“An investment said to have an 80% chance of success sounds far more attractive than one with a 20% chance of failure. The mind can’t easily recognize that they are the same.”
— Daniel Kahneman
Calculating Return on Investment
To calculate ROI, the benefit (or return) of an investment, see the formula below.
(Gain from Investment – Cost of Investment)
______________________________________________ = ROI
Cost of Investment
The result is expressed as a percentage or a ratio.
For example, suppose Bill invested $1,000 into Online Marketing in May and made $1,200 from online-business one month later. To calculate the return on his investment, he would divide his profits ($1,200 – $1,000 = $200) by the investment cost ($1,000), for a ROI of $200 / $1,000, or 20%.
We may change gain from investment to anticipated gain from investment. Anticipated gain from investment is what we use during the sales process, and the actual gain from investment is measured during the life of the campaign.
You can calculate revenue from organic search traffic by looking at your estimate of monthly web traffic, conversion rate, close rate, and average sales value. Your SEO provider can use Google’s Keyword Planner and Google Analytics to discover the average monthly traffic and conversion rate. It is up to the business owner or decision-maker to fully understand their business and give the SEO provider their accurate close ratio and value of an average sale.
Monthly Traffic x Conversion Rate x Close Rate x Average Sale = Monthly Revenue
97.8 x 8% x 40% x $5,000 = $15,648
The monthly revenue is your anticipated gain from investment. Once you’ve calculated your anticipated gain, you can logically determine your monthly marketing budget. After your campaigns have been running for a couple of quarters, you can measure your ROI and confidently justify your marketing budget.
Understand the Time Value of Money
You must also keep the time value of money in mind when thinking about your investment returns.
Typically, angel investors and venture capitalist funds are tied up for about five years before their portfolio companies are ready for harvest. I mention this as a reminder that seeing large returns in your investment takes time. We ask all clients to invest in on-going marketing for a minimum of 6 months in order to see growth and measurable results.
Entrepreneurs should match private equity investment expectations. If you triple the value of your investment in three years, you will earn a robust return of 44 percent. The longer you expect to have your funds tied up in your company, the greater your return expectations should be.
For example, suppose Bill invested $4,000 into Online Marketing in July and made $6,200 from online business four months later. To calculate the return on his investment, he would divide his profits ($6,200 – $4,000 = $2,200) by the investment cost ($4,000), for a ROI of $2,200 / $4,000, or 55 percent.
Set Realistic Investing Expectations
One of the biggest problems in the internet marketing industry is the irrational expectations for future returns. One reason is due to the widespread misunderstanding of real returns. We must not forget that tools such as search engine optimization and pay-per-click are meant to increase leads. An online marketing company can get them to call or come in, but they cannot close deals for you.
Another reason is unrealistic expectations. You cannot expect an investment of $100 to earn you $10,000. You also can’t expect to see a 500% ROI on day two of your marketing initiatives. Such a case may exist, but it’s extremely rare.
Savvy investors expect to receive a return between 6% – 15%. Anything above that is a bonus. Having a realistic expectation for your ROI will help you modify your online marketing plans. If your SEO provider manages your expectations, you should have a healthy and prosperous relationship.