Knowing the return on investment for marketing activities is important for any business and is maybe more so for Social Enterprises. Why? Well, often you are working to very tight budgets and understanding what works and what doesn’t, and reducing wastage of time and money, can be crucial to your bottom line.
To put it bluntly, it could be what makes the difference between growth and disaster. You could commit a large part of your available budget to activity that just doesn’t work or you might spend no money and believe that just putting yourself out on social media (at no apparent cost) is good enough. Either way, there will need to be some trial and error in order to see what is effective and that makes measurement of your efforts all the more important.
What is Return on Investment?
Put very simply, ROI is a measure of the return you are getting on the work and money you are putting in. The most obvious example is that you spend £100 on a marketing activity and you get £200 income from it. That’s a 200% ROI (provided you don’t factor in overheads).
A 200% return isn’t very good, especially if you do factor in the overheads, in which case you may make little or no profit at all. A better return would be, say, 500% (income is 5x the cost) and an ideal would be 1000% or more. If you’re really lucky, it could be a lot more.
Ideally we’d have a hard measure for everything we did (£x generated £xx) but it’s not always that easy and the following looks at some of the nuances in determining your ROI.
I’ll say at this point that, if you want some very simple suggestions on how to begin your ROI work, jump to the end of this post where I give some recommendations on getting started. If you feel up to taking on some of the complexities of building an ROI model, read on.
Hard and Soft Returns
Hard returns are what I’ve already talked about – spending one amount of cash generates another. It is possible, provided the numbers are sufficiently high, to give a value for any action of engagement, e.g. a click on the buy button on your website (if you have such a thing) is worth £5, given that 100 clicks generate £500 of sales. That could even be extended to a single tweet, e.g. 100 tweets generate £150, so a single tweet has an average value of £1.50.
Return on Investment can also be seen in terms of the amount of activity an investment buys. An example here would be that £x invested into a social media campaign generates the following:
- a number of followers, likes etc
- a number of tweets/posts created and sent
- an amount of engagement (RTs, clicks, likes, shares etc)
- a number of clicks to the website generated
- a number of actions on the website from that traffic
Although these may not lead to easily attributable sales, they are metrics with some value in themselves. Until the business is sufficiently developed to be able to attribute sales to specific areas of activity, softer returns like these may have to suffice.
If the definition for returns isn’t always easy, neither is that for costs. If you have a specific allocation of budget for marketing and you keep a careful account of how you’re spending it, that’s part of the job. There’s also the time you spend on it, which can be expressed in terms of what it costs, and then a proportion of overheads. Ideally you’d factor all of these into your calculations to come up with a full cost of any work you are doing. Suddenly that 500% return has dropped a bit and you find you have to make your marketing spend work even harder (which in turn means you need to be able to measure it even more accurately).
What success looks like
Here, for the purpose of illustration, is an example of a mature business, with well-established marketing practices, rigorous measurement and a profitable bottom line. Our unnamed business has the following amount of marketing activity (these numbers are based on a real business so are not made up):
- Twitter (35k followers accounting for 4% of traffic)
- Facebook (50k likes accounting for 8% of traffic)
- Email (56k subscribers accounting for 10% of traffic)
- Organic traffic (50% of traffic)
- Incoming links/direct traffic (20% of traffic)
These all perform differently when it comes to directly attributable sales (the difficulties of assessing attribution is discussed later). The conversion rate (the ratio of transactions : visits) is different for different activities – for instance, it’s 3.9% overall and 9% for direct traffic, 2% for email, 0.7% for Twitter etc.
Analysis of a series of email campaigns
So, small amounts of traffic can account for disproportionate sales results (e.g. direct traffic at just 20% of all website visits brings in 45% of business, while organic at 50% of traffic brings in 38% of sales). Knowing this is very important and allows you to make judgments on where you are going to put your time and money.
The company’s Twitter activity consists of scheduling 80-100 tweets per week. How does this Twitter activity perform? Well, as seen above, it counts for relatively low levels of traffic to the website (4% of the total) and it contributes even less of the income (0.5%, just a few hundred pounds a week).
Twitter is, therefore, not a very lucrative activity in terms of the money it generates but it can also be measured in softer terms – the amount of engagement with customers (typically 300 retweets per week, 400 likes, continual growth of followers etc), the value of constantly being in people’s timelines and getting them to comment on, like or share your content. If you assessed it purely in terms of income, you might ditch it as a poor revenue-generator but, provided you have sufficient resources to service it, you can decide whether it’s worth continuing because of the softer returns.
Note: there’s a further aspect of assessing social media in that you can get very different results if you spend money with the various platforms. This provides a firmer measure of social media activity because you can track the direct return on the spend.
Now, I’ve been talking about a successful business with a high ROI and it may all sound unattainable if you are running a small social enterprise but it serves to illustrate the sort of model you can build up in order to assess the overall levels of your ROI. The real-life business these numbers are based on has a turnover of around £2 million a year, by the way.
