I just got off the phone with a client. We discussed the results of a two-step campaign he’s been running to establish a relationship with potential customers. He quickly steered our conversation toward response percentages.
“Response is not yet relevant,” I said. “The first numbers we must count are dollars expended on the campaign, and dollars coming back to your business as a result of that campaign.
“Its the response rate, and the average sale, and the upsell, and the markup, and the repeat sales factored against the cost. This is Return On Advertising Investment. It’s the first and most critical number.”
Start with gross sales. Subtract your cost of goods (or cost of services). Divide the difference by the cost of the campaign to calculate your Return On Advertising Investment.
Any whole number is good, and the larger the number the greater your return.
Suppose that your ROAI calculations show that you’re getting back $3.00 for every $1.00 you’ve invested. Is your advertising too expensive? (Lemme ask it this way: could you consistently get a 300% return on any other investment?)
But now that you know your 3.0 ROAI, perhaps it’s time to examine that response rate. A ten percent improvement in any of the vairables will also increase your ROAI by ten percent, to 3.1. Could you improve that rate with a stronger offer? More frequency of repetition? Adjusting for seasonality?
When you know the ROAI, it’s easy to determine whether tweaking the other variables is making things better or worse. Until you know the ROAI you have no way of determining whether you can even afford to continue the campaign.
Let me give you an example* of why response isn’t important by itself, but ROAI is.
A few years ago an acquaintence of mine took over recruitment advertising for a large employer in Minneapolis. The company had been running regular display advertising in the “want ads” section of the Minneapolis Tribune. He placed all of their ad dollars on six local radio stations.
About ten days into the new strategy the client called, somewhat agitated, and said “We normally get a hundred applicants a week. This last week we got only three.”
The ad man asked “How many of those hundred applicants do you typically hire?” His client told him the usual number was three. He then asked “How many of the three applicants who did respond to the ads did you hire?” His client said “Well, all three.”
“Humm…” said the ad man. “So for the same investment you got the same three qualified employees, but this time you didn’t have to interview the ninety-seven deadbeats? That upsets you?“
In this example, adjusting the advertising because of the change in response rate would have been counter productive. But tracking the Return On Advertising Investment makes sure the campaign is accomplishing the job we need to get done.
* Choice of medium should involve the strategy, the desired audience, the offer, and a number of other variables, including cost. Please do not interpret this story as an endorsement of radio over newspaper.