Synopsis: Everybody’s talking about metrics, and this article provides helpful equations and tips.
Culture lags technology. People own electronic gadgets for years before they learn how to use most of their functions.
A similar paradox applies to measuring return on investment (ROI) – The Measurement Paradox.
Direct marketing guru Bob Hacker has said, “people seem to be afraid of numbers even if they know the importance of running the numbers.” He cites two universal truths:
- Interactive and Direct marketing are the only media that allow you to use hard numbers to plan, engineer and measure programs.
- Most marketers still don’t use the numbers to plan, engineer and measure programs.
Hacker says we may be intimidated by complex data modeling techniques, genetic algorithms, etc. But a few basic equations will help you answer “What worked?” and “How well did it work?”
DEVELOPING CAMPAIGN METRICS
First, identify each step of the sale – from first exposure to completed purchase. Is it a one-step sale like buying a holiday gift? Or multi-step, as in high-ticket B2B services, where you generate leads, qualify them, submit proposals, negotiate, and eventually close?
Secondly – guided by consultants, your sales team or case studies – assign a possible response and conversion rate to each step.
Next, conduct “sensitivity analysis.” What drives response and conversion rates? What happens to your ROI if they vary? A good campaign should produce a solid ROI, even if you don’t hit a home run with certain portions of response or conversion.
These numbers also determine scope and budget: Does circulation assure a valid sample size? Can you afford the more expensive media? Can you afford to increase frequency across channels?
SOME BASIC “COST-PER” EQUATIONS
Here are a few helpful equations that we find helpful in our quest to monetize campaigns and hold each tactic accountable for results:
Cost-Per-Impression: Total Campaign Cost ÷ Total Circulation
In media circles this is often bought, sold, and measured in cost per 1,000 impressions (CPM).
Cost-Per-Click (CPC): Total Campaign Cost ÷ Total Unique Click-Throughs
This is the basis for pricing pay-per-click (PPC) campaigns. It’s also used to justify SEO investment.
Cost-Per-Response (CPR): Cost-Per-Package ÷ Response Rate
This is an offline direct marketing term (e.g., direct mail). Hacker calls this “raw” CPR – excluding fulfillment, telemarketing, or promotional incentives. In the online world we use other terms for metrics similar to a “response”:
- Cost-Per-Lead (CPL): Campaign Cost ÷ Number of Sales Leads
- Cost-Per-Conversion: Campaign Cost ÷ Number of “Conversions”
- Cost-Per-Action (CPA): Campaign Cost ÷ Number of Predefined “Actions” Observed
Some of these tracked “actions” might be completing an online form, viewing a video, taking a survey, sharing or liking content, or entering an e-commerce store. In other cases it may be a sequence of specific pages viewed on your site. With Google Analytics and other tools, it’s easy to monitor these.
Cost-Per-Sale (CPS): Cost-Per-Lead (CPL) ÷ Closing Rate
In a multi-step sale, if each lead costs $50, and sales convert at a 20% rate, CPS = $50 ÷ 0.20, or $250.
Many marketers monitor another important “CPA” – Cost-Per-Acquisition, i.e., the cost to acquire a new customer or buyer. For example, The Wall Street Journal may be willing to spend $30 to acquire a new subscriber, knowing that average annual revenue per subscriber is $300 – and that 70% of first-year subscribers renew for a second year.
What does CPA mean to you?
It’s also important to keep in mind that there are different definitions for a “response” vs. a “lead” vs. an online conversion. Some marketers consider an email open or click-through to be a response, and a completed contact form a conversion. For other marketers that completed form is considered a response and the ultimate sale is a conversion.
And many in the CRM and sales operations world differentiate between a “response” and a “lead” – with the latter being either “marketing-qualified” or “sales qualified.” So the significance of these definitions really depends upon the product you’re selling, and how you sell it.
AND THE DRUMROLL, PLEASE…
What is considered by many to be the most important metric?
Return-on-Investment (ROI): Total Profits ÷ Total Costs of Sales and Marketing
This may be based on gross or net profit. It can be stated as a X:1 ratio, as revenue dollars per marketing dollar spent. Return-on-Advertising-Spend (ROAS) is simply measured as gross sales tracked to the ad campaign divided by gross cost of the advertising. Or ROI can be expressed as a Cost-of-Marketing percentage. If you’re selling a $2,500 product and each sale costs you $250, that’s a 10% cost-of-marketing.
In the real world, this seemingly simple math can quickly turn complex. One tactic or medium might have a low CPM but a high CPL or CPS – or vice-versa. So at the end of the day, ROI is the ultimate metric.
Bob Hacker calls all of this “Back of the Cocktail Napkin” math. You may want to keep a “crib sheet” of these equations handy. With practice, you’ll be comfortable scratching out your own ROI numbers. And you’ll be well-prepared to provide your client (or boss) the answer to one of marketing’s biggest questions:
“What will our return be if we do this…?”