06 Jun THE MARKETING ROI GAME FOR BUSINESSESReading Time: 4 minutes
Highlights covered in this article include:
- How to measure the effectiveness of a marketing campaign.
- Why “getting your name out there” is a losing strategy.
- How to get a good return on investment (ROI) when advertising.
Before we jump into things, I want you to remember this statement. What gets measured, gets improved.
So I say to the business owners be ruthless with your ad spend by cutting the losers and riding the winners. In order to know what’s losing and what’s winning, you need to be tracking and measuring.
“Half the money I spend on advertising is wasted; the trouble is I don’t know which half``
You see, most business owners do little if any tracking of advertising. Why? Because they spend their time focusing on what they know how to do best. Surgeons spend their time focusing on surgery, lawyers focus on law, roofers focus on roofing. It’s okay to focus on the details of the work you do but when it comes to growing your business, not measuring where your leads and sales come from and not tracking ROI on ad spend is the mark of the amateur business.
This is vital because media is by far the most expensive component of your marketing spend. It’s the bridge that connects your offer to your target market. Whether you’re using traditional media like radio, TV and print or newer digital media like social, search engine optimization (SEO) and email marketing, you need to understand the idiosyncrasies of each.
This is why hiring experts that specialize in the media you decide is right for your campaign is worth their weight in gold. You don’t want to try and do it yourself, especially when it comes to the most expensive part of your marketing process. What you don’t know WILL hurt you. Whether you’re using online or offline media each has its own technicalities that you’re highly likely to mess up if you’re not experienced with it. It would be a tragedy to get the target market and offer right and then have your campaign flop because you messed up a technical detail in your media.
I’m often asked questions like, “What’s a good response rate for direct mail?” or “What kind of open rate should I expect when doing email marketing?” The expectation is that I’ll give a numerical answer. Something like, “Expect a 2% response rate from direct mail” or “Expect a 20% open rate for email.”
Usually these kinds of questions come from well-meaning business owners who are yet to build their marketing infrastructure. My answer is always the same—it depends. Sometimes a 50% response rate is a disaster and sometimes a 0.01% response rate is a massive success.
“How do I measure the success of my marketing campaign?”
So how do you measure the success of a marketing campaign?
For the impatient, here’s the short answer: Did the marketing campaign make you more money than it cost you? Another way of putting it is, what was the return on investment (ROI) on the marketing campaign?
If it cost you more than you made (or will ever make) on this campaign then it’s a failure. If it cost you less than the profits you made as result of the campaign then it’s a success.
Of course some people will argue with me and say that even a campaign that lost money was valuable because it “got your name out there”. Unless you’re a mega brand like Nike, Apple, Coca-Cola or similar then it’s likely your budget doesn’t support burning tens of millions of dollars on mass marketing to “get your name out there.”
Rather than “getting your name out there,” you’ll fare much better by concentrating on getting the name of your prospects into your business.
I like to think of marketing dollars as firepower. You need to use your limited firepower wisely so that you can successfully hunt, come home victorious and feed your family. However, if you start randomly firing in every direction, you’re going to startle and scare off your prey. You need to be targeted and clever if you wish to be victorious.
If you’re a small or medium sized business, you need to get a return on your marketing spend. Putting your comparatively tiny marketing budget into mass marketing would have the same effect as a kid peeing in the ocean.
Let’s run through an example with some numbers to illustrate. I’ll keep the numbers small and round for the sake of clarity.
You do a direct mail campaign and send out one hundred letters.
The cost of printing and mailing the one hundred letters is $300.
Out of one hundred letters, ten people respond (10% response rate).
Out of the ten people who responded, two people end up buying from you (20% closure rate).
From this we can work out one of the most important numbers in marketing—customer acquisition cost. In this example, you acquired two customers and the campaign cost you a total of $300. So your customer acquisition cost is $150.
Now if the product or service you sell these customers makes you a profit of only $100 per sale, then this was a losing campaign. You lost $50 for every customer acquired in this campaign (negative ROI).
However, let’s say the product or service you sell makes you a profit of $600 per sale, then this is a winning campaign. You made $450 for every customer acquired (positive ROI).
Now obviously this is a simplistic example, but it illustrates how irrelevant statistics like response rates and conversion rates are. Our primary concern is return on investment, which varies based on the customer acquisition cost and how much actual profit a marketing campaign yields.
One of the massive advantages of targeting a niche is that your marketing becomes much cheaper. Targeted advertising ends up being much cheaper than mass marketing because there is far less waste.
If you’re selling photography of newborn babies you’d be far better served advertising in “New Mother Magazine” than putting a general photography ad in the classifieds.
Your customer acquisition cost will drop dramatically because your message to market match is much better and hence your conversion rate will be much higher than if you had a general message in your ad.
Your advertising costs would also be lower because your target market is smaller.
Remember the entire goal of your ad is for your prospect to say, “Hey that’s for me.” Being all things to all people is unlikely to result in this reaction.