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In one question, we asked:
How much total gross does your Internet department generate for every $1,000 spent on Internet leads from all sources (SEM, independent and third-party leads, classified site subscriptions, etc.) ?
Of the 183 responses, the answers broke down:
3X or less: 33%
7X-10X or greater: 20%
Don’t Know: 29%
These answers reveal there is quite a large disparity between auto dealers’ return on investment (ROI) on Internet spending, as well as a surprisingly large percentage that don’t even know their ROI. So I wanted to know: what should a dealership target for a reasonable Internet marketing ROI?
One of the experts we consulted for measuring this metric was David Kain, President of Kain Automotive. He suggested that 5X ROI was the absolute minimum that a dealership should strive for, and ideally Internet departments should be seeing 7X ROI on their Internet spend.
But how do you calculate your ROI? Basically, ROI is what you get for what you spend. Here is a simple formula:
(Gross Profit – Marketing Investment) / Marketing Investment = ROI
This formula represents three steps.
1) Marketing investment should be simple to figure out as it is the total cost of a campaign. For instance, if you spend $1,000 per month on a Pay-Per-Click campaign, $1,000 per month on independent leads and $1,000 per month on a subscription site, then your total marketing spend on Internet leads that month is $3,000. For the sake of simplicity, I’m going to suggest here that the cost of overhead, while included in some ROI measurements, should not be included when figuring out ROI for Internet leads, regardless of source. So in this formula, don’t worry about including labor costs (for staff), web site maintenance costs, etc.
2) Gross profit is the next metric you’ll need to figure (my first GM used to say, “Volume is vanity. Gross is sanity.”). If you can pull the actual grosses on all Internet deals, that’s great. If not, take the number of sales and multiply it by your dealership’s average front and back combined gross profits. So if $3,000 in marketing spend delivers 10 sales at an average of $3000 combined gross, then your total Internet-related gross profit will be $30,000.
3) Next, you need to subtract the initial marketing investment ($3,000) from your gross profit ($30,000) for a total of $27,000.
4) Divide that number by your initial marketing investment ($27,000/$3,000) and in this scenario you end up with 9X ROI, an excellent result.
Why is it important to know your ROI? Any time you spend money on anything, whether on Internet leads or a marketing campaign, it is an investment. Like any investment, it should be measured, monitored and compared to other investments so you know where you should be spending your money.
Also, knowing the ROI for all your lead sources gives you leverage. How many Internet marketing budgets were slashed in 2009 and 2010? Perhaps some cuts were deserved, but do you know which ones? Cutting back on a lead source that returns a high ROI is only going to hurt the bottom line.
Of course, our question focused on the overall Internet marketing spend, not on the ROI of various lead sources. But applying this formula to your separate lead sources is highly recommended and gives a better measurement of success than just closing percentage or other metrics. After all, ROI is what goes to the bottom line.
I’d love to hear some feedback: how do you calculate your dealership’s ROI on your Internet leads spend? What do you consider a good ROI? In my next blog, I’m going to give some tips on how to drive your team to improve ROI.