The Power of ROI in Measuring Marketing Effectiveness

I once worked with an electrical contractor who, despite engaging in various marketing efforts, saw a decline in revenues. His marketing firm presented monthly reports filled with new impressions on Facebook and Instagram, regular blog posts, and an influx of phone leads from paid Google ads. However, the bottom line, revenue, was not reflecting the desired upward trend. 

Understanding ROI 

In the realm of marketing, the ultimate goal is to increase revenue. The return on investment (ROI) metric stands out as an invaluable tool to measure the effectiveness of marketing efforts. The modified ROI equation is: 

This equation calculates ROI by considering the difference between revenue and cost, then dividing it by the cost and multiplying by 100%. In the context of marketing, revenue is the money earned, and cost includes all expenses associated with the marketing campaign. 

There are variations in calculating ROI; revenue, gross profit, or net profit can be used as the return, depending on the specific business goals. However, for simplicity, let’s focus on revenue for these examples. The investment encompasses all costs related to the marketing campaign, including agency fees, advertising platform fees (e.g., Google, Facebook, CBS), and even the costs associated with the sales team handling inquiries generated by the campaign. 

Improving ROI  

So, what constitutes a good ROI in marketing? A general guideline suggests a range of 400% to 600%, with anything below 200% considered poor and results exceeding 1000% deemed exceptional. This range depends on the profit margins of the business. High-profit margin businesses can afford lower ROI campaigns, while those with narrower margins need higher returns for the effort to be worthwhile. 

Electrifying Growth: An Electrical Contractor Case Study 

Let’s delve deeper into the story of our electrical contractor and his pursuit of business growth through marketing. He hired a marketing consultancy for about $1500 per month, to increase his revenue. 

The marketing consultancy set forth a plan that included writing two blog posts per month, coordinating digital advertising, and managing Facebook and Google ads. The contractor, like many small business owners, was eager to see results in the form of increased revenue. 

The Challenge with Facebook Ads 

One aspect of the marketing strategy was Facebook advertising. The marketing consultancy invested time and money in creating and running ads on the social media platform. However, despite the effort, the Facebook ads were not generating any inbound leads. This posed a challenge as it became difficult to measure the direct impact of the Facebook spend. 

This situation is not uncommon. Facebook ads, while potentially contributing to branding efforts, can be tricky to track when it comes to immediate lead generation, especially for service work. After all, who is scrolling through Facebook when they happen to need a plumber? The value of impressions and brand visibility might not translate directly into measurable inbound leads, making it challenging to determine the return on investment (ROI) solely based on Facebook ads. 

The World of Google Ads 

Shifting focus to Google ads, specifically utilizing Google’s call-in ads service, the contractor explored the world of pay-per-click (PPC) advertising. This model allows advertisers to pay for their ads based on the number of inbound calls generated. Google provides a special phone number or call link to track the effectiveness of the ads. 

The contractor adopted this approach to attract potential customers actively seeking services. For instance, when someone searched for electrical contractors in the local area, the contractor’s ad would appear, offering a direct link or phone number for the searcher to make contact. 

Measuring the Value of Google Leads 

As the contractor began focusing on Google leads, the initial concern was whether these inbound phone leads were truly valuable. Google provides a list of phone numbers associated with calls generated by the ad. In a specific month, the contractor received 50 calls from the marketing campaign. 

The next step in evaluating the effectiveness of the Google ads involved calculating the conversion rate and the revenue generated per customer. This is where the real challenge begins. 

It’s crucial to avoid the temptation of thinking that the $20 per call is the only cost. The contractor’s marketing agency was also charging $1500 per month to create and manage the ads. However, not all of this effort was dedicated to Google PPC. The contractor estimated that approximately half of the agency’s efforts were directed towards direct PPC advertising, resulting in a cost of $750 per month. 

Additionally, the contractor himself had to answer the phone and provide quotes for the jobs. Like many small businesses, his office manager and quote generator wore many hats. Based on the nature of the job, it was estimated that each job required about $50 worth of office resources. 

The Comprehensive View: Factoring in Costs 

Now, let’s break down the comprehensive costs: 

• Google PPC Cost: $20 per call (50 calls) = $1000 
• Marketing Agency Cost: $750 
• Office Resources Cost: $50 per job (let’s assume 20 jobs) = $1000 

Total Costs: $2750 

With the total costs known, we can now assess the revenue generated from these efforts. For instance, if the contractor closed 10 jobs from the 50 calls and the average revenue per job was $700, the total revenue would be $7000. 

Calculating ROI: A Comprehensive Approach 

Now, let’s apply the modified ROI equation: 

In this scenario, the ROI is approximately 154.55%, indicating a robust return on investment. This means that for every dollar spent on the marketing campaign, the contractor gained about $1.55 in return.   

The Significance of ROI in Marketing 

Based on our rule of thumb of over 200% ROI, this would be an unsuccessful campaign, primarily because the costs from the marketing agency do not appear to be generating enough calls to justify their fees.  From there, we had a productive conversation with the agency on why their marketing efforts were falling short. They offered several solutions including generating more inbound leads and focusing on higher revenue jobs, but if they can’t improve, he will be looking for a new marketing firm.   

Conclusion: The Balancing Act 

This detailed analysis highlights the complexity of measuring marketing effectiveness, especially in the context of PPC advertising. It emphasizes the importance of considering all associated costs to gain a comprehensive view of ROI.  

 The contractor’s journey reflects the balancing act small businesses must perform, juggling various costs and efforts to ensure that marketing expenditures translate into tangible returns. In the next part of this series, we’ll delve into the intricate world of branding and its impact on marketing effectiveness. 

 Next article:  Using the lifetime value of a customer to calculate marketing effectiveness.