Prior to deciding on integrating automation, and really any other business change, it is necessary to calculate an ROI. At first glance, the formula is simple. However, there are some nuances.
The first question is how to decipher the variables of this formula for a specific change: automation, hiring a new marketer and some advertising. The second is to measure the fact and compare it to the forecast.
|Standard ROI Formula||How a business calculates ROI in reality|
In this post, we will cover the methodology for forecasting profits and automating market by using a traffic, conversion, frequency and average check forecast as well as cost reduction. And in the end, we present a methodology for measuring facts relative to the control group.
Such an approach allows to properly place the right integration goals and determine which marketing part needs to be improved first.
If this method seems too complicated for you, then you’re in luck, as we wrote another article. In it we discuss the Mindbox profitability calculator. The calculator determines the automation ROI based on our stats.
Steps to follow
The following steps need to be completed in order to calculate ROI:
- Select the period for which you are calculating a payback.
- Calculate additional profit:
- first the revenue increased,
- followed by marginality,
- and savings.
- Add the cost of the service and Cost on new employees,
- with the quantity of IT and marketing hours spent on the integration.
- Calculate ROI from additional profits and costs.
Select a period
Prior to calculating, select a period for which you are measuring the payback from automation: month, half a year, or one year. The commensurability of investments and benefits depends on this. For example, if you calculate the payback from Mindbox for one month, then undoubtedly you will be down. Due to the fact that you will spend more on the integration and developers than the service will earn.
Another period that will be helpful when calculating variable ROI formulas. For example, to calculate additional profits, the value of each conversion during a first purchase will be needed. To understand which period of conversions to include, remember which period you are calculating your ROI for. Need an ROI for the year, then take the yearly value. Half a year? Look at the conversions for the last six months.
Calculate additional profit
To calculate additional profit, use the following formula:
How to count the variables of this formula.
Increase in revenue
A revenue increase is calculated from two variables, revenue prior to automation and revenue after automation. Here’s the formula:
To calculate your new revenue, use the following formula:
The delta in the formula is a forecast of how much traffic will improve, conversion and frequency thanks to automation. For example, before automation, the conversion of a purchase was 20%, but will increase by 5%;
5% — is the delta.
For your forecast, refer to the marketer that recommended to integrate the service. If automation doesn’t affect a certain variable, use a zero instead of delta.
Let’s move on to the next step – specifying the margin of added profit.
The marginality of added profit is a matter of financial accounting. We recommend you speak with your CEO because each business calculates marginality individually.
As an example, we’ll use an online designer kitchen store. Let’s assume, that the marginality from kitchen sales is 5%. And the marketer provides a forecast which states that automating marketing can help in selling 10 additional kitchens per month. In order to sell an additional 10 kitchens, they must first be made. These are direct expenses for goods, assembly, and delivery. The marginality of such kitchens is no different than from the ones that were being sold before – the same 5%.
Another example. You are selling theatre tickets in booths near metro stations. The marginality of tickets sold in your booth is 5%. In order to sell tickets with the help of newsletters, marketing integrated automation. The forecast is an additional 100 ticket sales in addition to existing ones. To sell an additional 100 tickets, the business will need to pay for the automation service. Since digital tickets cost nothing, their marginality is roughly, 100%.
When you determine which type of marginality fits your needs best, it’s time to transition to savings.
Cost reduction can be split into:
- External costs— cost of services used prior to automation.
- Internal costs — freed up IT and marketing hours which can be directed towards other tasks.
External labor costs
The integration of automated marketing frequently results in the renouncement of other marketing services. For example, separate services for sending newsletters for different channels, plus services for on-site item recommendations. Just calculate how much you have been spending on them, and move that money towards profits.
Internal expenses are freed up specialist work hours and manpower that is now automated. If whether or not to allocate these ours to profit or not remains to be determined.
For example, within a company, there is an entire department that manually places recommendations on the main page of the website. After integrating automation, this task is handled by an algorithm. If you fire the entire department, that would be considered as direct cost reduction. If the aforementioned department starts developing this new avenue, this will yield the company additional profits. This approach can be attributed to reducing costs, but this is up to the interpretation of the business. Here is a real example from practice.
When we calculate the payback of Mindbox, we explain to clients that integrating automation saves developmental resources. A programmer is a deficit profession, they are always doing something beneficial for the company. We attribute saved development hours to profits, due to the fact that they will no longer spend time on small tasks. Instead, they will be busy with large tasks that will definitely yield more money than their hourly rate.
We add our external and internal expenses:
Once you’re done with profits, transition to costs. If we compare previous calculations then everything is quite clear: direct and internal costs. Directlyrelatese to how much money you will spend on the service with taxes. If you purchase the service for a year, then simply multiply its cost by 12 and so on. Internal expenses are one-off. They are based on the cumulative quantity of IT and marketing hours which will be spent on the integration stage that gets the service going and making profits.
The cost of the service together with taxes are direct costs. The work of designers can also be attributed to direct expenses, web designers and copywriters as well. That is of course if there was nobody handling marketing in the department previously.
Internal costs are paid once. These are hours that your developers and marketers will spend on connecting the new service. For example, the IT department will need 60 hours for integration, and marketers around 20 hours for getting acquainted with the new interface. If you acquire the service for a year, these hours do not need to be multiplied by 12 months because your developers and marketers will only need to allocate their time towards the integration once, and that is at the start.
We add these values to the formula:
ROI calculation from additional profits and costs
Once you have information on additional profits and costs, calculate your ROI.
The result of your calculation is a forecast of profit for the selected period. This is how much money you will start earning, on average, over a given period of time.
A positive ROI signals that you earned a profit. A negative one means that you suffered a loss. To better interpret the result, compare the value with the deposit or discounting rate.
It’s been half a year since I integrated automation, what next?
Once half a year or a year passes after integrating automation it becomes necessary to compare the plan with facts in order to confirm or disprove expectations. A reliable way to measure growth is by means of control groups.
Control groups work as follows: to measure a conversion growth, purchase and check frequency a group of people is selected, which is not subject to change. When the experiment ends, compare indicators for both groups. This will become your data for calculating a factual ROI. After comparing the plan and facts it becomes possible to discover weak spots in your marketing and launch another improvement cycle.
For example, at Mindbox there is a report that operates based on control groups, it’s called «CRM Effectiveness». Here one can see how automation affects the average check, conversion, profit, and order quantity. Salad colored columns represent the control group’s reaction. For them, Mindbox does not exist. In green are those who are affected by automation. Such a report will help in confirming expectations or the opposite, figuring out where marketing falls short:
Designating a control group for measuring traffic growth is not possible, which is why we suggest to evaluate it professionally or based on Yandex.Metrics or Google analytics.
Remember: how to calculate your ROI from marketing automation by yourself
- Select the period for which you are calculating payback for automation. A year, half a year, or three months.
- Calculate additional profits:
- Cost calculation:
- Calculate your ROI from profits and costs based on: