How to calculate ROI with examples?
The bad news is, you still need to measure ROI. The good news is that ROI doesn’t have to be life and death. There are other metrics—return on sales (ROS), conversions, page views, and of course, LTV—that can help give you a clearer picture of how you’re doing.
The ROI (Return of Investment) ecosystem is crazily complex and impossible to pin down. In this blog, we explain How to calculate ROI with best examples and case studies?
With digital marketing, you can get real ROI and stop throwing darts at a board in hopes of hitting the bullseye. How? Tracking, of course. Ensure that all your content—and every customer who interacts with it—can be tracked and that data can be collected.
1. ABSOLUTE ROI
This is basically, “I know what I spent, and I know what I made from that spend and I can prove it.” Take Domino’s Pizza example. Say you drove a million downloads of your mobile app and the average cost per app download was $3, then you spent $3 million.
If you can prove that the profit generated by those million downloads was $50 million, that’s a brilliant ROI. You don’t even need to do any more math. Just keep spending more money on mobile app downloads, and fast, before your competitor works out what you are doing.
That’s the easiest way of measuring ROI. You should always try to achieve a positive absolute ROI if you can, as there are then no doubts.
Short-term metrics to track here are things like:
Cost per subscriber
Cost per mobile app installed
Cost per purchase
Cost per test drive
These can then be compared to the predicted LTV of those actions. For any customer segment, if the cost per action driven is less than the predicted lifetime value of those actions, then you have a winner.
In our experience running thousands of digital advertising campaigns, more than half of all marketing campaigns don’t fit this model neatly. If yours does, throw your marketing budget constraints into the trash can and uncap your spending.
Strike while the iron is hot, and before your competitors acquire those customers.
2. RELATIVE ROI
If you can’t prove the absolute ROI of a marketing campaign, but believe it is an essential spend required to build your brand, then relative ROI is the next best option. This means comparing the various ways you can achieve the same engagement with your target audience.
Video advertising—which includes both TV and digital video advertising—is the biggest example of this. Few video ad campaigns achieve a measurable positive absolute ROI, so you need to find the most efficient way to achieve your brand engagement goals.
According to IPG Media Lab and YuMe, as far back as 2011, more than 60% of all viewers watching TV spent time distracted by data applications on mobile devices, while 33% watched TV with their laptops open. Just 6% of those monitored watched TV with no distractions at all.
All those distractions lead to a dramatic reduction in ad viewing. According to the report, 63% of TV ad impressions are ignored, and just 25% of viewers studied were able to recall advertising they had seen during TV shows unaided, with 28% recalling TV ads with help. Imagine what those numbers look like in 2016...
For example, think about this question: “What is the ROI on my digital video campaigns versus my TV campaigns?” You do this to measure the cost per relevant view (CPRV) of online and mobile video versus TV ads. Here’s the methodology for comparing the two media:
Absolute Price: Look at the price you pay for your current TV advertising. To keep the calculations simple, if you are paying a $10 CPM (cost per thousand ads shown), that means you’re paying around $0.01 per ad shown on TV.
Filter for Non-Viewers: You typically buy TV advertising based on the audience numbers for a particular show. So you have to filter out all the people who don’t actually watch the ads because they go to the bathroom, channel surf, grab a beer or browse Facebook.
Let’s assume that only 30% of people actually concentrate on your ad, a reasonable assumption. That means you’re actually paying around $0.03 per viewer.
Filter for Relevant Audience: Clearly, not everyone who sees your TV ad is a target customer. On those rare occasions when I flip on scheduled TV instead of watching on-demand streaming services, I typically see ad after ad for old people drugs—which spend half their air time telling me all the ways that particular drug might kill me.
I am not that old, so this is an example of waste. If you assume that 30% of the people who actually watch your ad are target customers, now you’re paying around $0.09-0.10 per relevant TV ads view. This is getting a lot more expensive...
Compare TV Cost to Digital Video: The prices for video views vary, in the U.S., the range is currently from a few cents to as much as a dollar—which you might pay for a perfectly targeted B2B campaign with a click-to-play long-form video ad.
In my experience, a B2C advertiser will typically pay around $0.10 for each completed view of a 100% brand-safe, fraud-free, well-targeted digital video ad. That’s similar to the cost per relevant, completed TV ad view. So, funnily enough, there seems to be a “wisdom of crowds” with video ads pricing.
Or is there? Are we really comparing apples to apples?
Estimate Additional Value of Digital Video: Digital video ads have additional value over TV ads, so they should be worth more. I call these the “Five Ts”:
1. Targetable: You can go beyond basic demographics (as on TV) and target based on everything you know about the consumer from your CRM database and based on past interactions with your brands.
2. Tailorable: Match videos with specific audiences. For example, you can make one video for English-speaking audiences and tweak the same video with a different voice-over for Hispanics. However, it can get even more tailored: sending “awareness” videos to potential customers, “loyalty” videos to existing customers and “incentive” videos to lapsed customers.
3. Tolerable: Because digital ads targeting is optimized, you will minimize showing your ads to people who don’t need your products, and therefore you are unlikely to annoy people for whom your products/services are irrelevant.
