Marketing ROI – the king of marketing complexity
Measuring Marketing ROI remains one of the more complicated tasks every executive must contend with. What seems on the surface to be a 1+1=2 exercise, quickly becomes a much more complex undertaking. Marketers need to develop a more sophisticated understanding of digital marketing metrics, plus what is possible and what isn’t (yet), in order to estimate the most accurate return on their marketing activities.
To help demonstrate, let’s take a look at a few examples of common marketing measurement scenarios to see how measurement needs to be viewed:
Let’s assume, for example, you are running a Google Adwords campaign for a product. In this case, the direct ROI could be the number of sales that are directly attributed to clicks on your ads. You can track these sales by analyzing your overall online activity. If you’re evaluating what we call ‘attribution’, you do so by asking, “How many people purchased the product as a result of my search ad campaign?” In theory, that will tell you the total amount of money you spent on ads shown to each individual and the profit generated by his/ her transactions. It should also tell you whether the cost of driving that sale is higher or lower than the profit from the transaction.
Sounds simple, right?
Wrong. There are simply too many variables that are out of your control and impossible to measure. The ROI ecosystem is crazily complex and impossible to pin down. Here’s an example why:
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?
There is a good chance that the reasons will be out of your control, such as a new competitor in town or a brand new emerging technology that is threatening to replace your product in the future. Marketing could be to blame, but it is one of many possible explanations. The danger in using ROI numbers to conclude that a campaign succeeded or bombed is that correlation doesn’t directly equal causation.
A bad quarter might not mean you should fire your entire marketing department or re-invent your marketing strategy. It works in reverse, too. By all means, celebrate your success but don’t immediately change your earlier ROI projections based on rocketing sales this month. Try to get to the bottom of it and determine if any external factors caused it. There isn’t an attribution model or ROI metric in the world that takes account of all market variables, so be cautious. Don’t over-attribute either positive or negative results 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. Marketing is just one piece in a much more complex puzzle – and understanding all of the pieces of that puzzle is going to yield a far better and more accurate understanding of where your dollars went. Too many CMOs get blamed for doing the right thing, but not having the benefit of the full picture to support their outcomes.
HOW TO MEASURE ROI
Regardless of the complexities, you still need to try and measure ROI. The good news is that there is a range of ways to measure ROI that always means you can track and improve your marketing tactics.
There are three types of ROI, with increasing levels of complexity:
- Absolute ROI
- Relative ROI
- Attribution Modeling
This is basically, “I know what I spent, and I know what I made from that spend
and I can prove it”. The nirvana that we aim to measure is marketing spend vs increase in predicted customer lifetime value from that spend. This typically gets measured when a company’s media mix is simple (likely 100% digital) and ALL customer’s transactions are trackable. For example, let’s say you have a mobile phone app and drove a million downloads of the app, and the average cost per download was $5. In this case, you spent $5 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 to promote your app, and quickly, before your competitor works out what you are doing Other short-term metrics to track here are things like:
- Cost per subscriber
- Cost per install
- Cost per in app purchase
These can then be compared to the predicted LTV of those actions. For any customer segment, if the cost per action is less than the predicted lifetime value of those actions, then you have a winner.
However, over 80% of 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.
If you can’t measure absolute ROI of a marketing campaign, then relative ROI is the next best option. This means comparing the various ways you can achieve the same engagement or action with your target audience between the different media you can use to connect with them. Typically these metrics include cost per action, with ‘actions’ being things like likes, shares, email sign-ups, video views, site visits, or other engagements.
Let’s take video advertising for traditional broadcast TV vs Digital video as an example of a relative ROI calculation.
Few TV ad campaigns achieve a positive, measurable absolute ROI, especially in the early stage of product launch. You are building awareness, not necessarily driving sales. However, digital video offers far more precise metrics, including the cost per relevant view (CPRV) of online and mobile video. Here’s a pretty straightforward methodology for comparing the two media:
Traditional TV Ads
Let’s assume you are buying TV ads and paying a $10 CPM (cost per thousand ads shown). That means you’re paying around $0.01 per ad shown on TV.
You typically buy TV advertising based on the projected audience numbers for a particular show. According to IPG Media Lab and YuMe, as far back as 2011, more than 60% of all viewers watching TV spent time distracted by second screen content on mobile devices, while 33% watched TV with their laptops open. Just 6% of those monitored watched TV with no distractions at all. So, let’s assume that only 30% of TV viewers actually concentrate on your ad, which is a reasonable assumption. That means you’re actually paying around $0.03 per actual viewer of your ads.
Next, not everyone who sees your TV ad is a target customer. 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 ad view. This may seem like it is getting more expensive, but in reality it is just reflecting reality. 90% of your TV ad views were wasted.
Digital Video Ad Views
As is happens, $0.10 per relevant view is similar to what you pay for highly targeted digital video ads in 2016, e.g. on YouTube. Therefore, you could argue that there is a ‘wisdom of crowds’ out there, bringing prices all to their fair relative value.
However, digital video ads have additional value over TV ads, so they should be worth more. I call these the “Five Ts”. Digital video views are:
You can go beyond basic demographics (as on TV) and target based on everything you know about the consumer from your CRM database, third party data sources and based on past interactions with your brands.
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.
Because digital ad 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.
This is ROI gold. You can continue to test, measure and optimize ad campaigns – programmatically – to do more of what is working and less of what isn’t, in real time.
Good video content, well targeted, gets shared. Those views are free views and are also more valuable, because they are distributed by friends/ family rather than the companies themselves.
This example is based on running thousands of digital video ad campaigns and uses typical industry numbers for the U.S. Clearly, your numbers will vary depending on a number of factors (e.g. what % of your TV audience are your target audience, what price you are paying etc. However, this relative ROI methodology is pretty straightforward and works for most campaigns.
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.
Attribution modeling should be the eventual goal of all 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. 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 to we account for that? Ask me one about sports.
- What is the value of outdoor advertising? No idea
- What about word of mouth? Head explodes
You get the point. There is no consensus or tool for such perfect attribution. 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.
In summary, perfect attribution doesn’t exist yet, and is some years away. However, in the meantime, using absolute or relative ROI approaches, you can still measure and optimize your marketing activities very effectively.
Vive le ROI!