Calculating ROI - For Small Businesses, That May Be Heading Down the Garden Path
ROI. The holy grail of measurement and accountants everywhere. We all want to know that the dollars we’ve invested in marketing activities are generating sales, AND we need to be able to assess which of those activities yield the greatest result, but how?
In its simplest form, return on investment (ROI) is calculated with this formula:
(Revenue generated minus marketing spend) divided by marketing spend
x-y/y, where x=revenue and y=investment
Where it gets really tricky is in how you define the variables you want to include in the calculation.
Let’s assume that you are indeed a smaller sort of business, the size that likely does not have a CRM (customer relationship management) system that allows you to track a sale from the very first touch point all the way through to the eventual deal. When you measure ROI are you attributing the revenue generated to the last touch point or the first touch point? Common marketing lore suggests that seven touch points are required to make a sale. See what I mean? It’s enough to make a small business owner pull her hair out.
And what about the ROI on PR and other brand building activities? Christopher Penn detangles this one in this excellent Spin Sucks post that illustrates beautifully how you measure the impact of PR on audiences, not sales, because PR is not intended to directly link to sales. As he points out, if your PR activities generate a great deal of foot traffic to your store, but your store is closed and no sales are made, it’s not that your communications activities weren’t successful, it’s that their measurable outcome should not be sales.
So what are you to do?
Most small business owners I’ve worked with have a fairly intuitive feel for which marketing activities are working for them and which are not. But numbers don’t lie, and most small business owners I’ve worked with are usually surprised by what is found in Google Analytics. If you haven’t yet drunk from Google’s fountain of measurement, please, I urge you, get to it post haste! This free tool tracks almost anything you ever wanted to know about what’s happening on your website, and a few things you didn’t even know you wanted to know. Plus, you can get really sophisticated with this tool, setting up goals and tracking your web visitors’ journeys through your site. This post, although a little dated, shows how you can set up a goal in Google Analytics and what you might try to measure. Awesome, right?!
Which brings me back to my previous post about understanding business goals before defining communications goals. And being sure to measure outcomes, not outputs. You need to clearly define the tangible behaviors and actions you want to measure (the outcome) and then find a way to measure them. So, not the number of likes a Facebook post receives then. (Those are outputs, in case you were wondering.)
It seems to me that small businesses need to worry less about calculating a hard ROI number and more about setting outcome goals that increase revenue generation. For example, you might run a campaign that focuses on engagement with other businesses that will refer clients to you, and perhaps some local TV coverage, all supported by a blog. The initial goal here is to increase website visits month on month, but of course the ultimate goal is to gain new clients. This process may take some time and it may be difficult to track whether the client resulted from a direct referral, or increased brand awareness that included the prospective client reading and liking the blog and eventually contacting you directly.
So while you may decide calculating ROI is not easy without some rather outrageous and awkward assumptions being made, you can still measure the impact your activities are having upon your clearly defined outcomes. And you may want to learn how to create landing pages.
Looks like landing pages will need a post next, doesn’t it?