4. Trackable: This is ROI gold. Measure and optimize ad campaigns, to do more of what is working and less of what isn’t, in real time.
5. Tweetable: Good video content, well targeted, gets shared. For example, our native video company, Giant Media, runs campaigns that average 36% “earned media” (additional, free views) for their clients, as a result of viewers sharing.
Not to put too fine a point on it, if the results from the different channels are the same, spend your money where the cost per engagement is cheaper. That’s the best relative ROI. Your numbers will vary depending on a lot of factors, and this example is based on my in-depth knowledge of digital video, but this comparative methodology works for any kind of media.
Of course, because digital media are inherently more trackable and adaptable than old-school media like broadcast TV, it’s smart to allocate as much of your marketing spend as possible to media that let you see what’s happening and make adjustments on the fly. That’s what’s happening in our world, as more and more advertisers are migrating media spend from traditional TV to digital video.
3. ATTRIBUTION MODELING
This is the Holy Grail of ROI measurement. In theory, it lets you measure the impact of each part of your marketing spend—TV, video, search, display, social, outdoor, print—and precisely allocate results and revenues to very specific campaigns and strategies.
With successful attribution modeling, you might find a CMO, chest swelled with pride, telling you something like, “My video campaign drove 24% of sales, so the value of a completed view is 35 cents. As the cost of each view was 15 cents, this represents a spectacular ROI.”
And then you wake up and smell the coffee.
ROI reminds us not to fall in love with a type of media just because it’s popular. For example, everyone’s talking about social media these days, but according to the Direct Marketing Association, email still beats social media with an ROI of 4,300%. Yes, 4,300%. The lesson: it’s about what gets results, not about what’s cool. Results are the goal, not coolness.
Attribution modeling should be the eventual goal of marketing ROI measurement. Maybe one wonderful day, when all marketing campaigns are digital, all consumer databases in the world are linked to each other, cash purchases have ceased to exist, and the sky rains sunshine and puppies, we will reach this nirvana.
EXPLAINING THE ETHICS OF DATA COLLECTION AND USAGE
How do you respond to accusations that collecting and using customer data in such ways is unethical? I would respond as follows: Consumers love the fact that almost all websites and mobile app, including Google and Facebook, are free. They are free because they are supported by ads.
Therefore, you are going to see ads, whether you like it or not. By collecting and using consumer data for improved targeting, consumers will see useful ads instead of ones that are badly targeted, generic and annoying. That provides a better experience for consumers, better ROI for advertisers and better revenue for the publisher. Everyone wins!
GATHERING AND USING YOUR CUSTOMER DATA
How you use your data matters at least as much as the quality of your data. According to eMarketer’s 2013, marketers who use automated email systems to follow up with consumers—including messages like birthday emails and shopping cart abandonment prompts—enjoy conversion rates as high as 50%. If your CMO isn’t championing that kind of data use, why not?
What data can you collect and where does it come from? How are you putting that data to work once you have it? This isn’t a privacy question. It’s an optimization question. Once you have your data, are you using it in the way that produces optimal ROI?
In business school, would-be CEOs learn that it’s the volume of data that matters. But that’s like saying it’s the raw ore—not the gold—that makes a mine valuable. It’s possible to have so much data that you smother your marketing under a slagheap of irrelevant information. Valuable data helps you optimize customer LTV.
NURTURE, NOT NATURE
If you’re selling exclusively online, for instance, chances are you’ve captured your customer’s email address. If you’ve also gotten permission to send those customers email, you can start sending them promotions as part of your CRM campaigns.
If you’re selling to people in a retail shop, that’s an opportunity to capture their email address and/or their phone number as part of a point-of-purchase conversation, an incentive program or a comment card.
You’re not doing those things? Come over here, because I need to check your pulse. How is your business still alive? If you’re not capturing email and mobile phone information at every point of contact, start yesterday.
Just as valuable is something called email nurturing. That’s a touchy-feely way of saying you’re combining the personal info in your CRM database with emails to send regular, personalized communication to the inboxes not just of people who’ve bought from you, but people who haven’t...yet.
Nurturing works, especially when it comes to converting prospects into customers. KissMetrics says that 96% of first-time visitors to a website are not ready to buy, so it’s your job to get them ready by reaching out with targeted messaging.
Your CRM system tracks a visitor’s activity on your site—searching, browsing product reviews, taking surveys—and their place in the sales funnel, and sends relevant, automatic emails based on individual activity.
Over time, this turns prospects into customers: the MarketingSherpa 2012 Lead Generation Benchmark report said that organizations that nurture their leads show a 45% increase in lead generation ROI over organizations that don’t.
Need more proof? The Annuitas Group says prospects who have received nurtured campaign messages spend 47% more money than non-nurtured leads. If your CMO hasn’t been using nurturing, that thump you just heard may have been him or her fainting after reading this blog.
A report from eMarketer indicates global spending on social media advertising will hit a mind-boggling $36 billion in 2017, with nearly two-thirds of that money flowing to Facebook.
