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ROI For Brands, The No Bullshit Way

Many people say that they can't calculate the return on investment. But you can. You can always calculate ROI on a macro level... and you can also look for ROI by looking for patterns.

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Written by on January 24, 2013

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Avinash Kaushik

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As I wrote in "2013: What to Focus On", getting a grasp on ROI, or return on investment, is more important than ever for CMOs.

In 2011, a study came out saying that 70% of all CEOs had lost confidence in marketing, simply because Marketing could never quantify their results. Then in late 2012, another study came out which reported that 80% of all CEOs had lost trust in marketing. This caused people like Olivier Blanchard to speculate that we would reach 90% lack of trust in marketing in 2013... and he may be right.

Note: In comparison, 90% of the same CEOs do trust and value the opinion and work of CFOs and CIOs.

On top of this, we have the trend of abundance, which I wrote about in the same article. And we have the ongoing financial crisis, the inability of our governments to do anything other than argue, our countries' deficits dropping far beyond reasonable limits, and the extraordinarily low confidence levels by both corporate executives and consumers.

If that wasn't enough, the new world of media has an extreme focus on measured results, simply because we now have the ability to measure pretty much anything we want.

The result of all this is that the need for measured ROI should be the number one focus area for marketers in 2013. No longer can Marketing just spend their budget on whatever advertising campaigns they used to do. No longer can you just buy exposure for 500,000 views and think that means something.

In 2013, you have to prove your worth. You have to demonstrate that you are generating real sales, and that your efforts have a positive and measured impact on the company's bottom line results.

It's time to get really serious about ROI.

So in this report I'm going to give you a way to do this, in the most straightforward, no nonsense, and simple way that you can possibly imagine. In the first part of this series I wrote about ROI for nonprofits (which I encourage you to read as well), but in this report we are going to look at it for brands. Companies that have to grow and make money doing so.

First, you team up with Sales!

If you walk into most Marketing departments and you ask them how they are measuring ROI, they will look at you with a blank stare in their eyes as if you were just making up words. Marketing people often have no clue how to measure return on investment, and it's often not their fault. It's the fault of a siloed organization.

In most companies, Marketing and Sales are two completely separate organizational units. Marketing is responsible for creating brand awareness, enhancing the brand's image, and creating exposure (all things that cannot be directly linked to ROI). And Sales is responsible for selling.

Sometimes Sales and Marketing even run their own campaigns. Marketing doing their thing, and Sales running their campaigns (often to the annoyance of Marketing because sales campaigns don't have the same brand polish and perfection that Marketing wants).

So when you ask people in marketing how many products their latest ad campaign sold, they have no idea because they don't have daily access to the sales data. They are not responsible for the sale.

So the very first step is to tear down these silos. In the print world, it kind of made sense that Marketing and Sales were two separate units, because the format of print limited the interaction to passive exposure. But in the digital world, everything is just a click away... including the shopping cart.

The next thing you need is daily access to the financial data of the company. This might sound strange, but I have worked with companies who were prohibiting anyone in marketing from knowing any of the company's financials, for the reason that the Marketing employees might tell it to a competitor.

That's just sad. Not only does that demonstrate a complete lack of trust in the loyalty of the employees, but it's practically blindfolding Marketing. How can you calculate ROI without financial data?

What you need is your brand's revenue, costs and profit. And depending on how specific your campaign is, you need this per country, or per shop, or per whatever your campaign is targeting.

Now that we have the basics, we can start calculating ROI.

ROI, the simple way

Let's start with the simplest way to measure ROI that we can possibly come up with, and it's nothing like what you learned in Business school. In school, you learn that ROI is calculated like so:

This, of course, is utter bullshit. No brand would ever calculate it this way. It assumes that if you just make a tiny fraction of a profit, you have a positive ROI... and that simply isn't true in the real world.

Here's an example:

If you sell a product for $10, and your marketing campaign costs $9, this calculation will give you a positive ROI of 10%. This doesn't take into account the cost of manufacturing the product, the cost administration, the acceptable profit margins, nor that the sales price is nowhere near what you originally sold the product for to the shop.

It's just crap.

