How to measure the ROI of digital marketing - Zephyra Studio

The ROI of digital marketing is the relationship between profit and money invested, not the relationship between revenue and an ad budget. The formula is simple: subtract the total cost of the channel from the revenue attributed to it, then divide the result by that cost. The difference between the two approaches is that the investment includes time, tools, content and fees, not only the advertising budget. When cost is viewed narrowly, every channel looks profitable, and the decision rests on the wrong number. This article covers the formulas, what belongs in cost and revenue, and three mistakes that produce a falsely good result.

The formulas that get used

No single number describes profitability. There are several, each answering a different question, which is why they are used together rather than on their own.

• Profit from a channel: revenue less the cost of the goods or service, because revenue is not profit
• ROI: profit less the investment, divided by the investment, expressed as a percentage
• ROAS: revenue divided by the advertising budget, without the other costs included
• Cost per new customer: total cost divided by the number of new customers
• Customer value against cost: what one customer brings over time, divided by the cost of acquiring them
• Payback period: how many months it takes for the investment to return out of margin
• Average job value and the rate at which enquiries become jobs, because without them the calculation has no input

What belongs in the cost

Cost includes everything spent to make the channel work, not only what was paid to the platform. Alongside the advertising budget come content production, photography and writing, measurement tools, any commission if the job was brokered, and the time someone spends answering enquiries.

In services, time is the biggest invisible cost. If an hour goes into preparing a quote and one in ten quotes wins the job, then the cost of the channel includes the time spent on the nine that did not, because that time was paid for too.

The same applies to discounts and payment fees. If a job is won with a ten per cent discount and a card processing fee, the margin is smaller than it looks, so the channel's profitability changes even though the advertising budget did not.

What belongs in the revenue

Revenue is credited by clicks, and a click is not the only way a job appears. Some customers see an ad, do not click, then come back a week later through search. If only the last click is measured, that job is credited to organic traffic while the channel that started it gets no credit at all.

The second problem is telling new customers from existing ones. When a repeat purchase is credited to an ad, profitability looks better than it is, because that customer would have arrived without the ad.

The third problem is the difference between revenue and profit. A job with high turnover and a thin margin can look like the best channel, while a job with lower turnover and a better margin brings more. That is why margin goes into the calculation where it is known, and revenue only where it is not.

Three mistakes that produce a falsely good result

Profitability is most often overstated for the same few reasons, whatever the industry.

• Only the advertising budget is counted as cost, while time, content and tools are ignored
• All revenue is credited to the last click, leaving channels that prompt the decision invisible
• Repeat purchases are counted as new, which artificially raises the value of a channel
• Channels are compared on revenue against budget without margin, so turnover beats profit
• The result is judged after two weeks, before the decision cycle in services has finished

How to measure this in a small business

A small business cannot afford elaborate measurement, but it can keep one table with a row per month. It holds the investment per channel, the number of enquiries, the number of jobs, revenue and margin, and the other numbers are calculated from those. Consistency matters more than sophistication, because profitability shows over a series of months rather than in one.

A more reliable input than attribution is a direct question. Ask every new customer how they heard about the business and record the answer alongside the job. After a hundred such records you get a picture that is often more accurate than any setting in a tool.

Where the budget is larger, a test works too: switch one channel off temporarily in one city or for part of the audience. The difference in jobs during that period shows the channel's contribution rather than only its share of the last click. For estimating before investing, our ROI calculator works conservatively and shows its assumptions, while ongoing measurement is covered by analytics and CRO.

The profitability of content and SEO without an ad budget

Content and optimisation do not come with a monthly invoice for clicks, which makes it easy to conclude the channel is free. It is not, because it includes the time spent writing and editing, producing images and maintaining the site, and that time has a cost even when no contractor is paid.

So this channel is measured over a longer period, twelve months, and compared with paid channels on cost per enquiry. In the early months organic almost always looks more expensive, because the cost appears immediately while the result arrives later and spreads across all the months that follow.

The advantage shows in the fact that cost does not rise with the number of enquiries. With advertising every extra enquiry carries an extra cost, whereas a well-written text keeps bringing enquiries a year later without a new charge per click.

That is why a lifespan estimate enters the calculation. If content is written to last two years, its cost is divided across that period, which produces a cost per enquiry that can be compared with a paid channel. Once that is done, the picture changes, usually in favour of content.

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Key takeaways

• ROI is calculated from profit, not revenue, which is why margin goes into the calculation where it is known.
• Cost includes everything: budget, content, tools, fees and the time spent on enquiries that did not convert.
• Crediting only the last click undervalues channels that prompt the decision.
• Repeat purchases must not be counted as new, because that makes every channel look better.
• Asking new customers directly and testing with a channel switched off gives a more reliable picture than tool settings.

Conclusion

Profitability is not proven by click counts but by the difference between what went in and what came back, and that over a series of months rather than one. Once time and content enter the calculation, plenty of channels stop looking profitable, and the ones that remain deserve a bigger budget. If you have no record of enquiries and jobs, the first step is not a new tool but a table and conversion tracking, because without those every calculation is an assumption.