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How to Make ROI Based Decisions in Digital Marketing (or any marketing)

ROI-Based-Decisions

ROI-Based-Decisions

I gave a “Social Media for Customer Service” training recently, and was asked an interesting question. The question was about ROI; I was asked what the ROI was on investing in customer service. How can they justify the spending? Without more information I couldn’t really give a definitive answer, but I could provide a framework to simply answer the question, or any investment question in marketing.

ROI = Return on Investment

We need to weigh the expected return against the investment.

While we don’t have the specific answers, we can do “back of the envelope” math to determine if the investment is likely to payout or have positive ROI.

Here is the simple math to calculate the ROI of anything:

  • Cost to have an employee respond to customer service requests: $50/day (2 hours of time)
  • Number of questions responded to: 12 (10 minutes per question)
  • Value of a new customer (or keeping a customer): $100 lifetime value
  • Number of new customers required to payout: $100 per customer/$50 cost = .5 new customers /day

Then we step back and apply logic and common sense:

  • For every 12 questions I answer, how many people do I expect to become new customers or stay customers? 1 in 12? 2 in 12?
  • How does that compare to my break-even cost of 0.5 new customers/day?
  • What is the probability that this has a positive ROI?

Once you start implementing you can measure over time – the customer service employee can track the number of customers gained or retained and we can measure the actual impact.

This math can be used in many scenarios to understand the potential ROI or probability of positive ROI from digital marketing spending. Over time when you have results you can probably measure the specific ROI.

Facebook ad ROI:

  • Cost of ad $100
  • CPM: $5
  • Reach of ad: 20,000
  • Value of a new customer: $50
  • Number of customers needed for breakeven: 2 customers
  • Conversion rate to break even: 2/20,000 = 0.01%

While this doesn’t give you the exact ROI it does give you an idea of what is needed to payout. You can also use this to compare vs. other investment choices. For example, if you need a 1% conversion rate to payout social media ads but a 2% conversion rate to payout television ads you can now compare the two options. Is it likely that television converts at double the rate? Is it a much more impactful medium?

Rather than trying to get to a specific ROI number, use this to determine the minimum return needed and compare and benchmark across mediums.

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