“Half my advertising budget is wasted. Trouble is, I don’t know which half,” said American retailer John Wannamaker. If you’re nodding in sympathy, then you’re probably not measuring and maximizing the return on your marketing investment.
Measuring the return on your marketing investment—the product of a marketing campaign as a percentage of the money invested in it—is critical to understanding whether or not you should keep, quit or change marketing efforts. After all, who has money to waste? Tom St. Louis, principal of Zerald Communications Corp., a Toronto-based marketing consultancy for SMEs, offers this advice for measuring and maximizing your marketing ROI:
Do the math
“The wrong approach is saying, ‘We need some business, so let’s place an ad that gets our name out there and hope that people like it’,” says St. Louis. “That’s very unscientific.”
Instead, determine the lifetime value of a customer (e.g., one customer tends to purchase from us X times per year, for Y years, and his average transaction is worth Z dollars), then work backwards to figure out a profitable advertising budget.
To calculate marketing ROI, divide your net profit by your total investment, then multiply by 100. Here’s an example:
Say your direct-mail campaign costs $10,000. By the end of three months, the campaign has drummed up four new clients, from whom lifetime revenues are expected to be $27,000 each. After calculating expenses, net profit from each client is estimated at $14,000. Multiply that by four clients and you get $56,000 in total. Therefore, your ROI for that campaign would be $56,000/$10,000 = 5.6 x 100 = 560%.
“Some businesses can get by with a 300% ROI, and for some businesses, 1000% ROI is attainable,” says St. Louis. What determines success is making sure you have positive cash flow in the short term. “If you run an ad and get three buyers that will eventually create $3,000 in revenue, they might not become profitable until the second year,” says St. Louis. “That’s probably not a great advertising result, because that means you have to wait a long time to get your investment back,” St. Louis explains. In that case, unless you’re cash rich, you may want to consider another campaign.
“Run your campaign in a way that you can count results,” says St. Louis. Advertising that simply raises awareness by getting your name out there is “very lovely,” he says, but the results aren’t measurable.
To divvy up your marketing budget, “first invest it in [direct marketing to] all the people who already deal with you, who have dealt with you or who have been in your store,” suggests St. Louis. “If you have money left over and want to do lead generation, then do ads that are measurable, that produce a defined response, that cause people to call and request something or come in with a coupon. Then you can track the response and capture the data of the responders.”
If you’ve placed an ad that doesn’t invite direct feedback from the customer, then you can measure it with expensive surveys that capture pre- and post-campaign public perception, he says, but remember: “There’s no direct correlation between how memorable, funny or brilliant an ad is and any results [i.e., sales].”
Test, tweak, test, repeat
“If any activity that you’re doing is making a good profit, then you should probably keep on doing it,” says St. Louis. If a campaign isn’t working the way you’d like, there may be no need to scrap it; minor changes might generate dramatic returns. “There might be another articulation, another headline, another picture, another caption, another concept that would increase your response,” says St. Louis. In his experience, “the changing of something like a headline can produce up to a 2,100% improvement.”
Consider testing variations of your campaign by sending one version to half your list and another to the other half. Use separate telephone response numbers or identification codes, for example, to distinguish which version is more effective (and in what areas). Eliminate or tweak the less successful version. Remember, to boost your ROI, a successful version must result in increased sales, not just more leads or inquiries.
Read The Art of Smart and Snappy Ad Copy
© 2004 Susanne Baillie
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