December 30, 2008

E-Mail ROI Is Overstated Because Of Search

Sometimes our business intelligence systems and KPIs miss subtleties in customer behavior.

Take e-mail marketing. Pundits frequently tell us that e-mail marketing has the best ROI. And they are right ... only because e-mail marketing is essentially free, from a variable cost standpoint. Take a look at the following profit and loss statement:


Actual
Circulation 100,000
Response Rate 0.14%
AOV $125.00
Demand $17,857
Net Sales $14,286
Gross Margin $7,143
Less Marketing Cost $300
Less Pick-Pack-Ship $1,643
Variable Profit $5,200
% of Net Sales 36.4%
ROI: Profit/Cost 17.3

The ROI is spectacular because the campaign only cost an incremental $300 to deliver. Campaign development and staffing costs are largely fixed, as we all know, not appearing in a variable profit statement.

Here's where we overstate e-mail ROI.

E-mail is a demand generation vehicle, correct? In other words, e-mail causes demand to happen that wouldn't happen otherwise. More important, e-mail causes customers to search for merchandise --- the customer uses Google, and visits the site after clicking on a paid search ad (I see this happening in client data all of the time).

Many retailers will "matchback" the Google-based order to the e-mail campaign that drove the Google-based paid search order.

But few retailers take the next step ... matching back all paid search clicks that do not result in an order. And this is where e-mail marketers make a mistake. If e-mail marketing causes customers to use paid search, and those customers do not convert to an order, e-mail marketing must be held accountable for the expenses generated by paid search clicks not resulting in an order. In most cases, the paid search marketer is held accountable for this expense.

How does this change the profit and loss statement? Take a look:


Actual Paid Search Totals
Circulation / Clicks 100,000 3,657

Response Rate 0.14% 1.75%
AOV $125.00
$125.00
Demand $17,857 $8,000 $25,857
Net Sales $13,393 $6,000 $19,393
Gross Margin $6,696 $3,000 $9,696
Less Marketing Cost $300 $1,829 $2,129
Less Pick-Pack-Ship $1,540 $690 $2,230
Variable Profit $4,856 $481 $5,338
% of Net Sales 36.3% 8.0% 27.5%
ROI: Profit/Cost 16.2 0.3 2.5

There are two important facts to consider.
  1. E-mail marketing is not getting credit for an additional $481 of profit it generated via paid search. If e-mail marketing did not exist, in this case, 3,657 paid search clicks would not have happened, resulting in $8,000 less demand and $481 less profit.
  2. Just as important, real e-mail ROI is in the tank. Because e-mail caused 3,657 paid search clicks to happen, e-mail caused $1,829 of paid search expense to happen that would not have happened otherwise (you can easily verify this via mail/holdout tests). Reported e-mail ROI of 16.2, as stated in the analytics reporting generated by the BI team, is actually 2.5 ... comparable to other marketing activities.
Our analytics systems are giving us a false sense of the cause/effect that actually happens in marketing. E-mail marketing generates demand, consequently, it causes expenses that would not happen otherwise.

And this false sense of the cause/effect may actually hurt our ability to run the business. In this case, e-mail marketing is more profitable than otherwise observed. E-mail ROI, however, is grossly overstated using the typical KPIs generated by the BI team.

It is our job (as business leaders) to accurately portray what customers are actually doing. Most BI and e-mail analytics systems are not set up to detect the phenomenon described above. Most companies do not do the mail/holdout testing required to detect the phenomenon described above.

As a result, some of what we read in the e-mail blogosphere/trade-journal/vendor-whitepaper world is fundamentally flawed.

15 comments:

  1. Anonymous5:47 AM

    Kevin,

    One of the main things "wrong" with email marketing is that it's too cheap, with correspondingly artificially too-high ROI, encouraging too many marketers to over-mail and create issues within the email marketing world with delivery, declining open rates, over-zealous spam complaint use, etc.

    If we affix more costs to email, marketers should start to treat it more like catalogs, where additional circ has to be profitable if it is to be mailed. Your approach is exactly what the email marketing world needs: to break out of its blinder-on view of the world.

    Thanks for the view on this. We're doing a hold-out test on email this spring to read the impact on search (it's incrementality), but we hadn't considered assigning search costs back to email. Things could get very interesting . . .

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  2. It just makes common sense!

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  3. Finally, someone is thinking through the whole selling process to identify related costs. If it sounds too good to be true, then something was probably left out of the calculations.

    Nice piece Kevin. I hope it gets the attention it deserves.

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  4. Kevin,

    Anther cost that needs to be factored in is the 'cost of disengagement'caused by shoddy irrelevant email.

    I think this is composed of two groups:

    1. Unsubscribes - we have lost these people from the low cost email channel forever.

    2. 'I won't bother to read your email again' group created by sending poorly targeted email that cause people to 'tune out'. A much higher number of people than unsubscribes, but it is measurable.

    It would be incorrect to assume that either group is lost as a customer, but the low cost email communication channel is now closed as a result of the campaign.

    So how do you cost the impact of poor email? Higher future communication costs may be one route, lost future email driven revenue another. Both of these should be factored in to costs I think.