So how do we do it in the real world? It's simple.

Real brands calculate ROI by comparing their own performance to that of their competitors. Meaning, are you selling more products at a higher profit and at a lower costs than your competitors?

  • If yes, your marketing efforts are producing a positive return on investment.
  • If no, you have a negative return on investment.
  • If the same, you have a neutral return on investment... i.e. a ROI of zero.

Let me illustrate how this works. Let's say you are a fashion company, and that the graph below illustrates how your competitors are doing on average. As you can see, only 3% of their revenue is spent on marketing, and 19% of the revenue results in profit.

Note: This is actually the financial data for H&M, according to their annual report... in case you were wondering.

Then you look at your own financial data and what you might find is that you are nowhere near your competitors' performance. Your marketing costs are five times higher, and your profit is much lower too.

In fact, looking at this example, it seems that your marketing costs are directly proportional to your loss in profits. Your marketing efforts seems to be doing nothing more than a waste of money. That's not good!

This is the simplest form of ROI that you can do. If you are not doing anything else, at least do this. Compare your performance to the rest of your market.

If you are spending the same as your competitors and getting the same profit margin in return, you have achieved a return on investment of ZERO. That is, you are doing no better, nor worse than anyone else.

However, if you can either decrease your costs, or increase your profit margin, you have achieved a POSITIVE return on investment. And of course, if you are spending more, or your profit margins are lower than the rest of the market, you have a NEGATIVE return on investment.

So when the CEO asks how it's going, you should be able to show him something like this:

As you can see, even though your marketing budget was the same as in 2012, your efforts played a significant role in providing the company with a good increase in sales, and a 21% increase in profit.

This is what ROI is all about... how it affects the bottom line.

Defining zero return of investment

In the first part if this series, when we looked ROI for non-profits, I wrote about the importance of setting a ROI limit. That is, the maximum amount of money you are allowed to spend, in relation to your result.

For a non-profit, this is set as a percentage of the overall cost. With for-profit brands, it is set based on a combination of your overall revenue and your profit margins... in relation to the rest of your market.

It sounds complicated, but it isn't. If we use the example as before, where the market is spending 3% on marketing (on average) and has a profit of 19% of the overall revenue, that is your ROI limit.

That is, for every $100 receive, your marketing costs cannot exceed $3, and your profit must be at least $19.

And like before, this is also how we define zero ROI. If you earn more than that, at a lower cost, you have a positive ROI. And if you earn less, at a higher cost, you have a negative ROI.

So this is your baseline for everything you do. Whenever you create a campaign, whenever you embrace a new channel, and whenever you create an advertisement, this is the ROI limit around which you define if you have a positive or negative ROI.

Let's look at a simple example.

Imagine that you come up with the idea to create a video that you want to upload to YouTube, hoping it goes viral.

You hire an expensive advertising agency. You create your campaign. You upload it to YouTube, share on the other social channels, and you do all the necessary social follow-ups.

The campaign itself is brilliant, and you get a ton of views, people are retweeting it, sharing it on Facebook, and from a marketing perspective it's going great.

Like this one that came about via a partnership between Chevrolet and OK GO:

But what about the ROI?

Let's say the total cost was $150,000. This is the cost of paying the advertising agency + the internal cost of all the time your Marketing team were in meetings about it, setting things up, answering emails, going on location, renting equipment and so forth. Your total marketing costs.

I point this out because it is often something people in marketing forget. If you create an ad, you often don't consider the internal work hours as a cost. But often the real cost of making something is higher than the cost of publishing it (especially when it comes to digital media).

If you don't know the total cost of one internal marketing hour, ask your CIO. He/she knows.

From this, we can calculate zero ROI, like so:

The $150,000 marketing campaign (3%) must generate a minimum of $5 million worth of sales, resulting in $950,000 worth of profit (19%).

If this is your result, you have achieved a return on investment of ZERO. You are performing no better, but also no worse, than the rest of your market. In other words, if you spend $150,000, you have to sell five million dollars just to get zero ROI.

See how that works?

Any sales above $5 million is a positive ROI, and any sales below that is a negative ROI.

It is really that simple!

