BAMA 513 Article Report

Is the Click Still King? ROI Lags behind in Measurement

 http://totalaccess.emarketer.com.ezproxy.library.ubc.ca/Article.aspx?R=1007679&dsNav=Ntk:basic%7cIs+the+click+still+king%7c1%7c,Rpp:50,Ro:1,N:498

The article that I am reviewing was produced by eMarketer on May 7, 2010 and it addresses the relevance and prevalence of click through rates as metrics of success for online marketing campaigns.

Summary

The data collected by eMarketer showed that 60% of US marketing professionals still leveraged the click through rate as their primary measure of success when evaluating online marketing efforts. This statistic is troubling given the lack of information that the click through rate provides. For example, a click through provides no guarantee of a sale; consequently it is difficult to measure the value to a firm of a high click through rate. The same data indicated that 14.7% of the marketers surveyed, who should be considered more astute professionals, leverage conversion rates as a measure of success. A conversion rate reveals the percentage of consumers who execute a transaction following exposure to an online marketing initiative. This is a more meaningful statistic as it provides an indication of the effectiveness of a marketing effort in driving transactions and top line revenue. As online marketing is often touted as being much easier to measure then traditional forms of media, it is reasonable to expect a much higher degree of precision in the evaluation of campaigns. To this end, it was disappointing to see that only 38.4% of marketers surveyed used ROI as a key measure of online marketing performance.

When asked about their ability to accurately measure the performance of online marketing efforts, nearly half of the respondents (44%) were currently unable to accurately put a value on their interactive spending. The web analytics exist to produce superior data and information on the effectiveness of online marketing campaigns, however meaningful understanding of performance requires a serious commitment of both time and money and must be part of a long-term strategy. Tallying up click throughs is much easier and less expensive in the short-term and consequently is preferred by many firms; the problem is that the resulting information does not provide much insight regarding the long-term value of these marketing efforts.

Why should we care?

Progressive firms who are willing to invest resources in order to better understand the effectiveness of their marketing efforts will ultimately be rewarded by more profitable and effective campaigns. Effective campaigns lead to the acquisition and retention of valuable customers whose repeat business will drive long-term firm profitability. In an economic climate where all budget items are under increasing scrutiny, the ability to measure and rate the return of marketing efforts is extremely important when deciding how to deploy scarce resources.  It should be noted that ROI might not always be an appropriate metric depending on the strategy of the campaign (eg. maybe the immediate goal is just to raise awareness of a new product or service offering). Some marketing efforts should not be evaluated in isolation, as they may just be a single touch point or part of a larger more comprehensive plan. However, all firms marketing efforts should ultimately be part of a strategy to increase profitability in either the short or long-term, and this is why information pertaining to the returns generated by a marketing campaign is extremely valuable.

What should be considered?

Evaluating the effectiveness of a marketing spend by click through rate will ultimately yield the “cost per click”, while leveraging conversion rate will yield a “cost per conversion”. These numbers are viewed by many in the marketing world as reliable measures of online marketing efficiency or success. Although cost per conversion is an improved measure versus cost per click, it still fails to tell the whole story. The dangerous assumption made here is that all customers are created equal, which we know is just not the case. Although this is common knowledge, it is difficult and expensive to properly segment your customer base in order to understand who your valuable customers are and where they are coming from. Failing to understand this consumer information leads to an egalitarian approach to customer acquisition, where all potential customers are considered and consequently treated the same way. A customer’s value to a firm varies widely as a result of several different factors; in addition to differing consumption levels (some customers spend more than others), there is also the revolving door problem (customer retention is a major challenge for firms in competitive industries). Research has shown that firms can expect 10%-30% of their customer base to defect to competitors annually [1]. It is for these reasons that spending more money to acquire a more valuable customer may make sense in the long run for a firm, but given the current metrics of success for online marketing, this is often not taken in to consideration when decisions are made. Evaluating online marketing by a “cost per conversion” measure prioritizes cost savings over the acquisition of more profitable customers. Avinish Kaushaik articulates this concept by saying that,

“Measuring conversion rates is akin to declaring success after a one-night stand. Focusing on real success, not simply the first conversion (the one night stand!), should involve finding the customers that create value for the company, long term” [2].

Understanding the lifetime value of customers and knowing where they are sourced will allow marketing teams to focus their efforts on campaigns and initiatives which will drive firm profitability over the long-term. In order to gain these insights firms must leverage value based consumer segmentation, the more granular the information, the more targeted marketing efforts can be. If firms are able to track the success of advertising, marketing then ceases to be merely a cost-centre with a budget allocated to it. It instead becomes a variable cost of production that results in measurable profits[3]. The web analytics needed to segment and understand consumer behavior in this fashion are the drivers behind many firms’ large-scale CRM software implementations. The value proposition for marketers is obvious. David Hughes, the co-founder of the marketing consultancy The Email Academy sums it up by saying:

A focus on Life Time Value (LTV) will help marketers answer 3 fundamental questions:

1. Did we pay enough to acquire customers from each marketing channel?

2. Did we acquire the best kind of customers?

3. How much should we spend on keeping them sweet with email and social media?

Makes sense to me.