No digital budgets wasted: 6 essential steps to measure your ROI of digital investments

What is the trend of measuring ROI of digital investment?

Based on the recent reports from influential consulting firms and digital marketing firms, there has been a significant increase in digital investments among large organizations despite the worries of a slow economy. However, companies have also shown concerns about the investment return after implementing digital projects and software solutions.

A common question is asked after going digital: "Do you know how much your company spent on digital investments this year?"

What are others doing?

According to the EY-Parthenon 2022 report, less than half of large corporations measure the ROI of their digital investments (23% in 2020 and 41% in 2022). In other words, about three out of five companies are uncertain how much they spend on digital operations or capital expenditures. Similarly, they are unsure what value it yielded in incremental revenues, reduced cost and working capital. One of the common reasons behind the uncertainty is to develop a systematic way and reliable metrics that carry out such measurements.

At present, there is no standardized or one-size-fits-all metric to measure the return on digital investments (RODI). Companies from micro to large are devoted to spending more on their digital investments in the upcoming years to accelerate their digital adoption efforts. Thus, keeping track of your digital expenditures and measuring the return on digital investments can help you plan your budgets and stay ahead in the market.

In general, digital investments can be classified as digital technologies/ tools and digital marketing.

Common examples of Digital Technologies/ Tools are:

• Cloud-based productivity tools

• Project management software

• Customer relationship management (CRM) software

• Accounting and Finance Software

• E-commerce platforms

• Website upgrade

• Business intelligence analytics

Common examples of Digital Marketing are:

• marketing campaigns

• content creation

• social media management tools

• marketing automation tools

• paid advertisement

We will look at two methods to calculate your digital investment ROI.

o Method 1: (Gain from the digital investment – the cost of the digital investment)/ cost x 100%

This method is generally used when there is a clear and measurable gain from the investment, such as increased revenue or reduced costs. With the help of a business analytics tool (e.g. MS Power BI), larger corporations can use this method to measure their ROI more specifically.

o Method 2: (The estimated benefits/ Total cost of the project)

In many cases, it is difficult to single out one benefit, such as increased revenue and identify it as a gain from the digital investment, while there are incremental gains or losses and other activities, such as marketing campaigns contributing to the increased revenue. Therefore, companies tend to use the simple cost-benefit analysis (Method 2) to project their ROI while assuming the benefits will be constant throughout the year. This method provides a high-level view of the ROI but may offer less detail than Method 1.

Here are 6 essential steps to calculate the ROI of your digital investments.

1. Define your digitalization project: identify the specific digitalization project you want to measure the ROI for, such as implementing a new customer relationship management (CRM) system, upgrading your website, or automating your accounting process.

2. Define the time frame: involve your business success teams (it can be as small as 1-2 talent) to work with the new technology early in the process. Talent usually takes 3-6 months to adapt to the new software or system.

3. Determine the costs: sum up the project's total cost, including the software cost and any consulting or implementation fees.

4. Estimate the benefits: in the case of the new CRM, you can project the estimated revenue generated from handling more potential client enquires (emails/ chats/ calls) over the year.

5. Assign a value to the benefits: assign a monetary value to the estimated benefits. For example, this new CRM helps generate $32,500 more monthly profits (considering other factors are constant).

6. Calculate the ROI: Choose the proper method and put the number into the formula.

Happy Scenario: Let's assume you are the owner of a professional services business which has implemented a new CRM software to help your team to manage more calls/ chats/ emails so that you can gain more contracts/ projects.

After recording all the relevant numbers, we have the following:

Cost of the new CRM project: $21,000 (software + implementation fees) + $4,200 consulting fees = $25,200/ year (it is an annual digital service).

Estimated Benefits: $ 32,500/ month x 12 = $390,000/ year

(You estimate an increase in monthly contracts generating $32,500 in revenue).

Using the Cost-Benefit ROI method, we have:

ROI = (The estimated benefits/ Total cost of the project)

= ($390,000/ $25,200)

= 15:1

Therefore, the ROI ratio for this new CRM digitalization project is approximately 15:1. That means the cost for every dollar you spend on the project leads to about 15 dollars in revenue.

However, other factors, such as ongoing marketing campaigns, may also contribute to the increased sales.

Not-so-happy Scenario: Toni owns an engineering consulting company considering purchasing a new CRM software to improve workflow efficiency and get more projects.

He conducted an A/B test with two employees to compare the workflow efficiency between the current system and the software. After the two-week trial, they realized the software does not consider the user experience for small & midsize enterprises, and the significant features are not easy to navigate. Thus, it actually slowed down the speed of managing projects.

Estimated Benefits of the new software: -$ 6,500/ month x 12 = $78,000

Cost of this software: $4,500/ year

Toni used Method 2 to estimate the ROI with the software demo.

ROI = (The estimated benefits/ Total cost of the project)

ROI = - $ 78,000/ 4,500

= -17:1

It is a negative ratio (-17:1); therefore, Toni decided not to purchase this software, although it is reputable. It does not fit his business model.

How about the ROI on digital marketing?

The basic formula for calculating digital marketing ROI is

MROI = (Marketing Gain− Marketing Cost) / Marketing Cost x 100%

However, remember that each channel has unique ROI criteria. You can calculate various marketing ROIs to decide which ones are more effective and cost-effective for your business.

• Email Marketing ROI. If done correctly, email has an average ROI of 3,800%, an excellent marketing investment your company can make (source: Salesforce article). Through a tracking URL in the email ad, you can calculate the open rates, link clicks, and the additional sales you made around that campaign time.

• Social Media ROI. For this marketing channel, focus on the conversion and engagement rates.

• Other digital marketing channels are video or audio (e.g. podcasts); you can focus on impressions, click-through rate, search, and leads with a tracking URL or review the analytics provided by the host platforms.

The Real Value

As digital investment becomes vital for most businesses, more precise, accurate and standardized formulas will emerge in upcoming years. From now on, having a clear picture of the cost and value of each digital investment can help your business to grow without overspending on unnecessary business technologies or staying behind on the digital transformation journey.

Digital adoption or digital transformation is a continuous business development process. It should be achieved incrementally with the right business priorities and resources. A trusted business consulting partner can help clarify your digital concerns and solve digital business problems.

What are your thoughts or alternative ways to measure your digital investments? How often is it reasonable to measure the RODI and MORI for your industry?