Small businesses seem to have a rough time with ROI, at least with online marketing.
They can tell you about their gross profit, net profit and other financials. In other words, they know the health of their business.
But they sometimes blindly spend marketing money without any sense of whether the investment is worth the effort. They buy SEO services and paid ads on Google and get clicks, but is that really an ROI? They buy print ads in magazines. But how do they prove that the ad is working if that ad has the same phone they use everywhere else? They pay annual fees for directory listings without knowing whether that traffic is valuable.
Defining and measuring ROI is subjective and often includes a lot of guesswork.
When I provide online marketing services to clients, I always ask them how they’re advertising now and what ROI they’re getting so I know what I need to beat. They simply don’t know the numbers.
Well, that makes it easy on the surface because doing better than zero shouldn’t be difficult. Ultimately, I start to look at the number of forms, phone calls or online sales with e-commerce.
Over the years, I led teams at different agencies. We came up with custom strategies to help clients succeed.
Here are a few examples:
- A health care company with operations in multiple states enjoyed a surge in search engine traffic within a few months of SEO. With design updates, online sales increased 92%.
- New to the Internet, a cable entertainment company needed as much visibility as possible. Search engine traffic skyrocketed and we established links from credible websites, including Internet Movie Database, which delivered 10,000 visitors in one week.
- An established software company for the construction industry needed more leads. Content, design and keyword updates led to a 50% increase in leads.
ROI Funny Logic
I sometimes need to ensure that business owners don’t come up with unusual interpretations of ROI.
One owner insisted that his company could grow 30% each of the next three years. To help meet that goal, he decided he wanted to get $27 back for every $1 he spent with online marketing. If he paid $18,000 for online marketing, he wanted $486,000 in additional revenue to help him with his business growth projections.
What he didn’t mention at first was that his growth was coming largely existing customers who bought more products (not online marketing). In fact, he couldn’t provide any real ROI for previous advertising. Asking your existing customers for more money isn’t the same thing as marketing to new prospects.
Another owner told me he would look at ROI based on the number of new quotes, not leads. It’s one way he assessed the health of his business and sales – the quote to sales ratio. But that’s a bit of a leap – overlooking the value of leads generated by online marketing efforts. He wanted us to generate a certain number of leads to help him with his quote/sales calculation.
He didn’t account for the fact that his sales force (including him) may have had flawed sales practices. Did they respond to the prospect right away? How was their sales pitch that day? Did they offer the right combination of products? Did they charge too much? The list goes on and on.
I’m much more interested in keeping track of quality leads – if other leads really have little to no value. When I look at leads, I already rule out spam and people offering services. Sure, a form was filled out. But it’s hardly a lead.
Many business owners seem uncertain as we start to walk down the ROI path. They often sell different types of products or services and feel like they can’t pinpoint how many leads they really need to generate a positive ROI.
If the executives are in the dark about ROI, I encourage them to focus on a specific product line, products that generate the most sales, high margin products and/or new products. Pick something and start measuring.
Sales cycles can be long and complicate ROI projections. If initial data is limited, you don’t have a choice other than to estimate sales that will result from leads. Start measuring and tracking. If a company hasn’t tracked the numbers in the past, all I can do is help them get better numbers in the future.
Seasonality complicates the picture even further. Yes, sales are going to rise and fall and differ throughout the year. Clearly, you need to compare periods of time – year over year, quarter over quarter or month over month.
I helped one small business improve its e-commerce analysis by adding conversion tracking to Google Analytics (it wasn’t in place for several years). For the first time, the client could see online sales from different perspectives. Of course, the owners knew what they sold. But were the sales from paid ads on Google, natural searches or other web site traffic?
For example, we could all see how search engine optimization (SEO) was working – or where SEO needed to improve. Just because one brand of products sold well didn’t mean another brand couldn’t perform better with SEO. In other words, we could marry the conversion data with keywords, rankings and other data to shape, refine and measure SEO strategies.
On the surface, you might see some positive signs with ROI. But actually, they could all go either direction – even the apparent “loss” with a company that sells bottles of wine. Here are some general scenarios to get you thinking. They don’t cover all of the details, but they set the stage for knowing what’s needed to get a reasonable ROI.
The wine makes me think about a client I met early in my career. I discovered how a so-called “negative” ROI could be a positive ROI. The business sold frozen fish. The client was happy if he spent $135 on paid search ads and generated a $95 sale. Sound weird, right? But the business was built on repeat business and referrals to additional customers. The company would pay $100 or more all day long to generate a “loss” because of the ability to sell more products to the same person and get the new customer to bring in other customers. Wine might play out much the same way.
The ROI question really has much to do with your overhead (labor, rent, utilities, etc.) and the cost of the raw materials for the product you’re reselling.
Take the lamps, for example. How much did the lamps cost the business owner in the first place? The source of quality lamps is a huge factor. How big is the operation? How much do the employees earn? Is it an online business or a physical store? In other words, do all of the sales happen online or can digital marketing drive traffic to the actual store? Does the business sell more than just lamps? Can the business boost the average sale with other products that the customer adds to the final order? Do other products have a great ROI – enough to cover overhead?
The canoeing scenario likely would involve seasonality considerations. What’s the likelihood of a repeat customer the next year? Could the customer buy other services or products with high margins, including lodging and camping gear? Or, the $4,000 in sales could be a horrible ROI given the labor, insurance and supplies.
Maybe the motivational speaker is a one-person operation who works out his home. But he still needs to make a living. Overhead should be pretty low, especially if clients pay travel expenses. It may not be a bad ROI for the advertising. Hopefully, the business will grow through other marketing as well, word-of-mouth and repeat requests from the same company.
With B2B, it’s often said that it doesn’t take many leads to pay for an online marketing program. The products can cost more than some B2C items like shirts, cameras and bikes. Again, the overhead and components can be costly. You might spend $4,000 a month to get one $20,000 sale, but that could be a horrible ROI depending on the product. Maybe the profit is only $6,000 after labor and materials. Now that $4,000 investment doesn’t look so good. It’s quite possible that the $4,000 could support sales of more expensive machines and equipment with higher margins. What if the $4,000 led to two machines that sold for a total of $100,000 with a $30,000 profit after parts and labor?
Over a year’s time, however, maybe the online marketing strategy costs $50,000 and the business sells 25 machines for $20,000 each. That’s $500,000. With the $6,000 per machine profit, that would mean the $50,000 led to $150,000 after taking out the cost of the materials that went into the equipment. Given overhead considerations, even $150,000 may not be impressive. After all, it’s really down to $100,000 after you factor in the $50,000 cost of online marketing. A better ROI would come from s combination of more sales and some more expensive products that each have higher profits.
Bed & Breakfast:
I don’t know much about the cost of running a bed & breakfast, but I imagine the food, mortgage, property taxes, insurance, utilities and landscaping can add up. If someone paid $1,000 to advertise a few rooms that brought in $5,000, that’s only $4,000 in profit after accounting for the online marketing effort. Given mortgage, labor, insurance, maintenance, and other costs, it doesn’t seem like much of an ROI. A positive ROI might be possible depending on the lifetime value of a customer. Can the business get two or three more bookings from the same guests over the next two to three years? Can it trace other sales to these guests who participate in a referral program? The initial digital marketing effort can be tied to future sales.
In all of these scenarios, it’s important to understand how much of the business expenses are covered by other revenue sources. Like other businesses, total monthly revenue could come from other advertising, word of mouth marketing, cold calls from sales reps and other variables.