Breaking Down The ROI Model

Even though he’s been dead for years, John Wanamaker has been getting old lately, or at least his most hackneyed quote is. ROI-centric conferences seem to be all the rage, with no shortage in sight. Inevitably, speakers relate insights into their own business models, but consistently ignore broader, industry wide concepts.

So are you ready to get your hands dirty?

First of all, before getting involved in any kind of marketing activity, it’s imperative to take a long, hard look at your company or client and get a firm grasp of three key factors: objectives, expectations and resources. Objectives are your ultimate metrics for success. Expectations consist of the quantifiable benchmarks used to gauge performance down the road, and resources are simply the financial and HR commitments you’re prepared to take on.

Absolutely no on-line advertiser should focus exclusively on site visitors as its ultimate objective, since everyone out there is really looking for some type of back end return – such as sales, downloads, registrants, leads, etc. Even publishers need more than just clicks. They want users who return often and surf around a lot (i.e., see lots of ads). With the right closed-loop technology, it’s commonplace now. You can optimize your efforts and make decisions based upon a media vehicle/placement’s ability, or a creative’s ability to contribute toward these back end metrics.

Now for the good stuff. I believe that every online advertisement can affect a marketer’s bottom line in only six ways. Count ’em. Six.

While some of these may be difficult to measure (especially since few advertisers operate in a vacuum with online only campaigns), just keeping these factors in mind is a huge step in the right direction. They help all advertisers get a clearer picture of how hard their dollars are really working for them. And discounting or forgetting any of them will surely cost you in the end.

Drum roll, please.

  • Direct Response – Say what you will about the banner and on-line advertising in general. But as a direct response tool, it definitely performs for certain advertisers. Believe it or not, some users do actually click-through (or click within for certain rich media apps). They buy, register, and so on. all within one session. This is the easiest of all the factors to measure and can actually be significant when item numbers four and five below help create what Jupiter calls the “killer click.”

  • Delayed Response – Forrester’s statistics state that 67 percent of users abandon their shopping carts within the ordering process on e-commerce sites. Some of these are users that were driven to the site as a direct result of advertising. Although they may not complete the desired action in that very session, they may return later by directly entering the URL into their browser. Still, this is measurable via certain closed-loop analysis tools and definitely contributes to an advertiser’s ROI.
  • Branding – I’ll avoid the standard definition others seem to give this term, which is “anything we can’t account for.” Rather, let’s consider branding the value realized when users see an ad and don’t react immediately. Rather, they react at some later time, perhaps months in the future, when they choose to visit your site and perform the desired action. This may be due in part to other stimuli, but again we’re trying to add up all impact here. Some higher-end applications use cookies to track this phenomenon accurately, but may charge a premium for this level of analysis.
  • Lifetime Customer Value – There’s a reason Amazon.com doesn’t have a problem paying a couple hundred dollars to sell one $12.95 paperback. Wall Street be damned. Bezos believes (rightly so, I might add) that if his business can fulfill and even over achieve a user’s expectations in a consistent manner, they will be loyal. Many times, especially when an advertiser’s promise is fulfilled, customers will return time and time again. This must be taken into your break-even model when determining an appropriate cost per acquisition, and is totally accountable when advertisers integrate closed loop analysis with their sales logs.
  • Viral Value – Jay Chiat said, “Word of mouth is the most powerful form of advertising.” Bezos would be quick to point out to anyone who doubted his customer acquisition strategy that not only will an average $200 customer buy a few hundred dollars of product over time, but they will also spread the good word about Amazon.com, thereby bolstering its user base. Many smart advertisers (e.g., HotMail, Petstore.com, etc.) actively facilitate this process and even incentivize users to market for them. When done electronically, many times it can be measured effectively.
  • Offline Value – Not appropriate for the pure cyberbrands, the “clicks and mortar” advertisers are well aware that online ads have the ability to influence offline behavior. While it may be tough for IBM to distinguish the difference between online versus offline billboards for increased sales, rest assured they realize online is a contributing factor in the purchase and consideration cycles.

Next time you’re planning an online marketing strategy, do yourselves a favor and think through your objectives, expectations and resources before beginning any execution whatsoever. Trust me. You’ll be better off.

At the same time, keep in mind that pure direct response is not the only return you’re going to see in your ROI. By considering the above factors, you’ll be able to better justify future ad spending, and maintain a clearer picture of the contributing factors to your explosive company growth; something that many of us are lucky enough to be struggling with.

In the meantime, let me know your thoughts on the above model. And good hunting.

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