October 30, 2006

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%
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.

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