Surprise! Your Marketing ROI isn’t Surprising

When clients engage us repeatedly to track their marketing effectiveness and ROI over time, we are allowed a much deeper and more strategic role with them.  But sometimes, we report large swings in ROI vs the prior year- and it’s a shock.

It shouldn’t be.  Here’s why:

Many of the factors that impact ROI are predictable (in direction, if not magnitude).  And we can build a bridge that accounts for most of these changes so that the real factor we’re typically looking for, Marketing Effectiveness, can be isolated.  Let’s start here:

1) Compare Last Year’s margin driven by Radio to This Year’s margin driven by radio.

We see that Radio drove more gross margin dollars in 2010 than it did in 2009.  Great, but why?

2) Account for the fact that we spent more.

In this case, they spent 20% more on radio.  So, all else equal, when you spend more you should get more.

3) But the next dollar doesn’t work the same as the old dollars…

When the spend increases, it’s effectiveness decreases a bit.  We call this saturation (or desaturation, in the case of reduced spend) and it can be due to creative wearout, audience quality difficulties, etc.  In this case we saw saturation, but not to a large extent.

4) Media Costs: your customers see impressions, not the dollars used to buy them:

In this example, cost per point went down by 4.8%, because of some buying efficiencies on the advertiser’s side, as well as a shift between the mix of network and spot radio.  And if you’re getting the same media inventory for cheaper, that has a positive impact on ROI.

5) Effectiveness: This is what we were looking for!

So the advertiser saw a 38% increase in gross margin from radio, but they had visibility into their own spend change, their saturation rate (from the prior analysis), their media costs.  This explains more than half of the growth!

So what does “All other impacts” include?  This is where the advertising improvements we were searching for live- increased quality, better execution, and targeting.

(As an aside, if the gross margin rate of the product changes, that can be factored in as well- if an ad drives the same level of sales revenue as the prior year but margin rate is down, ROI will go down as well).

What we find is that the “All Other Impacts” column rarely drives more change in ROI than the other factors.  Yes it changes, and sometimes in meaningful ways, but a large swing in ROI is rarely due to the ad copy quality alone.