Of course it's not black and white. You know that by the end of the year, you have to reach or exceed zero ROI (maximum cost of 3% of your revenue)... and hopefully also grow your business doing so. But that doesn't mean that every single thing you do has to produce a positive ROI.

One example is your brand page on Facebook. You don't expect every single post to produce a sale. Often you will post something simply to make people feel good and more inspired by your brand. And that's perfectly fine.

But by the end of the year, you know that the cost of posting on your social channels must not exceed 3% of your sales revenue coming from those channels.

You can post 99 inspiring posts that produce no sales at all, but then when you announce your new product, the combined cost of those 100 posts has to generate enough sales to produce a positive ROI.

It's not that every single thing you do has to result in a sale. You can spend time building your brand image, creating awareness, and all the other important things. But the combined effort must result in a positive ROI.

In this example I used H&M financials as a baseline. But you have to figure out what your baseline is for your market.

ROI at a macro scale

The beauty and simplicity of this means that everyone can measure and calculate their ROI. There is really no excuse for not doing it.

You only need three pieces of data:

  • The cost of your marketing efforts
  • Your revenue (sales)
  • Profit

All of these are known facts. There is no guesswork involved. No, "we don't know what that is", and no "we don't know how many people buy something after seeing our ads".

We are not measuring the specific ROI of one advertisement over another. This is ROI on a macro scale. And all we do is to ask, "With the money that we spend, are we doing better or worse than our competitors?".

It is super simple to do!

Getting complicated...

From this point on, things will get much, much, much, more complicated. All we have done so far is to look at ROI from the macro scale, which only tells us if what we did was good or bad as a whole. It doesn't tell us anything about WHY something worked or WHY it didn't. Nor does it tell us HOW we must do something in the future.

To find the HOWs and WHYs we have to move into the world of 'conversion metrics' and look at the behaviors and conversion for each thing that we do.

This is relatively easy if you control your own shopping destinations, especially the digital ones. If you only sell your products via a web shop, you will always have a pretty good idea of why and when people buy your products. And it's also relatively easy to relate that to a specific campaign.

For instance, if you post a video on YouTube and receive one million views, whilst during the same time period you get a 155% increase in sales on your webshop, and a substantial part of those come from YouTube.com, then you don't have to be a rocket scientist to figure that one out.

However, most of the time it is not this simple. Often your marketing efforts are incremental, and the increase in sales for that specific period is not statistically significant enough for a definite conclusion.

Another problem is when you don't control the point of sale. For instance, when your products are sold by someone else, for instance a publisher's books sold by bookstores. The publisher might post about a new book on their social channels, but they really have no idea if that actually caused a sale at the bookstores. You simply don't have that data.

Hopefully a few months later, the bookstores will call you to order more books, which would be a good sign, but it all depends on how many books you persuaded the shops to order in the first place (long before you started the campaign).

In general, the further away you are from the point of sale, and the smaller the campaign is, the worse it gets.

You should not have any trouble tracking the result of a Super Bowl campaign. However, trying to figure out how many people bought a product because of a small advertisement on page 27 in a regional newspaper via physical shops that you don't control is... well... hopeless.

As an analyst, one of the worst things I know is when the data I have fluctuates more than the effect I'm looking for.

For instance if your sales fluctuate 3-4% over the course of a month, it's hopeless to look for a 0.2% increase in sales over the same period. This is often true with how we use social channels. Each post you make is unlikely to cause a substantial level of sales. It's a slow incremental growth.

But you can always look at ROI on a macro level.

Many ROI experts encourage you to perform tests. They encourage you to run a campaign within a niche area/market/product because by narrowing your measurements you have a greater chance of seeing any changes.

That is a good idea, but one thing you have to remember though, is that we now live in a multi-funnel world. If you look at your total sales, my guess would be that 95% of it is the result of activity outside your control. Maybe it's because of word of mouth. Maybe people were just at the right place at the right time, or maybe their decision was not based on one single signal.

For instance, most people who have ever bought an iPad went through a long process of deciding whether to buy it. And during this time they were influenced by a ton of tiny points of influence.

