Get the most important digital marketing news each day.
ROI: The Most Dysfunctional Metric In Digital Marketing
Ok, so maybe the title of this article is a little dramatic for ratings’ sake, but, seriously, ROI conversations are the bane of my existence. Not because I have an offline background where the idea of having to prove value from my campaigns seems ludicrous. Not because I am some brand-happy marketer that believes impressions are the best way to judge success.
Heck, it’s not even because I am just being extra cranky today (although that might be the case — I have been known to be a bit ornery in my old age). It’s because we all get it wrong, and there is no one to blame but ourselves. Here’s how it works:
- Agency/Marketer takes on a new campaign.
- Agency/Marketer knows they have to show big numbers right off the bat to impress the Powers That Be (PTB).
- Agency/Marketer runs the easy, heavily direct response channels like branded paid search and retargeting and earns really impressive ROIs — leading to all the adoration in the world from the PTB.
- Agency/Marketer maximizes these channels and goes broader — running brand growth or acquisition-type campaigns that deliver significantly lower ROI. The PTB see an ROI much lower than what they are used to seeing, freak out, blame the agency/marketer and cut the brand growth and acquisition budgets to raise their ROI back up.
- Agency/Marketer obliges, and the brand goes right back to being the same size, with little expansion (but a really fantastic looking, high ROI) opportunity.
And so the cycle begins. It is an unhealthy cycle that hurts marketers, kills creativity, and ultimately stifles brand growth. The good news is that it’s completely preventable — and when agencies and marketers approach ROI the right way, their brands flourish.
The Value Of A Customer
One of the biggest issues with ROI in its most common interpretation is that it puts value on marketing and eliminates the value of the customer driven from the marketing.
While it obviously makes sense to put a value on marketing, it doesn’t make sense to split that from the value of the customer driven. For example, let’s say your search marketing campaign drives two conversions.
One conversion is someone who buys once because one item is on sale then never buys again. The second conversion is someone who buys each season when new product is released. By putting all the value on marketing and not investigating the value of the customer driven by the marketing, both these conversions are of equal value.
So the first step is to figure out what a customer is actually worth. By looking at data around lifetime value, purchase frequency, AOV, etc., you should be able to come up with a pretty solid number showing the value of your average customer.
If you have the ability take it a step further, you can divide this data up even further, giving different values to people based on their purchase history (e.g. people that have bought less than 3 times in their first year have a value of X while those that purchase 5 times in the first year have a value of Y).
Once you have figured out the value of each customer, set up the systems that let you qualify each conversion that comes in from your marketing (this is the part most people don’t want to do because it can take some time, is data-heavy, and no one likes working with boring old customer databases because they are un-sexy and upper management rarely sees the value because it is harder for them to grasp).
By setting up a system that allows you to quantify each conversion that comes in (even if on a weekly or bi-weekly basis), you are now able to assign value to your conversions, which then allows you to give a more “correct” value to conversions driven from your marketing.
The Value Of Customer Actions
If we are working to put a value on each customer our marketing drives, it only makes sense to put a value on each action a customer takes after interacting with our marketing.
In most cases, people track one action, most often a purchase. But tracking conversions only is like driving a car without seatbelts, lights, a windshield, or a radio: you can do it, but probably not the best idea. Instead, make sure you track, and know the value of, every action a customer takes on your website. For starters:
- Email sign ups. This one is an absolute must if you ask me. Email takes a ton of credit for conversions, but something drove people to the site to sign up for email, so make sure that credit/value is partitioned out appropriately.
- Store locators. You can give a value to a store locator visit and you can take it a step further and give additional value to someone who prints store directions/address info (which is a much stronger indication of offline purchase intent).
- Catalog sign ups.
- Social interactions.
- Wishlist adds
The list could go on and on. But the idea is that is when you are only looking at conversions, you are eliminating a massive amount of value being driven from your marketing. And when you show less value from your marketing, you tend to run your campaigns differently, and by default, more conservatively.
Combining Customer And Action Values
So if you know what your different customers are worth and you know what different actions your customers make are worth, the final step is combining the two. When you do, you end up with something that looks like this:
Old marketing ROI model:
$1 in marketing drives 1 conversion. Conversion is worth $10. Marketing ROI is $10:$1
New marketing ROI model:
$1 in marketing drives 1 conversion, 1 new customer, 1 new email sign up. Conversion is worth $10, new customer is worth $30 for the year, email sign up is worth $5. Marketing ROI is $45:$1
While that is a bit of a simplistic way of looking at it, you can see the type of impact this sort of thinking can have on your campaigns. If you knew your marketing ROI was actually 4x higher than it actually was, would you run your campaigns differently?
Don’t get me wrong. I am 100% a believer in holding ourselves, our agencies, and our campaigns accountable for driving true value to our business. But if we are too nearsighted to investigate the true impact our marketing is having on our business, then we will always be overly conservative with our campaigns and stifle our own brand’s growth potential.
But then again, who really cares about our brand growth when we have a really high, shiny ROI we can show off to our friends?
Some opinions expressed in this article may be those of a guest author and not necessarily Marketing Land. Staff authors are listed here.