Measuring Return on Investment

The good folks at Direct Magazine shared this article about e-mail return on investment. The comments in the article appear to be accurate, if ROI is measured as net sales divided by marketing cost:

• Catalog drives $7.09 net sales for every marketing dollar spent.
• E-Mail drives $57.25 net sales for every marketing dollar spent.
• Online Marketing drives $22.52 net sales for every marketing dollar spent.

While e-mail clearly has the best ROI, the following table below shows it is least powerful in driving sales volume. Because e-mail has almost no cost, any amount of sales generated by e-mail makes e-mail marketing appear to have a great ROI.

ROI Comparison, Catalog, E-Mail and Online Marketing
		Catalog	E-Mail	Online Mktg.
Circulation / Searches		100,000	100,000	225,200
Response / Conversion		5.32%	0.17%	7.50%
Responses		5,318	172	16,890
Average Order Size		$100.00	$100.00	$100.00
Net Sales		$531,750	$17,175	$1,689,000
Gross Margin	50.0%	$265,875	$8,588	$844,500
Less Cost		$75,000	$300	$75,000
Less Variable Expense	13.0%	$69,128	$2,233	$219,570
Net Profit		$121,748	$6,055	$549,930
ROI per Direct Magazine		$7.09	$57.25	$22.52

Given the return on investment stats in the article, and an assumed cost of $0.003 per delivered e-mail, the same circulation of 100,000 customers results in catalog driving thirty times as much sales volume as e-mail. The same assumptions results in online marketing driving ninety times as much sales volume as e-mail. You can use this template to plug in your data, your assumptions, and see how your story turns out.

I think it is important to see a variety of ways of analyzing data. It is important that you develop a balaned approach to understanding ROI. The Direct Magazine example, and this example, provide two opposite, but appropriate, ways of measuring ROI.