Quantifying ROI on Advertising Expense

When measuring ROI on advertising, we should look at immediate sales revenue plus the longer term benefits to branding.

How do you determine ROI on advertising expense or what should you expect from a marketing campaign? These are deceptively difficult questions because a buyer makes decisions based on awareness of a company or its products that likely was built by multiple contacts over a period of time. There is some debate about the influence of TV advertising driving people to search online for a product or a company. Accepting for the moment that people will search a store circular or search online for something they remember seeing on TV, is it fair to credit the TV ad with all the ROI for a given sale?

It’s natural to focus on ROI and it’s easy enough to set a revenue target for an ad campaign, or for that matter, any category of expense such as labor or equipment. Tracking the revenue from an ad campaign can be quite easy in many cases, if your campaign uses any specific tracking parameter: a promotion code, unique product codes or catalog tracking ID, a unique landing page or a pay per click ad. Asking, “Where did you hear about us?” is pretty much automatic in ecommerce and direct marketing. But if you run a car dealership or a dry cleaner or you build houses, it’s not always automatic. Salespeople can ask the same question, “How did you hear about us?” but often the mechanisms for collecting and reporting the answers are not really in place. What’s more in almost any business, maybe the ad was the proximate cause of today’s inquiry or sale, but maybe many other factors were taken into consideration before the ad triggered an action. If your sales cycle is long, then is it realistic to expect immediate revenue from advertising?

Advertising builds awareness, loyalty and credibility, promotes trials or drives repeat purchases. But product quality or store location, customer service and recommendations play a role in purchase decisions too along with myriad other factors. Measurement of advertising effectiveness can attempt to quantify the increase in brand recognition or those types of factors too. Establish clear, realistic goals. Would it be reasonable to set the same ROI objectives for an established product in a competitive market as you would for a new product without any campaign history? Would ROI on print media be the same as an email campaign or outdoor signage? Should you use only the media with the highest ROI for your product and how will that impact market share and target demographics?

So what is a business line manager supposed to do? Set goals, measure, test and constantly improve. When any one of these four elements are weak, advertising is usually cut; and without advertising the business will likely decline. Focus on tracking when designing ads so the performance can be measured; test different ad copy and different media with different target audiences; and try to improve with every iteration.