Measuring the return on investment for marketing activities is a constant challenge for marketers. At Evergage, we know the value of real-time personalization and have seen the significant lift it provides our customers, but we also know it can be a leap to those marketers investigating website personalization as a new initiative. After all, you shouldn’t invest in a solution without knowing the potential impact it can have on your business.
With that in mind, I’d like to provide you with an easy way to measure that impact so that you can decide whether to invest in personalization or even justify your existing personalization strategy. But how you measure the ROI of personalization depends on your goals. So in this blog series, I’ll explain how to calculate the ROI of your personalization efforts for several different use cases, starting with demand generation.
If your primary goal of personalization is to convert more visitors into sales leads on your website, this calculation is for you.
The formula for calculating basic ROI is simple — you just need to isolate the gain you receive and divide it by how much you spend to achieve that gain.
% ROI = (Gain/Investment) x 100
For cases where personalization is employed to boost demand generation, particularly for B2B organizations, the key goal is to increase the number of leads brought into the funnel (e.g., registrants for eBooks, webinars, free trials, etc.). Therefore, we need to calculate how many additional leads your website will bring in with personalization and what is the value of doing so.
For this calculation, you’ll need to know these variables:
- Monthly unique visitors (UVs)
- Current or historical visitor-to-lead conversion rate
- Expected increase in conversion rate due to personalization (you’ll want to be conservative with this assumption, of course, and test different rates of improvement)
- The value of a lead to your company (if you don’t know this yet, you can calculate it with three more variables):
- Average sales transaction value
- Average lead-to-opportunity conversion rate
- Average opportunity-to-sale conversion rate
- The cost of a personalization solution
Quick note: I’ll calculate the gain on a monthly basis below so that we can calculate the months needed to breakeven on the investment.
How to calculate value of additional leads
First, we need to calculate the gain. In this case, it’s the value of your additional leads gained through personalization.
You will need to know your conversion rate of visitors into leads (let’s assume it’s 2%), and the lift you anticipate from personalization. Let’s assume it’s a conservative 10%.
If you expect a 10% lift in conversion from 2%, then you’ll achieve a new conversion rate of 2.2%.
To calculate the number of leads your site generates per month, you just need to multiply your new conversion rate by your unique visitors each month. If your site has 100,000 unique visitors each month, you’ll have 2,200 total leads per month.
100,000 x 2.2% = 2,200 total leads per month
Now that we know how many leads you’ll have, we need to calculate the value of the additional leads. To do this, you just multiply the value of each lead by the number of leads gained. In this example, the value of a lead is $100. (If you don’t know this number already, I’ll show you how to calculate it toward the end of this article.)
In this example, the value of the additional leads brought in through personalization is $20,000 per month.
Value of additional leads = (Value of One Lead) x (New Number of Leads — Old Number of Leads)
Value of additional leads = $100 x (2,200–2,000) = $20,000 per month
How to calculate the ROI of personalization
Now that we know the value of your leads, let’s return to that ROI formula mentioned at the beginning:
% ROI = (Gain/Investment) x 100
In the previous section we worked out that the gain from personalization (the value of additional leads gained) is $20,000 per month. If we assume that your personalization solution costs $48,000 per year, the monthly cost would be $4,000. So your ROI would be 500%.
% ROI =($20,000/$4,000) x 100 = 500%
How to calculate your breakeven point
Congratulations! You have achieved a positive ROI on your personalization efforts. To take it one step further, let’s figure out how many months into the year it will take for the benefits to outweigh the cost of your investment. Assuming you pay upfront for the solution, here’s a quick calculation to identify your breakeven point. In this case, it is just a short 2.4 months.
Breakeven point = Yearly cost/Monthly value of additional leads
Breakeven point = $48,000/$20,000= 2.4 months
How to calculate the value of a lead
I didn’t want to slow us down earlier in the calculation because you may already know the average value of a lead for your organization. But if you don’t, you can use this quick calculation method to figure it out.
The value of your leads depends on how many of them convert into opportunities and then into sales. So for this calculation, you’ll need to know your average transaction value, the average rate at which your leads convert into opportunities and the average rate at which your opportunities convert into sales.
The calculation looks like this:
Value of a lead = (Average Conversion Rate of Lead to Opportunity) x (Average Conversion Rate of Opportunity to Sale) x (Average Transaction Value)
But let me spell this out a little more clearly so you understand what the calculation is actually doing and how one might arrive at the $100 lead value used earlier. Let’s assume that your business converts 5% of your leads to opportunities and 25% of those opportunities close. You would have a funnel that looks like this for each sale:
If your average transaction value is $8,000, you can divide that $8,000 by the 80 leads it took you to get that one sale to find your value per lead.
$8,000/80 leads = $100 per lead
Using the formula laid out above, you can easily get to the value of a lead by multiplying the average rate at which your leads convert into opportunities by the rate at which your opportunities convert into sales times your average transaction value. In this example, it is $100 per lead.
.25 x .5 x $8,000 = $100 per lead
Quick note: If you know the conversion rates for all the stages of your marketing and sales funnel after the lead stage, you can multiply them all together by your average transaction value to get to your average lead value.
You can use the ROI calculation approach outlined in this article for a few different purposes. If you’re already implementing personalization tactics on your website to drive incremental lead flow, you can use the formulas to measure your ROI on those activities and use that for planning going forward. If you aren’t seeing a high enough ROI, investigate what do you need to do to improve your effectiveness.
If you haven’t yet implemented personalization for demand generation purposes but are considering it, you can use these formulas to justify the business case internally and identify the levels of minimum lift/improvement you need to see to make the numbers work.
Happy computing! Please be sure to share any feedback you have in the comments section below. Thanks!
Originally published at www.evergage.com.