Though it may sound simple, calculating an accurate return on investment (ROI) is not an easy thing to do. You will need answers to questions that include:
- Did any additional sales or results come directly from the linking campaign?
- Did the linking campaign have an impact on the effectiveness of other marketing initiatives (e.g. search engine optimisation)?
- Were prospects generated through the campaign more likely to buy than others?
- Were prospects more likely to buy again and convert to long-term customers?
To find accurate answers to these questions requires measurement tools and the staff to use them. You could get yourself into an 'Alice in Wonderland' dilemma, "Does the return on investment in measuring return on investment justify the expense?"
The answer to this dilemma depends on who you are and how you manage your business. If you already do sophisticated measurements on your site, you'll probably be able to answer these questions without too much difficulty.
However, if you do not take sophisticated measurements on your site, then you have some choices to make.
At the very basic level, you could implement your linking strategy and just observe whether your traffic or sales go up. This might be sufficient for your needs, but you could do more. How about taking the opportunity to do some more work on measuring what is happening on your site and how that relates to your business performance.
In paragraph (ix) of Section 6, we described the types of measurements you should take as part of your linking strategy. You now have to relate these to business objectives.
You will need to know:
- Conversion rate - the % of new visitors to your site who turn into customers
- Average value of first sale
- Average repeat purchase over 12 months
- Average profit contribution for each sale
- Estimated life-time value of each customer
- Number of new visitors generated by the linking campaign (look to your log-files or analytics for referring sites)
Now, with this information you can calculate three measures for the ROI of your linking campaign.
- ROI1 covers the first three months of the campaign
- ROI2 covers the first twelve months of the campaign
- ROI3 covers the life-time value of customers generated by the campaign
ROI1 - The first three months
Let´s take the example of an online retailer whose conversion rate is 3%; first time sales average $150 and net profit is a healthy 20%. Suppose the linking campaign generates an additional 5,000 visitors in the first three months.
Number of new customers= new visitors*conversion rate
= 5000*3%
= 150
Amount of new sales= new customers*average first sale
= 150*$150
= $22,500
Amount of profit generated= new sales*20%
= $4,500
The retailer has employed a freelancer to do the campaign for 10 days @$300 per day -$3,000 in total. The campaign therefore produces a profit of $1,500 or an ROI of 1.5 in classic direct marketing terms.
Not a bad result at all.
ROI2 - The first twelve months
Now suppose that 50% the retailer´s first time customers come back and within the first year make another $300 worth of purchases. These figures should also be factored into ROI.
So the retailer generated 150 new customers from the linking campaign. 50% of these come back to spend another $300 over the year.
This generates sales= (50%*150 customers)*$300
= 75*$300
= $22,500
= $4,500 additional profit.
So overall, the additional profit for the first year is $9,000 for the original investment of $3000. Therefore the total profit is $6,000 giving an ROI of 3.0 - very healthy indeed!
But it could get a lot better.
With email marketing, you have a one-off hit per mailing. But with a linking strategy, the links are likely to stay where they are generating new visitors to your site all the time. So if we generate 5,000 new visitors in 3 months, we could expect 20,000 in a year. From our ROI1 calculations, this would generate 600 new customers spending an average of $150 on their first purchase giving additional sales of $90,000. Add to this another $90,000 from 300 repeat customers and our campaign will have generated an additional $180,000 in sales or $36,000 profit. That gives an overall ROI of 12.
ROI3 - Life-Time Value
Life-Time value is notoriously difficult to calculate, but is certainly good marketing practice to think about the long-term relationship that you want to have with your customers. So here is a very simple calculation to illustrate.
In the two scenarios above, our retailer generated 300 additional repeat customers spending $300 per year. Repeat customers tend to stay loyal - what if 50% of them stayed with the retailer for another 5 years?
That's worth 150 (long-term customers) x $300 (annual sales) x 5 years = $225,000 in sales.
These calculations are very rough, but they do demonstrate the value of long-term repeat customers. If your linking strategy can play even a small part in generating these levels of repeat purchase, then it will pay for itself many times over.