    Any thoughts on this?
    Matthew Tod
    CEO
    Logan Tod & Co

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  5. Thanks Ted!

    Matthew, no disagreement with your comments.

    Sometimes, you see a situation like this.

    Customer with no e-mail address = $10.00 future value.

    Customer who is a current e-mail subscriber = $17.00 future value..

    Customer who was a current e-mail subscriber and opts-out = $15.00 future value.

    The latter customer is interesting. We don't always consider that we angered the customer, but only angered the customer by $2 of value, still improving future value by $5.

    This perspective is missing from the e-mail marketing community.

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  6. Thanks Kevin,

    So on your example emailing above, if 1000 people were found not to open email in the future then 1000 x $2 of future value was destroyed by the campaign. Factor that in and the results are getting close to half the original 'profit'.
    Interesting!
    Matthew

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  7. In your example, the e-mail list probably has 5,000 people on it, creating 5,000 * $7 = $35,000 of value.

    And then, the campaign angered 1,000 people, destroying 1,000 * $2 = $2,000 of value.

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  8. "e-mail causes demand to happen that wouldn't happen otherwise..."

    Hmm. Is that a safe assumption? I think we just found another BIG fallacy, eh?

    http://www.jeffmolander.com/strategies/how-email-roi-becomes-over-stated/

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  9. Test and holdouts answer your question.

    At Nordstrom, we did holdouts on every e-mail campaign we executed. E-mail drove $200,000,000 that would not have happened otherwise.

    I've also executed test/holdouts where the net impact is zero.

    So it can go either way. But you have to do the testing.

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  10. Very interesting indeed – thank you for opening this debate. Like you, we have been looking at this issue for a while, but have come up with very different conclusions!

    It is our opinion that email is consistently UNDERVALUED because of overinvestment in search (both SEO and PPC), banners and other channels like affiliate programs.

    I agree that an email causes demand to happen that wouldn't happen otherwise and that customers who have received a proposition via email eventually visit the site and or make a transaction after clicking on a paid search ad or via an affiliate, but have a completely different take on the phenomenon. Here at Alchemy Worx we believe that any email marketing activity that causes someone who receives a proposition via email to transact via a more expensive channel should be regarded as a failure of your email campaign and NOT the channel.

    I would argue that you are blaming the symptom rather than the cause and the cause is chronic, endemic, under-investment in email (over-investment in search and other channels?). The “false” ROI issue you describe is because you only attribute $300 to the cost of marketing! Any other channel generating $14,286 in sales would have 10 x that amount devoted to it. Compared with other channels - search in particular; email tends to get overlooked when it comes to budget allocation; so you could argue that it is a miracle email generates any ROI at all.

    If you believe as I do that email is and will probably always be the most cost effective way of getting a given offer to any given individual or individuals then it is imperative that you maximize this golden opportunity.
    Email should be the primary means by which someone you already know, visits your site, transacts with you or interacts with your brand online.

    We call this The First Law of Email Marketing.

    Until it is you are NOT allocating your scarce resources efficiently across the channels.

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  11. Thank you for your comments, Dela Quist.

    Fortunately, this is a world where folks can have a myriad of opinions, and they can agree to disagree!

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  12. If I may... there are some fairly selfish thoughts being offered in terms of 'channel preservation/growth'. Ok, I respect and understand that but here's what it ends up missing:

    The opportunity to measure, realize and take action on a balanced, holistic approach to marketing that can (if we let it) yield more results than strategies employing dueling marketing tactics.

    Stated bluntly, who cares what channel out-performs the other when the fact is they ALL play off of ("cannibalize" if you like) each other... RELY on each other in many (uh, most?) cases. Does this translate to "stop measuring?" No it translates to "stop navel gazing at separate channels and listening to employees, consultants or vendors who have a stake in any given channel."

    Don Schultz, professor at Northwestern University’s Medill School and president Agora, recently said this at a conference here in Chicago:

    "While promises are made by marketing people, they are fulfilled by the other employees within an organization."

    Marketing is, itself, a group effort (internal strategies)... and, increasingly today, is a business-wide/cross discipline effort. The goals are shared and the behaviors of customers cross multiple tactics (with "discovery" -- aka search -- as the driving force for this).

    Back to marketing. Colleague Jonathan Salem Baskin recent said to me:

    "Customers don't follow orders nor do they run on your schedule. There's no limit to the ways, media, contexts and reasons why... and how they can help make decisions that lead to purchase or abandonment.... Information sharing doesn't end with the work day and isn't limited to the channels chosen by your marketing department."

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  13. Jeff, thanks for your comments --- they provide a good theoretical outline for thinking about marketing in general.

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  14. With pleasure but I take this action on a blog site operated by a guy who not only appreciates and is expert in theory but in PRACTICE. Rubber's gotta meet the road. Thank you, sir, for the work you do (including all the publishing of your knowledge)!

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  15. Hi Kevin
    Thanks

    Nothing like a healthy debate and this looks like it has legs - at least we agree that there is an issue.

    Dela

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