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Marketing – Understanding ROI

This is a lesson that I learned… slowly.  But I think I have a solid handle on it now, and so I figured I would share it as simply as I can.

Small business owners are inundated constantly with opportunities to advertise their business.  Note my use of the word ADVERTISE – you pay for advertising, and you don’t necessarily pay for marketing.  This is important.

Everyone that sells you advertising will come and tell you why you should invest in their medium.  That’s pretty easy to understand – these are salespeople.  The tough work for you is to understand where you will see a positive ROI with a particular advertising investment, determine if you can get to ROI and then also TRACK results on your advertising.  The tracking bit is critical to your success – don’t commit to any form of paid advertising if you cannot track it back – you will never know if you hit positive ROI if you cannot track.

Step one – Understanding Lifetime Value

The first thing you should understand is the lifetime value of a client.  An oft-made mistake is assuming that the client’s first transaction is the total value of the customer.

To give you an example – if you were a magazine, you could take an average over a period of time (likely years) of all of your customers.  Obviously there are folks that subscribe for one year, and others that subscribe to your magazine for decades.  The average lies in the middle.  Let’s say, for example, that the magazine subscription is $50/year and the average stay for a customer is five years (unlikely in this day and age, but this is an easy example).  So now you have an average lifetime value of $250.

Achieving ROI

If you were this magazine, and you decided to run a mail campaign that cost you $2500, your break-even would be ten new clients – using the average above.  If you were able to find 20 new clients, you would have doubled your advertising investment.

This is obviously simplified, but you get the idea.

Tracking ROI

Now – with a magazine offer, it’s really simple for them to track ROI, and if you pay close attention they do this all the time.  Remember that subscription card that offered a free watch?  It had an offer code.  They can trace that offer code right back to the specific campaign that they ran.

You can do something similar – and it’s important to do just that in order to track your ROI.

Other examples are special phone numbers used for offers – in the old days they did this with the Yellow Pages (who uses those anymore?) and today there’s a myriad of ways to track your ROI on marketing.

If you are marketing online, be sure to send your traffic to a landing page – this will allow you to track back ALL the clicks for a particular campaign.  With online advertising, you want to track conversions, not just clicks.

Summary

I could write an entire book on this topic, and this is really a brief summary of a concept that I have learned the “hard knocks” lesson over time with, so I wanted to share.  If one of you are helped, that would make it worth my while in typing it.  If you have questions about how this works, feel free to drop me a line – always happy to help!

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