Calculating Online Advertising Return on Investment

I’ve been helping a friend write a business school case on his company. I haven’t done too much but it’s been fun to see the process. Recently I helped with an appendix covering the ROI calculation when dealing with online advertising campaigns. I thought I would include it here in case it might be useful for other folks.

Calculating Online Advertising Return on Investment

The end goal of any advertising campaign, online or off, is for the campaign to generate more profit than the campaign costs to run. When a campaign reaches the elusive state of generating more money than it costs, it has become “ROI Positive” and is generating a positive return on the investment made to run it. In the online advertising realm, it is possible to track ROI from a nearly infinite number of campaigns and channels concurrently. This sort of tracking is far more difficult or impossible within offline channels and campaigns like billboards, TV, print and radio advertising. A key aspect in calculating true ROI from an online campaign is attributing visitor conversions to specific campaigns and assigning a value to each conversion. In the e-commerce space, a conversion is usually defined as a purchase, and the conversion value is generally the profit generated from the purchase. The definition of conversion and the value assigned to them will differ for different types of sites. For example, a social network might define conversion as a signup that does not deactivate within 1 week. Without conversion tracking, campaign analytics could be limited to how many people see an ad, click a link or land on a site. In these situations, the ROI calculation must use assumed conversion rates, which is very risky practice because traffic from different campaigns will likely have drastically different conversion rates (e.g. SEM traffic will convert at a much higher rate than traffic from a rented email list). Finally, true ROI calculations must include post-conversion factors that impact the value of the conversion like exchanges, refunds, churn, etc.

(Value from Campaign) – (Cost of Campaign) = Return from Campaign