ROI: the loaded buzzword
Definition of "ROI":
• A measure of money gained or lost on an investment.
• What you expect to get back from what you are spending as an investment.
The campaigns and projects that we, as Account Managers, work on every day are investments that our clients are making in their own companies. Like all smart investors, your client should want to know that their money was spent wisely; that their investment is yielding high returns; and that the services your agency provides are all justified. We can do this by calculating a client's Return on Investment (ROI).
Some campaigns are designed purely to raise brand awareness, or increase purchase intent, and are not intended to generate profits in the short-term. In these instances, ROI can be calculated over a long period of time (e.g. monthly, quarterly, yearly) to give a more holistic view of results for your client. Other campaigns are specifically designed to drive sales or achieve a pre-determined objective, in which case ROI can then be measured fairly easily.
Knowing what the Return on Investment (ROI) has been for a campaign will help you and your client decide whether or not the investment was worth it, and whether or not you would do a similar campaign again in the future.
"ROI" should not be confused with "profit"
Profit is simply the difference between the amount earned (your client's sales) and the amount spent (their investment in the campaign).
ROI is a way of looking at the profit in relation to the amount spent. We achieve this through a calculation.
ROI (%) = (net profit / investment) x 100
net profit = revenue (or gross profit) minus investment
investment = the amount your client spent on the campaign
Example:Campaign total revenue = $30,000
Campaign costs = $20,000
Calculation: ((30,000 - 20,000) / 20,000) = 0.5 (x 100 = 50%) ---> your ratio of profit to overall cost
Understanding the terms
Investment: If you are calculating ROI across a whole campaign, then "investment" is the total cost of the campaign. If you are calculating ROI for just TV, or just radio, or just a coupon drop, then "investment" is the cost of the media for that particular channel. Don't forget to add in the cost of "people" (e.g. labour hours, etc) for a more accurate result.
Profit: Profit is more difficult to determine, especially when you are running multiple campaigns simultaneously, or when it is difficult to track the sales. If this is the case, it may be better to look at your ROI across all campaigns within a specific period based on sales achieved within that period.
How to figure out if your ROI is "good" or not
First off, you'll want to see your ROI as a positive %, not a negative %. Obviously, a negative percentage means your campaign did not make enough to even cover costs. 0% is a break-even, which is also something you do not wish to see (your client would have been better off putting their money into an interest-bearing bank account!).
Although any positive number is good (hey, your client made money), you need to determine (with your client) what your ROI target is for the campaign. There is often not a lot of sense (other than creating intangibles such as brand awareness and goodwill) of putting time and effort into a campaign with a low ROI.
It is commonly acknowledged that a "good" ROI lies between 20% an 50%. However, on platforms such as Facebook, it is better to want to see around 60%+ ROI, as social ROI will usually be inconsistent on a daily basis. Even ROI of 5% on a massive campaign (based on volume) can be a huge amount of money. So, the answer is that there really isn't a magic percentage number that you can aim for.
Here's another way to look at ROI from an agency point of view in order to justify your existence to your client. For every subsequent campaign that you do, just make sure that your ROI is equal to, or better than, your current lowest ROI for any given campaign.
The main thing is profit = more money. Some clients will be more focused on profit - or even, more simply, revenue achieved - than on ROI, so you need to find the formulae and lingo that best resonates with your own client. For example, I have one client who aims for a "5x +" result on all campaigns. This is not (thankfully) an expectation of a 500% ROI, she simply wishes to see a revenue which is at least 5 x her investment.
Risk of predicting ROI
After a campaign, ROI can often be measured fairly accurately. Using ROI as a decision-making tool prior to a campaign can be risky. As you can imagine, trying to predict what a campaign will achieve in sales is nigh on impossible - and you have to be very careful what you "promise" (or communicate) to your client when talking about campaign ROI.
You could make predictions based on things like current keyword traffic for the market or your client's website (using Google Analytics); target the estimated CTR (click through rate) of a link; predict TARPs for a TVC based on spend and your media plan, etc.
You can try to predict ROI based on research, or stats from a previous campaign. You may also have enough stats and/or sales figures to be able to predict a likely outcome from what others have experienced within the same industry.
What is safer is to agree, with your client, is what the ideal ROI should be (or has to be) in order to make the campaign worthwhile, or viable.
How do you track ROI?
Right at the planning stage you need to designate your campaign objective(s):
- reach a sales target (conversions)
- ensure more people hear about your client's business or offer (awareness)
- increase number of conversations with customers (engagement)
In order to accurately measure the financial success of a campaign you need to be able to - clearly - see how your campaign achieved these objectives. For example, when tracking conversions, if it is difficult to separate campaign-driven sales from usual business sales, then the waters become muddied and you will only be able to take a best-guess on ROI.
The best way to identify campaign-driven sales is to track where the sales came from. Here are some examples:
- Text-2-get promotion: customer texts to receive a discount code which is then used online or in-store to buy a product.
- QR code: scanning the code drives the customer to a website page/landing page, from where the path-to-purchase is tracked and measured.
- Printed coupon: customer takes a coupon into a store to redeem. Coupons are then collected and recorded.
- Landing page: create an unique website landing page specifically for your promotion (campaign, print ad, radio ad, EDM, etc). The page should contain a sign up form, call to action, gateway to purchase, etc. Put this unique website URL onto your promotion material and track the visitors and their behaviour on the website.
- Campaign domain name: purchase a campaign domain name and redirect it to an existing website page and add Google Analytics Campaign Tracking.
- Online advertising (including social media advertising): click-throughs are analysed and compared with sales for the same period. If you set up your online path-to-purchase sensibly, you will be able to see the customer's every move - when they purchase, how they got there, when they abandon the process, etc.
- TV advertising: TV investment is tracked against sales for the same period (note: determining ROI with TV is not nearly as accurate as with other methods of advertising).
- Social: Social ROI is often more measurable than traditional media spend (e.g. a billboard). If you cannot directly measure ROI (in the traditional sense), you should be able to measure customer engagement (including actions, fans, followers, retweets, likes, comments, etc). To effectively measure social ROI you need to limit the parameters of the offer and have pre-determined goals in mind. For example:
- Twitter: use Twitter as a direct ordering channel.
- Community: Use your own community of social media followers (e.g. on Twitter, Facebook, blog) as a feedback channel (saving you $000s annually on traditional research and test marketing).
- Digital coupons: offer special coupons on Twitter and Facebook for download and use.
- Offer exclusive social media-only deals.
- CTR from posts: Use a weblink in your post, then track and measure the click through rates (CTR) and visitor behaviour to track resulting conversions (e.g. sales, subscription sign-ups, coupon download, etc).
Attempting to link advertising efforts to positive or negative sales performance can often feel like trying to pin jello to a wall. Sometimes the conversation will sound like "the only thing we did differently during that period were those couple of Facebook posts where there was a lot of engagement...". When you start to wonder if the sales figures were influenced by the weather, the day of the week or the economy you know that figuring a definitive ROI will be impossible.
Linking advertising to + or - sales performance can often feel like trying to pin jello to a wall. – Sarah Ritchie
Even when the metrics are hazy, should you still attempt to track and measure ROI. If your client isn't already monitoring the figures themselves, they will need you to tell them if their money was well-spent. Meanwhile, you will want to know whether to repeat the same tactics; tweak your campaign; or try a completely different approach next time. ROI is a valuable tool to keep in your account management arsenal.
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