How is Website ROI Calculated?
Understanding and then quantifying the return on investment (ROI) your website provides may seem daunting at first – like trying to find a mermaid in the middle of the ocean. I promise – ROI is a metric that you can master. Let’s start with the standard definition of ROI:
“Return on investment, or ROI, is the most common profitability ratio. There are several ways to determine ROI, but the most frequently used method is to divide net profit by total assets. So if your net profit is $100,000 and your total assets are $300,000, your ROI would .33 or 33 percent.”
ROI determines how much value you’re getting out of an investment. Quantifying a website’s ROI is a bit more difficult than the definition listed above, so we’re going to look at the steps you’ll need to take to do so effectively.
Step One:
Start with Google Analytics tracking. You’ll need to track the total traffic to your site, as well as your conversion rates for various activities. These activities are largely dependent on the site itself. Examples of conversion activities are: contact form submissions; phone calls; purchases; or resource downloads. You’ll have access to all of this information so long as you’re tracking data via Google Analytics. To find your “conversion rate” simply divide the number of conversions per month by monthly visitors.
(Monthly Conversions) / (Monthly Visitors) = Conversion Rate
Average conversions rates across all industries range from 2-5%, so you should be shooting for the upper end of that range. Rates below 2% usually indicate that something needs work. Start with traffic – if people aren’t getting to your website they aren’t going to have the chance to complete the desired activity.
Step Two:
Now it’s time to determine how many website-generated events occur each month. This can be done by figuring out your closing ratio and multiplying it by the number of leads you have each month.
Closing ratio is pretty straightforward – to calculate it simply divide the dollar amount in signed contracts by the dollar amount in proposals. A company (for this example, Bob’s Balloon Bonanza) writing $3 million in proposals and earning $1.5 million in signed contracts has a closing ratio of 50%. Now that we’ve ascertained the closing ratio, we can figure out the number of website-generated events that happen each month. Take the total number of website leads per month and multiply it by your closing ratio – this gives you the total number of events generated by your website each month. In this example, the company had a closing ratio of 50% or .50. This means for every 200 leads generated online, you’d end up with 100 website generated events.
Step Three:
The last numbers you need to find are your average value for a sale and you average gross profit per event. This will let us calculate the gross profit per sale. Average value per sale is simply your total income from sales divided by the total number of events (or contracts). Continuing the example above, Bob’s Balloon Bonanza had $1.5 million in sales. There total number of events was 5000. So, when you divide sales by events, you’re left with $300 as their average sale amount.
Finally, we can calculate the average profit for event. This number is found by subtracting the average cost of goods sold per job from the average sale. Let’s say Bob’s costs for their goods sold in an average sale is $175. Subtract $175 from $300 and you’re left with $125 – Bob’s Balloon Bonanza’s gross profit per sale.
Step Four:
Now we’re ready to calculate the ROI for Bob’s Balloon Bonanza’s website. Let’s take website-generated events per month (100), and gross profit per sale ($125), and multiply these numbers to determine how much profit we can expect to see from the website in a month. In this case, the answer is $12,500. If the website cost the company $25,000, it takes only 2 months of average sales to see the appropriate return on the investment.
There are many ways to calculate website ROI, but this is a fantastic starting point. It can help you understand the kind of return you should be seeing from your site, as well as guide planning and budgets during the build process.