The Catalyst

Do a Google search for the phrase “measure advertising ROI” and check out how many results you get. I got almost a million. This is not a new phenomenon. Nobody would argue that advertising ROI is more front-and-center today than it was say, a few years ago.

Now, close out your Google search, because you likely won’t be finding any answers there. You might find a lot of promises, calculations, solicitations and “studies”, but not much in the way of measuring your advertising’s true worth.

Here’s the problem with measuring advertising ROI: People don’t know how to measure it.

The first mistake occurs when we ask the customer “Where did you hear about us?” and then try to run the math backwards from there to determine ROI. Sounds good, except the customer doesn’t know, and quite frankly, many of them don’t care. May as well ask them what they had for dinner six months ago.

The next mistake occurs when we give credit to the wrong source of advertising. The sustained growth of internet advertising has had the wonderful side-effect of holding advertising media accountable. This is a good thing, and is expediting the “market correction” to sweep away inefficient media. But, in a world with ever-fragmenting media and piecemeal advertising efforts … we still don’t know where our customers are coming from — and neither do they (the customers).

Pure-play internet types will argue that the internet’s unparalleled measurability enables us to source every click to see where we’re truly getting a bang for the buck. Not so fast — are we really giving credit to the “last ad viewed” and assuming that it is accountable for 100% of the customer’s purchase decision? If so, we’re making a big mistake. We’re already learning that a growing portion of online inquiry is the result of offline advertising, most notably television. Just because the click is easily measured doesn’t mean it gets all the credit.

Advertising Age recently posted an article in which they “measured” the ROI for a social media campaign. The math was a little hazy and assumptive, but they still arrived at an ROI for this campaign of 28%. The actual company spent $1M in social media advertising to get a return of $1.28M in sales. One would have to assume the point of the article was the measurability of the campaign and not its success, because that type of performance is woeful.

We’d also have to assume this company didn’t have much in the way of other costs, like maybe the cost-of-goods-sold, payroll, rent, inventory, utilities, insurance … because they already blew 78% of their money on advertising. This is a recipe for disaster.

I need to make two things absolutely clear before I ask an important question: I am a big proponent of good internet advertising. I am also a stickler for advertising metrics. Okay, now for the question:

Why is advertising performance taking a back seat to measurability? Seems to be all the rage these days.

The real measure of advertising effectiveness is the ad-to-sales ratio measured over time. Every company calculates this, whether they call it ASR or PVR or cost-per-lead is irrelevant. When your advertising is working, this number should be declining. At the very least it should be holding steady. When your advertising is broken, this number is moving north.

Funny how sometimes the simplest answer is actually the best.

The function of advertising, good advertising, is to make a profit for the business. Period. We can measure this many ways, but as far as our advertising is concerned, if I can generate an increasing profit margin over time, I’m in good shape. In other words, if the cost to acquire my next customer is lower than the cost of the previous customer, I’m winning the game.

Just for the record, you may have guessed that the 78% ad-to-sales ratio from the above social media experiment is outrageous. But hey, at least it was measurable! Sorry for the sarcasm, but a 78% ASR is not just grounds for dismissal, it’s what will put a company out of business.

Measuring our efforts is very important, but we had better make sure we’re measuring the right things first, or it’s irrelevant. We can break down the math a little more if we’d like. If the question arises as to which segment of our advertising is working better than the rest, we should start with a simple comparison of cost-per-thousand against our target audience, using post-data. That should shed some light on the mystery. Am I paying $10 per thousand for my customer’s attention, or $50? Or $100?

At the local level, good internet advertising is at the lowest end of the spectrum in terms of cost-per-thousand. So is broadcast television. When they’re executed properly, they provide the most direct, cost-efficient path to our next customer. Bloated social media “experiments” and dying (print) media will be at the other — more pricey — end of the spectrum.

We can do a little simple math to figure out which medium is the best to fetch our next customer. Then we benchmark our ASR and watch as it declines.

Albert Einstein is credited with saying “Everything should be made as simple as possible, but not simpler.” I couldn’t agree more. Too bad he’s not around today to help us calculate ROI.

Dave Eckstein does not play shortstop and was never the MVP of the World Series. He is a partner in the firm ESA & Company, based in Red Bank, New Jersey.