Posts Tagged ‘ROI’

June 12th, 2009

Measuring web sales from offline advertising like TV, press and radio

If you are running press, radio, TV or DM activity to drive traffic to your web site and generate online sales, you may be wondering how to measure the relationship between offline media and online sales. This short piece will give you a simple guide to analysing whether your offline advertising is delivering web sales.

It’s worth stating at the outset that the job of relating offline media to online response is a complex area. Media channels like TV, press and radio don’t carry cookies so the tracking options available within the online sales funnel are simply not available when you start working with offline media.  Consequently,  we have to use other techniques that can give us an informed view about ROI from offline media in online environments.

The approach I am going to take you through is not 100% watertight, but it is a fraction of the cost of statistical modelling and will give you a reasonable idea of how to explore the efficiency of offline media in driving online sales.

Stage 1 - Visual observation of the data

  1. Obtain web log data running around 1 month prior and 1 month post your offline campaign activity
  2. These web logs should be daily level data showing both total unit sales and total sales value by day
  3. If possible obtain data for sales originated through both search engines and direct browser visits
  4. Enter into an excel spreadsheet
  5. Separate these two sources of data and undertake the following for each of the two sales data sets
  6. Add your daily offline media spend
  7. Chart the direct and search sales alongside the spend data
  8. Look at the data and see if there is any visual pattern in it. See of there are slight rises either during or lagged behind your offline campaign activity
  9. If there are any patterns which suggest an effect between your offline media and online sales proceed to the next stages.

Stage 2 -Sales analysis by day of week

  1. We need to ‘eliminate’ any day of week effect (for example, for many online companies Sunday and Monday are often their best sales days) so sort your data into the seven days of the week for the whole period
  2. You should now have seven mini data sets, one for each day of the week, each containing media spend (where applicable) and sales data.
  3. Calculate the average number of unit sales or sales revenue for each day of the week
  4. Now rank within each mini data set of days by daily unit sales or sales revenue
  5. Compare the sales for each day to the average of that day over the period
  6. If the advertising supported days are all above average, then your offline advertising is likely to be driving these online sales.

Stage 3  - Estimating the value of web sales driven by offline advertising

  1. For each of the days of the week, refer back to the average sales for each day
  2. Now for each of the days with web sales above the average, subtract those sales (or their sales value) from the average figure for the day of the week
  3. This is your incremental sales revenue
  4. Now compare your total incremental sales revenue to your offline advertising spend in the period
  5. You can now estimate sales and gross margin ROI
  6. For revenue ROI, compare the incremental sales value to the ad spend
  7. For gross margin ROI estimate your gross margin a percentage of sales and then compare the margin value to the advertising spend.

You will also need to factor in seasonality. Ideally, you would undertake the same exercise for the same period one year prior to the period you are analysing. If your sales in March are high, it may be the case that March is a good seasonal sales month. You need to account for this eventuality too.

If you’re an advertiser with large volumes of traffic and omnipresent advertising, then of course, things become more comlex. You will need to build a test marketing campaign structure with lots of media variation - i.e. different channels running at different times with different messages. This can then be seasonally adjusted and modelled using multiple regression to estimate the sales effect of each media channel being used.

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February 24th, 2009

Using ROI metrics to evaluate Pay per Click search marketing

For many online advertisers, trading and evaluating paid search marketing (PPC) has now moved beyond paying for clicks.  More advanced search marketing campaigns are traded and evaluated on cost per “action” - i.e. paying for a marketing outcome; the generation of a lead, subscription or sale for example. Even more advanced campaigns are evaluated using Return on Investment (ROI) metrics where search engine marketing activity is optimised around the relationship between online spend and revenue generated.  ROI evaluation can be a very powerful way to evaluate paid search, but it is not without its own pitfalls. You need to be careful about which ROI metrics you work with - pick the wrong ones and your best endeavours may still end up generating high volumes of low profit business.

I thought it might be interesting to explore how we can look at ROI as a measure of margin or even profit.  But before I do that, here’s a quick review of current PPC evaluation options.

1) Cost per Click

Cost per click is the most basic and easy to obtain evaluation metric in search marketing. Unfortunately, clicks are of limited value for a number of reasons. First they do not represent whether or not a purchase has taken place. Second, they offer no view of sales value. Third, they are the metric by which most paid search campaigns are traded. Search engine owners want to sell you as many clicks as possible because they’re paid by the click. But you need sales because only sales will drive your business forward. So how can you move from evaluating search on clicks alone? There are two options:

2) Cost per Action

Cost per Action (sometimes called Cost per Conversion) is a much more interesting metric. It can be obtained using either the conversion tracking tool in Google’s main Adwords dashboard or via the Google Analytics tool. You can set conversions as particular actions “goals” or on your site. These might be sales, leads or subscription sign-ups. So if you have a target cost for generating lead or sale, conversion tracking can help you to achieve this. But there is a problem with looking at Cost per Action alone; it does not allow you to understand your revenue Return on Investment.

3) Revenue Return on Investment

Search marketing can only be fully optimised when you can understand the relationship between the cost of generating a sale and the value of that sale. If you are selling a product, or capturing online orders, then it is possible to capture the sales value from the forms generated on your web site. You can then use an analytics tools to look at the relationship between sales cost and sales value across either keywords, ad texts or products.

How do we develop ROI as an evaluation metric?

Calculating ROI in isolation of margins can produce superficially healthy feedback which in fact covers potentially disastrous business practice. ROI ratios can be used to help us understand the business metrics that keep businesses healthy - gross and net profit margins.  Here’s an example of three sales:

1) Sales Value: £200 Cost Per Sale: £50 Sales ROI: 400%

2) Sales Value: £600 Cost Per Sale: £100 Sales ROI: 600%

3) Sales Value: £900 Cost Per Sale: £125 Sales ROI: 720%

So, which sale would you rather have? In sale 1, the cost of the sale is 25% of the revenue generated. In sale 2, the cost of the sale is 16.6% of the revenue generated.  In sale 3, the cost of the sale is 13.8% of the revenue generated. Whilst the capital cost of sale 3 is much higher, it offers more potential profit because it’s a lower proportion of the revenue generated.

If you were optimising your campaign on a cost per sale basis at £75 per sale, then cutting out keywords or ad text that delivered over this level may mean that you miss out on higher margin business which offers better profitability. In a worse scenario, because revenue is flowing in, you might think that the relationship between ppc spend and revenue is healthy and bid for a higher share of the market. But this may be an online form of the venus flytrap;  the revenue may mask preilkously low margins or even loss-making business.

As a post text, there’s an interesting book about understanding the economics of generating sales in direct marketing by Peter Rosenwald, a former CEO of both Wunderman Worldwide and Saatchi & Saatchi Direct called “Accountable Marketing, The economics of Data Driven Marketing”.  Rosenwald attaches great importance to calculating and understanding your own “Allowable Cost Per Order” (ACPO) so that you can organise your marketing activity to deliver profits as well as sales.  Tim Ambler at London Business School takes these ideas further, arguing that marketers need to look at the rate at which cash is generated in relation to outgoing marketing expenditure.

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