  • First they heard about a friend buying it.
  • Then they talked about it at work "what do you think? Hmmm..."
  • Then they visited Apple's website... not to buy, but just to see it.
  • Then they saw another friend who had one
  • Then they read an article about it
  • They saw another friend post a picture of it on Instagram.
  • ... and on and on...

And finally, after months of this, these signals have built up enough influence for you to buy one yourself (or maybe you didn't even buy it, maybe you got one for Christmas).

So how do you calculate the specific ROI of any of these points? Well, you can't, because none of these points where significant enough to cause you to buy.

And it's situations like these that cause many people to say that they can't calculate the return of investment. But you can. Because you can always calculate ROI on a macro level... and you can also look for ROI by looking for patterns.

Calculating ROI: Looking at the patterns

Another thing you can do is to not look at the numbers, but instead look for patterns. The way this works is that you create a graph with your sales per day. Like so:

And then you add in all the points where something significant happened in terms of marketing.

  • When you launched a campaign
  • When you held an event
  • When a new product was launched
  • When you see spikes in your social media monitors
  • etc...

And as a result, you might see something like this:

Note: High-res version here.

So as you can see, we had 3 big campaigns, 14 smaller ad campaigns, and we recorded 7 periods with unusually high levels of social activity.

Only one of the big campaigns worked (green). The rest produced no noticeable change in sales:

Only five of the smaller advertising campaigns (yellow) produced a noticeable result:

And three of the periods with high social activity (pink) caused a sale.

Notice that most of these periods with a high levels of social engagement came in conjunction with another campaign. So you have to pay attention to correlation versus causation here. What caused the social effect? What caused a campaign to work?

Note: The answer in many of these cases is that it was a mixture.

Also notice that one of the periods of social activity (in August) caused a dramatic drop in sales. Initially the fall campaign looked promising (it was going up), but then something happened that seriously pissed people off.

You need to figure out why this happened. Was it because of the campaign? Was it something else? One explanation, and something that happens fairly often, is when a brand over-promises but under-delivers. When you do that, this is the kind of graph you might see.

Also ask why the other two big campaigns did not work? Why did we see a social effect in a period where we didn't run any campaigns at all. What happened on those days?

And now you can mix this with the cost of each campaign, and see if it produces a positive or negative ROI within that pattern.

This is an incredibly simple yet powerful way to calculate ROI. If you combine this with your macro ROI calculations, you always have a fairly good idea of how you're performing.

This is particularly useful if you are one of the brands who cannot measure a sale directly. By looking for patterns instead of numbers, you often get a much clearer picture of what's really happening.

In fact, if I was working for a large or medium sized brand, I would invest a little bit of money in building a dashboard that could give me this on an ongoing basis. Just as you have a dashboard for your website analytics.

This dashboard would combine ROI on a macro scale, with ROI as a pattern.

On the top you would have the graph with all the important moments plotted into it. Then below you have the overall financial ROI calculation, plotting year-to-date and per quarter, to see if you have stayed within your ROI limit.

And if you are a big company, you might even want to include pointers for when your competitors are doing something.

For instance, when we see that a social activity caused the sale to drop, what if that wasn't caused by a social backlash? What if it was instead because one of your competitors had launched a new product, and people started tweeting to say "don't buy that, buy this instead!"

That would provide you with a pretty good indication of just what you need to do next, wouldn't it?

ROI is simple

Yes, ROI can be tricky to measure in the details, and not everything has to generate a positive ROI. In fact, Seth Godin recently wrote:

The bathrooms at DisneyWorld are clean. It's not a profit center, of course. They don't make them clean because they're going to charge you to use them. They make them clean because if they didn't, you'd have a reason not to come.

But there is no excuse for not calculating ROI on a macro scale, for not knowing what your ROI limits are... and therefore also what an ROI of zero is.

And if you don't control your sales channels (conversion tracking), there is no excuse for not looking at your ROI in terms of sales patterns.

Overall, measuring ROI is exceptionally simple to do. The hard part is to do something that creates a sale in the first place.

...but that is a topic for another time.

Head over to G+ to comment and discuss this report.

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Avinash Kaushik

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