25th May 2011
Jonathan Rodger looks at the relevance of ROI when examining email marketing and the importance of focusing on measuring absolute returns across multiple channels.
According to the Econsultancy Email Marketing Census 2011, the vast majority of responding companies (72%) rate email as 'excellent' or 'good' for return on investment.
It's easy to see why this would be the case, as in a measurement of ROI it is not just revenue and profit that is measured, but the costs are also a key factor.
In calculating the figure for ROI, i.e. (Profit – Investment) / Investment, the result is as much determined by the cost of the investment as the profit it generates. Email marketing is relatively cheap to implement, and as a result its ROI is very high compared to other forms of marketing. Consider the following example.
A company uses both pay-per-click (PPC) and email marketing to generate visits and sales from its website. The PPC cost is an average of £2 per click. It takes 100 clicks on average to generate an order for £500 with a profit margin of £300. So the ROI is (£300 - £200) / £200 = 50%. The conversion rate is 1%.
The email marketing generates one order of £500 with profit of £300 per 5000 subscribers in an average campaign. The conversion rate is therefore much lower at 0.02% but the cost is much lower at £0.001 to deliver each email message. Therefore the ROI is an impressive (£300 - £5) / £5 = 5,900%.
Of course, the above examples don't include additional costs such as creative, campaign management and testing time. These would all have to be factored in to arrive at a realistic figure, but as a means of comparison with other popular forms of digital marketing it goes to show that email marketing represents exceptional value on this basis.
These impressive ROI figures are often cited by email marketing providers, for good reason. However, they are misleading if conducted in a simple comparison like the above examples. When looking at the value of marketing, it's not just the ROI that is an important number, it's the absolute return that has to be considered as well.
The absolute return
Returning to the comparison of PPC, the latter may not have an impressive ROI but it is more scale-able than email. Once you have optimised a PPC campaign to the point of a decent ROI, in theory it can be scaled up as far as the keywords allow. In the above example, if the PPC campaign generates 2,000 clicks per week, the overall return will be £2,000 profit at the end of each week, or roughly £8,000 per month.
With email marketing, where the company is sending campaigns to its own opted-in lists, the total audience is limited to the number of contacts on its list. So, if the company had 20,000 contacts, but it takes on average 5,000 emails to generate a single order, the maximum return is £1,180 profit. If the frequency of the email campaigns is only once per month, the comparison with PPC looks less favourable as it produces much smaller absolute returns.
The scalability, and absolute return from email marketing is obviously increased if the company uses external lists to broadcast to, but that leads to another debate about the effectiveness of marketing to rented and purchased email lists.
However, as is always the case when analysing marketing spend, you can't take too narrow or simplistic a view of any one approach. Taken in isolation, the company's marketing department may consider that for a return of £1,180 per month, excluding creative and other costs, that their email newsletter is not worth bothering with. However, this simple calculation doesn't measure the true impact of email marketing.
Taking a holistic view
The industry is defined by cold metrics such as open rates, clicks and conversions. To measure the true impact of its email marketing, a company would need to have a holistic view of its entire customer database and see how purchasing patterns are indirectly affected by the email campaigns.
For example, the email campaigns may be driving additional sales in the company's retail outlets, or to its call centre. It is the sum of sales in all channels that is key. Measuring this cross-channel effectiveness is tricky for most companies, but the company could do a simple test to measure the overall effectiveness of its email.
This is done by taking a small section of the database, and not sending any email campaigns to it for a few months. Compare this with a similar sized section of the database that is receiving the emails and monitor any differences in business generated across all channels by the two groups.
Linked to this is the incremental value of sales. Incremental sales are ones generated where the customer would not have ordered if the marketing effort that appeared to trigger their purchase had not taken place. How does the company measure whether the sales attributed to any one form of marketing would not have happened anyway? How many of those paid clicks are customers that are just looking for the company's website to go and place their order?
Another factor to consider is that email marketing is more than a regular newsletter or announcement. It also encompasses transactional emails and auto-responders where a sequence of emails can be triggered following actions by the customer, such as a website enquiry or a download. These can be much harder to measure than conventional email campaigns.
For businesses that have a long or complicated sales process, the analysis of ROI becomes harder still.
Measuring the ROI of email marketing is not as simple a process as it may seem. Standard industry metrics can be less useful than they appear, and are geared towards an e-commerce environment with instant sales. The marketer should not be consumed by increasing ROI figures alone, which is relatively simple to do. Instead, they need to focus on the absolute returns including all channels where possible.
Jonathan Rodger is CEO of email marketing service Message Horizon.