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:

  1. Agency/Marketer takes on a new campaign.
  2. Agency/Marketer knows they have to show big numbers right off the bat to impress the Powers That Be (PTB).

    ROI: A Flawed Metric

    ROI is important, but we all seem to be approaching it in the wrong way.

  3. 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.
  4. 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.
  5. 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?

Opinions expressed in the article are those of the guest author and not necessarily Marketing Land.

Related Topics: Channel: Search Marketing | Retargeting & Remarketing | Search Marketing | Search Marketing Column

Sponsored


About The Author: is a New York-based digital marketing and strategy consultant specializing in retail. He has worked with Nike, Neiman Marcus, Staples, Michael Kors and many others to develop fully integrated digital marketing strategies.Follow him @VicDrabicky on Twitter.



Sign Up To Get This Newsletter Via Email:  


Share

Other ways to share:

Read before commenting! We welcome constructive comments and allow any that meet our common sense criteria. This means being respectful and polite to others. It means providing helpful information that contributes to a story or discussion. It means leaving links only that substantially add further to a discussion. Comments using foul language, being disrespectful to others or otherwise violating what we believe are common sense standards of discussion will be deleted. You can read more about our comments policy here.
  • http://www.facebook.com/ingo.schurmann.1 Ingo Schurmann

    This.

  • Pat Grady

    Complicated further by the many things overlooked that leech into the equation, taking last-in credit for the sale.  If you add affiliate coupon sites, and your baseline SEO and PPC sales go down… do you conclude:  “Wow, look at those coupon site conversion rates, turn down our SEO and PPC efforts, let’s just do these fabulous coupon sites!  Their ROI is wonderful!” Doh!

  • http://www.facebook.com/profile.php?id=1283922090 Darren Floyd

    What’s fascinating is, we can discuss all of this, show a 1001 different sales and marketing predictions, and many of the PTBs will say they get it. But at the end of the day, the PTBs will generally say “we all just need to roll up our sleeves and make due with less budget!” Maybe I’m missing out on some fascinating new marketing methodology, but I can’t acquire customers or place media with sleeve rolling alone! 

  • siliconallstar

    Couldn’t agree with you more Darren.  Unfortunately, “sleeve rolling” usually becomes “get rid of anything that seems the slightest bit complicated or outwardly looks less than perfect” – which is short-sighted.

    Pat – totally agree.  The entire marketing ecosystem and how you attribute credit can be complicated and difficult.  But it still pains me to see people going through the trouble to set up complicated attribution systems to figure out which one should get credit for a sale without actually looking at the value of the customer driven from the sale.  Attribution has to be a part of it, but anything that evaluates marketing without considering the value of the customer/conversion driven will lead back to the same place.

  • http://www.onqmarketing.com.au Quentin Aisbett

    Great post Vic! I like the other guys commenting couldn’t agree with you more. The key for agencies I think, is to find the right mix of clients that understand the situation. It will at the end of the day validate our strategies, deliver the ‘long-term’ objectives, make us look good and leave us less stressed out by clients that are looking for the shiny ROI.

    Honestly, how exciting are the opportunities available to us today when a conversion can mean not just a sale but an email subscribe, etc, etc. 

 

Get Our News, Everywhere!

Daily Email:

Follow Marketing Land on Twitter @marketingland Like Marketing Land on Facebook Follow Marketing Land on Google+ Subscribe to Our Feed! Join our LinkedIn Group Check out our Tumblr! See us on Pinterest

 
 

Click to watch SMX conference video

Join us at one of our SMX or MarTech events:

United States

Europe

Australia & China

Learn more about: SMX | MarTech


Free Daily Marketing News!

Marketing Day is a once-per-day newsletter update - sign up below and get the news delivered to you!