Measuring the performance of online marketing agencies is a subject that creates a lot of frustration for business owners. There's a fundamental disconnect between what agencies generally report on and what business owners are looking for. As the owner, we care about the bottom line - sales and profits. But what most agencies want to focus on in reporting is activity - clicks, likes, shares, links, etc.
It's not to say that there isn't value in activity reporting, but what we want to do is tie it back to revenue as tightly as we can and get to the ROI so we can make allocation decisions between campaigns and between our online opportunities and other marketing channels (print ads, trade shows, affiliate programs, etc.)
From an ROI perspective, each channel of online marketing can be a little bit different. For example, paid search ROI is much easier to track and calculate than social media. In areas where tracking is more challenging we generally look to "baseline" a campaign, meaning we look at the revenue level before a vendor begins work, adjust for seasonality, and then compare that to the revenue level once work is underway. It's also important to communicate this to your agency partner so they understand your need to tie activity to revenue.
A very typical example of an interaction between an owner and an agency would be for the owner to give a pay-per-click agency a monthly budget, say $2,000, and then each month the agency produces an activity report that would include overall sales and some activity detail. The way we approach paid search is by putting the responsibility on the agency for a set Performance Threshold. We say to the agency "We need $5 in gross sales for every $1 put into ad spend." Everything over this 5-to-1 threshold, we're a buyer all day for, regardless of budget (because it's creating net profit). Everything below this threshold we don't want, and need to eliminate spending on as quickly as possible. This is commonly known as setting a minimum ROAS - return on Ad spend.
With this kind of threshold in place, we can spend our monthly reporting calls going over which campaigns we are cutting, where we're getting good ROAS and where we are seeing the really big gainers - 10x ad spend, 20x ad spend, etc. By identifying the areas where we're seeing better than average return we can look to boost spending in those areas, promote those products on other channels and make them more prominent on our own website.