However, I recently had a workshop with a group of diverse, experienced and highly intelligent marketing people on the subject of attribution, and we went around in circles. We asked questions like:
A video builds a brand for more than a single campaign, so what is the impact on next year’s sales? No answer.
The quality and price of the product or service are massive drivers of success. How do we measure their impact on a campaign? Tricky.
Past customer experiences also drive repeat sales—how do we account for that in media attribution? Not sure.
How do we link cash purchases to a consumer’s digital profile? Not possible yet.
What if a child uses YouTube under their parent’s login name. How do we account for that? Ask me about sports.
What is the value of outdoor advertising? No idea
What about word of mouth? Head explodes.
One thing we did agree on was the value of testing, especially for digital media. It’s very easy to target one group (e.g., a particular geographical area) with one campaign, and target another group with a different campaign to compare the differences in impact between different control groups.
That sort of thinking—exhaustive tracking, quick testing, subtle adjustments in content, incentives or targeting—is what we’ll need if real attribution modeling is ever to be more than a CMO’s idle daydream.
[Note: You can free download the complete Office 365 and Office 2019 com setup Guide.]
THE IMPACT OF MARKETING CAN BE MEASURED
“Revenue for revenue’s sake is dangerous. Too many chief executives are enamored with boosting the top line. The theory goes, ‘Where revenue flows, profit will follow.’
Not always. Look at Groupon, which struggled after going public because of its early high-volume/low-margin business model.” —Bloomberg Business, Sept. 26, 2013
So customer lifetime value is the most important marketing framework, but is that all you need to measure? Unfortunately not. There will be lots of tactical measurement required, too.
Now it’s time to go after the most amorphous metric of all: return on investment or ROI. How do you ensure that you and your team are getting a good ROI from your marketing spend? More to the point, how should you be measuring this notoriously elusive thing in the first place?
Want to make ROI less vague? It’s all in how you measure it. First, know what you’re measuring. Are you just looking at the cost of gaining each customer? Or are you comparing the cost and return of different media, like social video compared to pop-up ads?
Second, how much weight are you giving the results? The world of commerce is just too unpredictable for any model or metric to account for every dollar of cost or revenue.
BAD AT MATHEMATICS
I’ve done brainstorms with some of the smartest people in the industry, and when you dig into the truth of statements like, “We can prove to you the ROI of every single ad you ever showed”, you find they’re all lying. Okay, sometimes they’re not really lying...they’re just bad at math.
I’ll give you an example. You run a campaign in which you buy video ads, search and some other stuff. You ask, “When someone sees our display ad, how much more likely are they to do a search on Google?” You can work that out if you track the online activity. Let’s say that you show that when you run a display ad, people are more likely to search.
If you’re doing what’s called attribution, you follow it by asking, “How many people purchased?” In theory, that will tell you the total amount you spent on ads shown to that individual and the profit generated by the transaction. It should also tell you whether the cost of driving that sale is higher or lower than the profit from the transaction.
The ROI ecosystem
Well, no. I would describe it as interesting. Unfortunately, a lot of that data is misleading. I wish it weren’t so, because I really want to be able to show you what an amazing tool, but here’s the problem: there are too many variables that are out of your control and impossible to measure. The ROI ecosystem is crazily complex and impossible to pin down.
Let’s say you run the same media for a year, get the same strong click-through and search results, and yet watch sales decline. That might have nothing to do with you. It might be that your campaign is great but your chief competitor is killing it with a new product or promotion. It might be that their product was just featured on the cover of Vogue.
Maybe they dropped their price. Perhaps your product has become obsolete, or that all your target customers have purchased one, and don’t need another. None of this means you’re doing bad marketing. It means something else changed that you didn’t measure and can’t control.
The danger in using ROI numbers to conclude that a campaign succeeded or bombed is that correlation doesn’t equal causation. A bad quarter might not mean you should fire your entire marketing department.
It works in reverse, too. A quarter of rocketing sales doesn’t mean you’re suddenly Steve Jobs. Maybe there was a promotion that had nothing to do with media. Maybe your competitor went bankrupt. If you’re selling umbrellas when it rains, you’re going to make money.
There isn’t an attribution model or ROI metric in the world that takes account of all these variables, so be cautious. Don’t over-attribute either positive or negative numbers to your content, media spending or placement strategy.
It’s important to know how well your marketing is working, but it’s equally important not to overreact to outcomes that weren’t entirely a result of what your marketing team did.
Other Engagement Drivers
There are many other drivers of campaign success. For example, we often run campaigns that serve ads or adapt campaigns, based on the weather forecast, which can dramatically improve results.
The causes of this problem are two-fold:
Inadequate resources in the marketing team or at the agency, meaning no one has any time to monitor and optimize campaigns after launch.
Ignorance about the potential improved ROI that comes from continuous optimization, often exacerbated by a lack of focus on useful ROI metrics.
The solution here is simple. Either ensure that your marketing team or agency is well-equipped with experts who do this kind of optimization every day, or hire specialists companies that can—typically by using a combination of programmatic technology, math geeks and additional data sources. These specialists may cost you more, but the improvement in ROI will be well worth it.