Know-How Exchange : Other

Hi Gerard

Welcome back to KHE.

ROI is usually measured in monetary terms and expressed as a ratio, or a time-period in which an investment can be recouped.

In it's simplest form, the ROI is calculated as

Increased profit from the initiative
--------------------------------------- x 100%
Cost of the initiative


e.g. Suppose you sell a service for a total price of $5000, and the client makes $20,000 from that service, then the ROI is (20,000/5,000) x 100% = 400%.

Alternatively, suppose you sell that same service, and the client takes 6 months to generate $5k in increased profit by using that service, then the ROI was achieved in six months - also known as the payback time. Of course, at that point the service is paid-for, and the customer may be able to continue using it to generate more profits over time, depending on what the service is and how they have to pay to use it.

Hope that helps.

ChrisB

ROI is quite valuable to use as a single metric. But don't bet your life on it. It reflects the results from your past actions. If you repeat the same process, you're not guaranteed the same results going forward (since competition, tools, and technology change).

You'll also want to have baseline numbers to reflect your marketing testing, so you can understand if 200% is a good ROI for you or not.

Additionally, "cost" is more than your out-of-pocket - it includes increased time (such as: learning new marketing tools, interviewing consultants, etc.) and might include risk.

You might want to rethink the calculator idea. Calculating marketing value is usually more complex than just two variables, and there are a host of other factors that play a role.

While customers gained/returned is one measurement, you also get value from increased awareness, name recognition, and improved branding, all of which are notoriously difficult to quantify but which are very valuable. How about increased web traffic, window shoppers (who may become buyers) and inquiries? These aren't sales so they don't have dollar values, but they may well lead to sales and probably wouldn't have happened without the campaign. How about media coverage? Unpaid publicity (such as mentions in articles--anything but ads) can be quantified by calculating what you would have paid per column inch or broadcast minute. How about increased word of mouth? Attendence at any special events that are part of the campaign? Requests for information? How about the residual effects that take place several weeks or months later as a direct result--people finally having a triggering event to make them buy?

I worked with a hospital once that quantified all of its marketing by asking one question on the patient survey--"how did you hear about us?" Since they only gave a small space, everyone said "doctor referral." (Of course--that's the last step and you don't get in without one.) When we changed the survey to list all of the marketing activities--ads, newsletters, web site, signage, events, etc.--and said "check all that apply," people started to check off 10 or 12 ways they'd heard about the hospital, which made them choose it when the doctor recommended several facilities.

The moral of the story is that successful marketing requires the combined effort of multiple techniques over time. Your pitch can be great, but the buyer will respond when he/she has an urgent need and not before. You sell yourself short by limiting ROI to one or two factors.

Jay's also right about "soft" costs--they can be significant.

Another idea you might wish to incorporate would be a tracking phone number on your media and separate web pages which will auto-track upon a hit/visit which record the server ip address.

Both of these tracking ideas record specific attempts to reach the "target" and are part of the overall effect from the marketing work.

And, as outlined above - it still may sell you short on the work that is being done.

I disagree with rethinking the calculator. Any tracking that shows the value of marketing, even if imperfect (as it likely will be), is useful.

As said above, the closer you can get to tracking the dollars gained per dollar spent, the more value it will provide. But this information is incredibly hard to get, so often you end up tracking things like number of customers gained, number of leads gained, etc. Just remember the perfect situation is to track dollars, so the closer you get to that, the better.