Measuring ROI – Some thoughts

Measuring ROI of any marketing effort can be more difficult than measurements in other areas of a business. You can usually measure quite accurately how many dollars were spent on a particular project. You can measure the number of units produced per day or the number of employee sick days. You can measure your sales versus profits.

Marketing is a bit more hazy. Yes, you can measure the number of leads collected in a particular month compared to the amount of money spent on advertising. And if you have exceptionally strategic-minded salesmen you may even get them to regularly ask their contacts how they heard about you to further narrow down your marketing effectiveness.

But it can be more difficult to measure customer loyalty (ie. who thought about switching and didn’t) or determine whether an increase in repeat sales is due to your marketing or due to som other factor. Customer buying habits are complicated, and usually the best you can prove is correlation, not causation (ie. “when we increase marketing spending 20% our sales increase  between 8-14%” vs. “we can make sales increase 1% by spending $10,000 on marketing”).

That said, there are certain relationships that can and should be tracked. Any marketing executive who claims you can’t measure the effects of marketing should be watched closely. The same goes for social media. There are certain results that can be measured if you are willing to make the effort.

The problem is that many businesses are not always collecting good data to begin with. Regardless of whether you use Social Media, can you say what the cost of acquiring a new customer is for your business? Can you say what a customer is worth to your business?

For example, it could cost you $500 to attract a single customer. That customer on average may spend $200 per year with your business. At that rate it will take 2.5 years to realize a profit on that customer. If the average customer only stays with your business for three years you’re not going to have a very good return – only about $100, or about 6.6% per year.

However, knowing that information, you are now in a position to measure the benefits of any specific marketing effort. Suppose you decide to implement social media marketing in your business. After a period of measurement you determine that customers gained through social media cost only $400 to obtain. Assuming the other factors are equal, you now break even within two years, for a $200 profit on that customer over three years, or 16.5% per year ROI.

Or imagine that it still costs $500 to gain a customer, but you can increase their yearly purchase rate to $220. Your three-year profits on that customer rise to $160, or 10.6% yearly ROI. That’s a significant increase over the original 6.6% ROI.

Or let’s say through a change in your marketing you are able to retain a customer for an average of four years instead of three. You now make a net gain of $300 over those four years, or a yearly ROI of 15%.

Now these results are for demonstration purposes, and not indicative of expected results. They are to make the point that there are several ways that any marketing initiative can impact your bottom line. But you won’t be able to know you are getting those results if you aren’t already measuring some very basic factors in your business.

Make sure you have metrics in place in your business. Without them you will never be able to be sure if your marketing is working, or whether you just have a very good salesman running your marketing–good at selling you on fronting the money for their experiments.