September 26, 2007

E-Mail ROI: Again

The e-mail community is on a mission to prove it is "right".

The community continues to use the "ROI" metric as a way to shoot down paid search, portal advertising, shopping comparison sites, affiliates, and catalog marketers.

ROI is typically measured as the "profit dollars obtained in a campaign divided by the marketing cost to execute the campaign".

E-mail depends upon two very important metrics --- one dramatically working in its favor, one dramatically working against e-mail.

After factoring in staffing levels (which may be comparable for online advertising, catalog advertising, e-mail and search marketing), the incremental cost to do e-mail marketing is low --- almost zero.

By default, this yields a ridiculously high and meaningless "ROI" metric --- the metric e-mail advocates use to defend investment in e-mail ROI.

The metric working against e-mail is sales per contact. E-mail is awful at generating sales volume per contact. Catalogs and paid search are great at generating sales volume per contact/click.

The table below illustrates this fact:

Return On Investment: Marketing Tactics

Catalog E-Mail Paid Search

Demand $4,000,000 $400,000 $4,000,000
Net Sales $3,200,000 $320,000 $3,200,000
Gross Margin $1,600,000 $160,000 $1,600,000
Less Adv. Cost $1,000,000 $1,200 $1,000,000
Less Pick/Pack/Ship $384,000 $32,000 $384,000
Variable Operating Profit $216,000 $126,800 $216,000
Profit As A % Of Sales 6.8% 39.6% 6.8%

ROI 21.6% 10566.7% 21.6%

Circulation / Search Clicks 1,500,000 2,000,000 3,000,000
$ per Contact $2.67 $0.20 $1.33
Orders 40,000 4,000 40,000
Cost per Order $25.00 $3.33 $25.00

The dynamics of cataloging and search marketing are very different than the dynamics of e-mail marketing. You never hear e-mail advocates talk about a $0.20 demand per e-mail delivered. Nope. E-mail advocates scan a profit and loss statement like this, pick out the two metrics that look the best (ROI and Cost per Order), and then beat up folks who work on other marketing tactics.

Chief Marketing Officers are pressured to drive sales now --- or they lose their job. It's hard to drive sales at $0.20 per contact, when paid search and cataloging drive so much more volume than e-mail marketing.

Dive in head-first, and do your best to maximize all marketing activities. You should have a great e-mail program, using best practices and targeting strategies and personalization to maximize ROI. It is absolutely worth the effort!

Just listen with a grain of salt when you read the research reports and vendor marketing articles that tell you that e-mail has the best ROI, articles and reports that beat up others to justify investment in e-mail marketing.

Look at the net sales and profit dollars generated by each marketing activity, and let those metrics speak for themselves. E-mail will be able to stand on its own merits.

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