6 Classical Mistakes In Calculating ROI (#4 is The Worst of All)

As the marketing and technology landscape is continuously evolving, getting customers' responses and conversions is no longer a straightforward thing. It is not just about creating clever campaigns and hoping for the best. It takes data-driven decisions and research to ensure long-term success rates.

In such challenging perspectives, some marketers still take shortcuts when looking at their campaign's effectiveness by focusing solely on bottom-line results or their instinctual decisions. But, on the other hand, those who measure digital ad-spend make gross mistakes that make them no different than those who do not keep a sharp eye on such vital signs.

Which of the categories mentioned above do you fall in? Well, I hope none of the above. Because if you are not objectively measuring your campaign results and comparing them to the costs you put in, you will never have an accurate idea of the health of your campaign.

By correctly measuring each tactic's ROI (Return On Investment) in your marketing mix, you can evaluate what is working for you and what needs necessary changes. In this article, I will talk about the classical mistakes in calculating ROI that you must avoid in order to survive in highly dynamic marketing trends.

1. Confusing Other Key Metrics With ROI

Many marketers make the mistake of defining ROI as things other than revenue divided by the cost. As a result, many vital metrics or Key Performance Indicators (KPIs) are often confused with ROI.

For example, Cost Per Deal is a great metric to look at, but it can be misleading if you're using that instead of ROI. The limitation with cost-per-deal is that it does not take into consideration the deal size.

So even though one campaign might have high costs, even above your target threshold, you let this campaign run because it provides bigger deals. This may seem actually working out in your favor, but if you make your decision on such metrics rather than ROI, it may be problematic.

At the end of the day, your focus is the amount of money returned for each dollar spent on marketing efforts on each campaign rather than getting big deals with a small return on the investment.

2. Neglecting Labor / Operational Costs

To most marketers, ROI seems like a simple formula involving net investment gain and cost of investment. So, they calculate Ad placement and retainer expenses and forget to consider the value of their time or that of their employees.

Operational costs such as how much you are paying your employees to manage those campaigns are also a part of the investment cost. Neglecting these parameters easily makes the ROI formula off and gives you a wrong assumption.

3. Neglecting Time Horizon While Comparing Different Campaigns' Performance

It is a mistake to neglect the time frame while comparing the ROIs of different campaigns, but many marketers often do. I know some marketing campaigns are run focusing on brand reputation more than the investment standpoint. But still, you can not neglect the time horizon while comparing the health of the two campaigns.

Let's say you run campaign A by investing $200 and get an ROI of 20% after three months. On the other hand, campaign B has an ROI of 10% with an investment of $350. Which campaign is better in your view?

Apparently, campaign A seems more promising given that its 20% ROI. However, practically, campaign B is better. You can check this by taking the time horizon the same for both campaigns using the multi-year ROI formula.

Multi-Period ROI = (1+r)^t - 1

Where:

t= time horizon (number of periods)

r= return in one period (It can be in years or months)

Using the formula, campaign A will have single period ROI

20%= (1+r)^3 - 1

r= 6.27%

Hence, you can see that campaign A has an ROI of 6.27% in a month while campaign B has an ROI of 10% per month.

Hence, if you compare lions with cheetahs while calculating ROI, do not expect a plausible conclusion. To draw the most accurate conclusions, your data must be homogenous and comparable.

4. Not Considering the Full Sales Cycle

Many campaigns, especially in B2B marketing, take time for their full potential to be realized. A negative ROI at the start doesn't mean you should abandon your campaign altogether. In fact, many strategies have an initial period where the return is not as profitable but gradually ramps up to a more profitable one.

If you try to calculate your ROI too soon, it will undervalue the amount of impact your campaign has made. In B2B buying processes for new prospects, who have come in through different channels like email or cold calls etc., can take many months before closing a deal.

This delay is not always because those people are not interested, but instead, there could be a lot going on internally within their company as well as externally where they need more information from you.

You must understand the impact of the sales cycle while calculating the ROI of your campaigns. This sales cycle helps you figure out the lag between your action (engagement with your ads) and the result (revenue).

Once you generate enough awareness and educate your consumers about your product, the buying frequency might increase. Pick such a time to measure your ROI.

5. Casting Intangible Benefits Out

Your return on investments (ROI) is more than just having new customers from a particular campaign. You also need to bear less tangible factors in mind, including a change in brand awareness or perception, improved search engine ranking, increased online visibility, higher customer engagement, etc.

6. Relying on Single Touch Model

Marketing is a game of inches. So we make sure that our prospects are farther down the buying journey and closer to their final destination with each touchpoint.

Nowadays, people are always looking at different ways of reaching out and connecting with potential customers. Every touchpoint in this multi-step process carries weight.

As in a relay race, where one team member may perform better than the other, the race is considered incomplete if any team members do not run. This is because the fastest player does not run for the whole team, and every member has to play their part. Similarly, no matter how awesome a touchpoint performs in marketing, we can not rely solely on it.

You have to evaluate every touchpoint down the sales funnel and calculate your ROI based on the multi-touch model. So yes, you have to consider all touchpoints at the bottom of the funnel for a successful retargeting campaign and accurate ROI calculation.

Concluding Remarks

Calculating ROI is an essential part of any marketing campaign. If you do it correctly, you can make decisions that will help grow your impact on the business and not waste money by pouring funds into failing or fruitless campaigns.

If you avoid the mistakes mentioned earlier in calculating ROI, your campaigns will have more potential for success than failures. I hope this article helped you in identifying where you are lagging in terms of calculating ROI.

References

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