This was mentioned above and is an important aspect of how the numbers quoted are arrived at. Attribution is (or should be) a constant problem for marketers.
If you send out an email and someone buys an item by clicking on the link, does that mean that the email has created a sale? Perhaps, but, more likely, it was one of a number of touch points. The customer might have been thinking about the item for some time and seen a number of different adverts, emails, tweets etc and finally decided to buy when they received the email. Should email receive all the credit for the sale, when they might never have bought on the strength of the email alone?
You are in danger here of attributing the sale wrongly. You could scrap everything except email because that’s the channel that converts best, whereas the sale would never have happened without the other activity (including the very “low performing” Twitter, for example).
Google Analytics, which you should have set-up for all pages of your website, allows you to apply different attribution models and it’s a judgment call on which one you are most comfortable with. But that’s starting to reach more sophisticated levels of measurement and you might like to keep things simpler in the early stages.
A further complication that should be taken into account is that Google Analytics only accounts for online interactions – it could be a phone conversation that clinches the deal or a poster outside your shop etc. The more careful you are with attributing value to different bits of activity, the closer you are likely to get to the truth. The important thing is not to take any of the numbers at face value and consider all the contributory factors.
Keep things simple but not so simple that you are reaching inaccurate conclusions because of a lack of data (or thought power).
The time element and the danger of small numbers
If a company commits to, for instance, a TV campaign in order to build their brand, they are in it for the long haul. They can’t judge the value of the spend after the first advert has gone out. It may be months before the awareness has built and the ROI at the end of the campaign may be much higher than at the beginning. In fact, it could be exponential. It’s important not to judge results too soon.
Connected with this is the danger of looking at small numbers (for instance, a website that generates only small amounts of traffic). Your first sale may come from a tweet but it would be foolish to scrap all other activity and only do Twitter on the basis of one result. On the other hand, ditching Twitter because the following is not building fast enough or engagement is low might be cutting off a potentially useful tool in the future.
Until you’ve built sufficient data to really test a channel, you are also in it for the long haul. This is especially the case for startups, trying to go from scratch in a short space of time. There is, nevertheless, another judgment call to be made, in the meantime, about where to put your resources (carefully using whatever data is available).
The 80% rule and diminishing returns
Something else that should be taken into account is that typically with marketing your low-hanging fruit accounts for 80% of your sales. The other 20% is much harder-won. So, you may spend £500 to make your initial £5,000 but to make the next £1,250 may cost you another £500. So, diminishing returns sets in and you have to decide how much you are prepared to commit to that extra 20%. It’s important, of course, to ensure that you are harvesting your low-hanging fruit as well as possible, as that will always be the easiest and most cost-effective activity but, at some point, you have to decide whether to top up and at what cost.
To illustrate this, if you discover that the most effective source of income is through networking, you should be looking at how best to support and enhance that with your marketing efforts (which could include a whole range of activities) rather than rushing around and finding new types of marketing. Identifying and pursuing the best avenues for networking (the 80%) would likely be more fruitful than, say, trying to build organic traffic on your website or drive traffic through pay per click (which you might eventually decide to do for the extra 20%).
If this post is largely about segmentation, then the first 80% and last 20% are other important segments to take into account.
I’ve gone into a bit of detail in this post but, if this is new to you and you are just beginning to work on ROI, you shouldn’t feel overwhelmed by all the different factors.
In the early stages keep it simple – any data collection is better than none (although beware of making major decisions on incomplete figures or insufficient analysis). You might start with some of the softer returns I’ve mentioned. If you are doing some social media, keep a record of the activity and the amount of engagement you’re getting. Are you really making contact with people or are you churning out content that nobody’s responding to?
You may not be able to put a monetary value to it initially but at least you’re not working blind and merely guessing at the value. 50 tweets in a week, generating 20 retweets, 10 clicks to the website and one phone call with a potential customer is better than “we’ve been doing lots of tweeting lately and it seems to be going quite well”. You could even put a value on it – each tweet is costing £x, each click to the website £x. It certainly focuses the mind when you look at it that way.
If you place an ad, try and find a mechanism for monitoring the response. Tracking is a lot easier these days with online marketing, so you should take full advantage of it (contact me at firstname.lastname@example.org if you need help with that).
When you’re ready, or if you’re there already, start putting in place a system of measurements that will lead to comprehensive tracking of ROI. The discussion in this post has hopefully shown that it can be a complex and nuanced activity. Again, if you need advice on what metrics to be looking at and how to connect them all up, drop me a line.
Getting the mental attitude right is the starting point. Approach this work with an enquiring mind and really want to know those numbers. We can figure out a way to do it but the curiosity about how you’re doing can only come from you and it is indispensible.
Simon Thomas is Bubble Chamber’s marketing co-ordinator and you can find out more about his work at www.bubblechamberdigital.com (where you can also download a free booklet on ROI)