The Return on Investment of Ecommerce
Reading Time: 4 minutes
Analysing the Importance of Return on Investment of Ecommerce
There are many things that you need to consider when analysing the performance of your ecommerce efforts. In this post, we discuss the importance of Return on Investment of Ecommerce campaigns and the effect of the marketplace on performance.
Calculating Return On Investment
To know how effective your ecommerce efforts really are you need to keep a close eye on the return on investment of your campaigns. However, this is not as simple as it may seem. When calculating this figure for ecommerce, you need to consider sales that have happened directly but also those that are attributed indirectly.
The simple way to calculate return on investment:
Return on Investment = (Total Profit)/(Cost of Investment)x100
The problem with calculating return on investment in this way is that you don’t get the full picture about where your revenue is coming from. As a result, you may miss crucial insights about how your campaigns are performing.
Directly Attributed Sales
To calculate the directly attributable Return on Investment of your Ecommerce efforts, you need to look at the number of ‘one-click sales’ from your website. This is the easiest way to calculate return as it can be directly monitored by website analytics. These are the people who have visited your site then made an immediate purchase.
However, this does not give marketers the full story. In order to know the true ROI of an ecommerce campaign, you need to know how many people have converted later, or the number of indirect conversions.
Indirectly Attributed Sales
It is often the case that a sale does not take place straight away when the customer looks at an advert, email or website. Sometimes it may be hours, days or even weeks before action is taken.
To calculate sales that have happened as an indirect result of your marketing efforts, you need to use campaign tagging. When you add tags to a campaign, the URL is assigned additional values which track user behaviour beyond the website.
There are many reasons that a user may navigate away from your campaign. An individual may want to compare the prices or different brands before making a purchase decision, they may have to accumulate funds or simply take time to consider whether they need the product. No matter what reason somebody may delay their purchase decision, you need to be able to attribute their purchase to the correct marketing channel.
It is important to calculate both the direct and indirectly attributed sales on your website. To do so you need to calculate the total number of both sales types, subtract the cost of marketing and dividing this total by the cost.
You can calculate this using the following formula:
((directly attributed sales + indirectly attributed sales) – cost of marketing)/cost x100
The benefit of calculating return on investment in this way is that you can gain a deeper understanding of your overall performance. Although return on investment from direct sales may give you a negative outlook on performance, when indirectly attributed sales are factored in, this figure often looks much more healthy.
Tracking the Return on Investment of Ecommerce with UTM Parameters
When looking to track customers who leave your site after viewing ecommerce collateral, you need to track them using UTM parameters. UTM parameters are the tags that can be added to a URL to track user behaviour. The benefit to using these parameters is that you can analyse how people are behaving. You can then use this data to build a more effective and streamlined conversion funnel.
Examples of UTM parameters that you can use include
Medium: The general category associated with your traffic source
Source: Identify which marketing channel is bringing traffic to your website. Your visitors may have originated from LinkedIn, your website, Facebook or Twitter or somewhere else
Campaign: Identify the exact campaign that the user has viewed before visiting your website.
You can use UTM codes to identify where your website traffic is coming from and where website visitors have landed. The results associated with the UTM codes can be viewed in Google Analytics where you can analyse visitor behaviours.
The Influence of a Highly Competitive Marketplace
When you are looking to optimise your return on investment, consider how competitive the market place is. A highly competitive market place forces companies to spend more to compete and gain a larger market share. In a situation where a company is starting to grow within a market, they can rapidly accelerate increase in market share by increasing investment.
Conversely, in a shrinking marketplace where there is decreasing demand for products or services, marketers may also find it hard to maintain their market share. Competitors need to fight harder to retain their custom and are unlikely to see an increase in returns for their expenditure. There are less people to target in the market meaning that any business is going to be hard to attract.
Looking at the bigger picture: Customer Lifetime Value
You can gain a broader perspective of how your ecommerce is performing by looking at the Customer Lifetime Value. The Customer Lifetime Value (CLV) shows you how many purchases a customer makes over time. This metric takes into account all of the purchases that a customer makes; you can then identify your most valuable customer and improve your return on investment as a result.
To monitor the performance of your email campaigns, you need to track return on investment. It is important to understand the full picture and include both direct and indirect conversions in your calculation. Once you have calculated the average return on investment for your campaign you can begin to optimise your marketing collateral and conversion funnel.
Find out how to optimise your email marketing campaigns with our free download. Download your free copy of The Complete Guide to Email Marketing to get started.