How to Calculate Online ROI


An Internet Marketing salesman promises you online success if you will just pay him. Do you throw money at him and cross your fingers? No!Before you spend one dime with someone promising you the world, determine your online ROI. In this video, Eric Spellmann shows you how to calculate the effectiveness of your online advertising.
With real world examples, he guides you through the easy math that gives you real numbers to make educated decisions with. Stop “wondering” if your advertising is paying off. Find out now by watching this video!


Note from Eric: Below, you will find a word-for-word transcript of this video. I provide this as an aid for the hearing-impaired and for those who might just want to read it rather than watch the video. This conversational style is not reflective of how I write. Be nice! Hi. I am Eric Spellmann with Spellmann & Associates. And today we’re gonna cover How to Calculate Online ROI. But before we do, you kind of got to know what ROI is. Basically if you haven’t had a business course, it means Return on Investment. Now as it relates to online, we mean for Online Advertising.
In other words if someone calls you up and says they want to offer you this and it will help you online, you need to be able to say “Based on what you’re charging me, I need to sell this amount to pay for it. And not only pay for it, but make enough profit to make it even worth doing!” That’s what Return on Investment really is. Keep in mind that for every dollar I spend, how much more should I get back?

And that’s how you need to look at this. Before you just throw your money at some online advertiser, you need to be able to compute exactly how you’re gonna make that money back and whether if it’s even worth it in the first place.

So let’s start. First understand the difference between Leads and Sales. Now I have a lot of videos to discuss this, so I won’t go into great depth but just understand that when I talk about Leads, we’re talking about qualified prospects contacting you. When I talk about Sales, we’re talking about actual purchases on your site where people use a credit card number.

Let’s first talk about sales. How to calculate Online ROI for your sales. First, we need to talk about what margin is. And basically it’s the difference between the price you’re charging for it and your actual true cost of making it. And then you have to figure out how many extra of those “things” you have to sell in order to cover the cost of that advertising and in order to make it worth it. And not only to just cover the cost of advertising, but an extra profit to make it worth it.

This is usually a time when i discuss something called AOV, that if you actually sell something online, your goal is not necessarily to sell a tonne of your product, your goal is to make more money on each shipment you make! In other words, it only costs you 1 box to send 1 product, but sometimes you can get 3 or 4 products in a box, so therefore your costs are lower and you make more money. I’m gonna have a video on this concept later so be on the lookout for it.

So let’s give an example from a sales standpoint. Let’s say that you sell cookies. And when you sell em, you sell em by the case, of course you don’t ship 1 cookie at a time! So let’s say that right now before you do this new advertising thing you sell 100 cases per month. The price per case you’re charging is $50. The cost per case, in other words for you to make it and ship it (everything I mean) is 20 bucks.

Therefore your margin is what? 30 Dollars! Now you figure out this guy is trying to sell me some advertising and it’ll cost me a 100 dollars a month. Well if I want to calculate the ROI on that 100 dollar a month advertising, basically I’ve got to to sell 4 extra cases to break even. Which means I want to sell a lot more than that to make it even worth it. Take a look at these numbers and I think you’ll see how I came up with that.

Now let’s talk about calculating ROI on Leads, which is in some peoples’ minds a little more difficult. First of all, you’ve got to realize that our goal here is to figure out what is the value of a lead, not a sale. What is the value of a qualified prospect calling you?

Then, you’ve got to figure out how many leads do you currently get. I mean before you do this advertising you’re gonna be paying for, how many leads do you already get, how many qualified leads? You might get some random calls out of the blue but how many leads do you get now?

And then you’ve got to figure out what you’re close rate is. In other words if I put a qualified lead in front of you, someone who actually is looking for your product, and you get to talk to them or meet with them, what is your percentage chance that you’re gonna close the deal and sell them?

And now if you’ve done enough sales, you should be able to figure this out. It can be anywhere from 20% of the qualified leads you close to or it can be up to 80% or even 90%, depending on how good of a salesman you are.

At that point we want to figure in what is the value of 1 sale? In other words, when you sell 1 thing, 1 service whatever it is you’re selling to this lead, what is the value of that. And if it’s an ongoing, you may want to calculate what is the value of that over a year. You’ve got to come up with a dollar amount for 1 sale.

Let me give you an example, a Realtor. How does a Realtor compute online ROI? Let’s say that this Realtor receives, on average ten calls per month, ten qualified leads per month. Some are calling him and saying “Hey tell me about what you’ve got. Hey I wanna go see this house.” Now let’s say that this Realtor’s close rate is 20%, meaning that if we put 10 calls to that Realtor, they can probably close 2. 1 sale is let’s say $6,000 in commission. So if the Realtor sells a $200,000 house, then let’s say that on average that Realtor will make $6,000.

So, follow me here. They’re getting 10 calls a month on average, and they’re closing about 20% or 2 out of the 10 and 1 sale is $6,000. So basically what I’ve been able to calculate is 10 leads comes down to $12,000 on average. If I give you 10 leads and you close 2 of them on average at $6,000 a sale, that’s $12,000. My point is, I’m trying to get you to the point of realizing that 10 leads is worth $12,000 to you. If you divide that up, you’ll then be able to figure out that 1 qualified lead, on average is worth $1,200 to you.

Well, that’s it for today. If you have any questions, and I know I got a little more mathematical than I normally do. But if you have any questions don’t hesitate to visit my website, ask me a question. Go to Facebook, I’ll help you in any way I can. I’m Eric Spellmann, I’ll see you in cyberspace.