By Mark Baird, AVB Inc.
It used to be that the only way we knew if a newspaper ad, radio commercial or television spot worked was if people were walking through the door and buying, and we accepted that as the metric.
If you think about it, the same anecdotal method still applies today, although you now know exactly what worked, what didn’t, and how to make it better. The data tells us who responds, what they respond or don’t respond to, and the actions they took or didn’t take.
So how do you calculate digital return on investment (ROI)? If you’ve ever dipped your toe into Google Analytics (GA), it’s likely you were quickly overcome with an avalanche of data. That’s the great thing about GA, there’s almost nothing that isn’t measured and reported, but it takes a Ph.D. in applied mathematics to understand it all.
When someone asks if your advertising is working, what do you think they’re asking? Are they asking if it’s generating awareness, creating foot traffic, or driving sales? When I ask this question, I want to know if your marketing is successfully generating business. That’s really what marketing needs to accomplish.
If you’re spending money to generate revenue, you should have a simple way to know if the activity drives business. ROI is an essential metric for any business activity.
ROI is calculated using two primary metrics: the cost to do something, and the outcome generated. But there are a few challenges with calculating ROI for marketing activities. For one, it can be tricky depending on how you measure impact and costs, and it requires complex formulas and algorithms which factor in dozens of different variables.
So, let’s shelve the complicated equations and algorithms and focus on one simple metric: the revenue to marketing cost ratio. This is the “hard” metric, the one that impacts cash flow, sales growth and profit.
What Is the Revenue to Cost Ratio?
The revenue to marketing cost ratio represents sales generated for every dollar spent on marketing. For example, $10 in sales for every $1 spent in marketing yields a 10:1 ratio of revenue to cost. However, in the average appliance or electronics retail business, an advertising cost of 10 percent would break the bank. In contrast, furniture and mattresses have higher margins, and 10 percent may be a good investment for that kind of business. So, determine your sales to marketing percentage and create the ROI ratio target.
What Is Considered A Marketing Cost?
When calculating your ratio, a marketing cost is any incremental cost incurred to execute that campaign or cadenced “digital marketing” activity, such as a search campaign. These could include:
- Pay-per-click (PPC) spend on search or display/banner ads
- Content production costs
- Social media management fees
- Marketing/ad agency fees (don’t forget margin on spend)
- Website fees
PPC, email, social media and websites are the top four digital channels for engaging consumers. Whether they are using mobile phones, tablets or desktop PCs, customers use these channels to learn, compare and purchase products and services.
Both hard and soft metrics factor into calculating ROI, and soft metrics like impressions, engagement and visitors (returning/unique) are essential for shaping your marketing strategy into a winning game plan.
You can also think of metrics as three separate categories: front-end, middle, and back-end. Front-end metrics, such as click-through-rate (CTR) and engagement ratio, tell you if your content is relatable enough to inspire action by your target audience. Middle metrics note measures like conversion rate and bounce rate that show you the number of leads moving closer to buying.
Back-end metrics like sales opportunities and revenue show you not only how your marketing efforts have been hitting the company credit card regularly, but also how much income you’re receiving in return. These are the usual metrics for measuring your financial ROI.
Email has come a long way since its inception – the same year Jean Knight’s “Mr. Big Stuff” swayed hips – to where we see it today, and it continues to be a primary source for brands to engage with their consumers. Whether it’s through newsletters, inquiries or order confirmations, email remains a quality avenue of information and communication between consumers and brands.
If you’ve run an email campaign before, then most of the following metrics should be familiar to you. However, as email evolves, it’s essential to keep an eye out for new updates and features, as there might be something new to add to your reports.
Also, incorporate tracking parameters in your emails, so you know where to attribute any leads and successes.
When measuring the initial success of your email campaign, especially when using A/B testing, pay attention to the following:
- Bounce rate
- Open rate
- Unsubscribe rate, or “Hello darkness, my old friend.” This metric is an easy way to determine if something is wrong. If your consumers are getting turned off by your content, do investigate
- Clicks and click-through-rate (CTR)
- Conversions and conversion rate – how many people are following through to your email’s end goal? You can have a high open and click rate, but if you’re not converting then there is room for improvement. You might need to make some adjustments to your email format/content, context and/or your landing page.
All of these metrics give you a solid summary of your email campaign in great detail, in order to make adjustments and record ROI. A deep dive into the components of metrics for these platforms warrants several more articles in the future – watch for them in upcoming issues of YourSource Magazine and BrandSource’s newly-launched news site, YourSourceNews.com.
Remember the early days of Facebook when you were ecstatic the first time you hit double-digit likes? Triple-digit? For small business, likes were hard to come by and it’s not getting any easier. In fact, I think it’s become more difficult, but no less critical to success.
With Facebook ads/posts, build on your content strategy and take an in-depth look at what has or hasn’t been working in your previous campaigns by using Facebook’s Insights tool. How many of these conversions became quality leads that led to more engagement or sales? You’ll want to look and pull reports from both Facebook Insights and your web analytics platform to get the full picture.
Website Landing Pages
Consider your website as a digital Disneyland. It’s where the magic happens. But instead of a giant mouse in short shorts selling you an overpriced funnel cake, it’s where you send your potential customers to find quality content and information on your products and services. Your website is the engagement and conversion machine.
Be sure to take a look at these metrics on your website analytics using your tracking parameters:
- Traffic – see how many visits your landing page received from your campaigns
- Unique and returning visitors – this is the number of individuals who came to your website, and how many keep coming back!
- Total page views – note any other pages visited on your website after your landing page
- Time spent on your page – not only can you see how long people stay on your website, but it also tells you if your visits are engaged or immediate exits
- Actions/conversions – whether it’s an online purchase, request for a quote, a contact, a call, a directions/hours look-up, or a sign-up for an event, find the value generated from users that complete a goal on your website.
Take a look at the path to discovery and purchase data to follow your buyer’s journey on your site. Your campaigns can bring you revenue outside of your initial promotion, so it’s a significant additional metric to determine which campaigns and actions are contributing to conversions and sales.
Lifetime Value of Customer
Lifetime value refers to the total value a customer brings a business over their entire life as a customer, not just through their first transaction with you. Many companies only think in terms of “first sale value” and call it a day. However, a customer for life is far more valuable, so to accurately calculate return on investment, we need to understand the full ROI.
It is not easy to calculate the revenue generated for all marketing activity. Specific tactics like social media, content marketing and display ads target users long before a purchase takes place. However, just because a marketing activity can’t be measured correctly doesn’t mean it shouldn’t be considered. Again, as we noted at the start of this discussion, there is always the anecdotal analysis of money spent and sales transacted.
That being said, retailers should always work to connect the dots between activity and revenue. Advances in web analytics software and methodology provide better tools for measuring activity over time and gaining greater insight across different devices.
All marketing is about generating revenue. Implement a ratio, treat it as the “golden metric” for marketing activity, and focus on the outcome: growing your business’s sales and profits.
Global Creative Director
YSN is published by BrandSource parent company AVB Inc.