value on numbers of Facebook Likes or Twitter followers?
The answer is that you don’t. Increased brand awareness and reputation should lead to more sales, so the value of brand building will already be included in your calculation. However, you may wish to take into account intangible benefits such as brand awareness when evaluating the costs and benefits of your website or social media presence
Estimating sales increases
To calculate additional sales as a result of investment in a website or social media channel, consider:
Sales data analysis
Did sales increase after the investment, compared to your sales forecast without the investment?
What was the extra profit from sales?
Was this extra profit due to an increase in the sheer number of sales or to an increase in the average value of each sale?
Did anything else occur to impact sales either positively or negatively?
Do you need to factor in seasonal changes in sales figures?
For existing e-commerce sites, did the checkout rate (the number of people purchasing online) increase after the investment?
Did the average value of online sales increase?
What is the conversion rate from enquiries via the website’s contact form to sales?
What is the conversion rate from enquiries via your social media channels to sales?
What is the average value of these sales?
Consumer surveys can be a useful snapshot of consumer attitudes, particularly if you are experimenting with a change to your website before rolling it out permanently. However, a small sample does not provide statistically reliable data, and conducting large-scale surveys is expensive. And whatever the sample size, data gleaned tends to be “noisy”, leading to complex analysis.
Calculating cost savings
For an online presence, calculations must include cost savings as well as sales. This is particularly true for websites which are information-only, or whose primary purpose is to reduce printing and postage costs or the number of phone calls to a call centre or office.
ROI calculations should include cost savings (actual or estimated) from:
- Printing and postage of catalogs, booklets, programs, reports, white papers, user manuals, concert/event tickets.
- Printing of internal office documents which are now available online or on intranet.
- Cost of time saved printing and posting documents.
- Cost of time saved responding to phone calls due to online registration, FAQ page, email contact form, or communication via social media (Tweets, Facebook status updates).
- Distribution of newsletters, if e-newsletters have taken the place of printed newsletters.
Some features of a website are not directly related to sales or cost savings. For instance, an archive of past publications, a calendar of events, a picture gallery. If these features are expensive or time-consuming to maintain, and if it is difficult to estimate their value, consider dropping them – while remembering that they may be indirectly responsible for an increase in sales by drawing traffic to your site.
How to calculate costs
ROI calculations should include costs (actual or estimated) of the following items. Put these all in a spreadsheet, noting the times:
- Initial cost of building website, including consultant or contractor fees if appropriate.
- Annual cost of server space and domain name.
- Ongoing costs of updating website with fresh content.
- Initial cost of setting up social media platforms.
- Ongoing costs of social media platforms.
- Costs of designing social media campaigns.
- Costs of “pro” features on social media e.g. Twitter’s sponsored tweets.
- Cost of time spent building initial website and social media.
- Cost of time spent servicing website and social media.
- Cost of time spent responding to customer contacts via website and social media channels.
Many costs associated with the internet are time rather than cash. This is particularly true for social media. Having a basic Twitter account or Facebook page is (currently) free – what costs is the time you spend servicing them every day. Remember to include that time in your costs spreadsheet.
Now that you defined the value behind each variable, just use the formulae described at the start of the article!