Who Comes Up With This ROI Stuff, Anyway?

Before using Return On Investment as your sole indicator of a strong campaign, you might want to ask a simple question: How did you get your ROI goal to begin with?

Last week, we talked about why ROI isn’t the be-all-and-end-all of Search Engine Marketing metrics. While getting good ROI is crucial, using it as your exclusive focus is limiting. Even if you’re raking in money, you might be losing market share – in other words, your competition is gnawing away at your customer base. So you need to focus on ROI and market share together.

This week, we want to talk about a second problem that can come up with ROI targets. That problem is this: your ROI targets themselves might be wrong.

Any number of problems could lead to an incorrect ROI target. Just to get the people thinking we’ll list three:

Problem 1: ROI-based on a generic campaign, not on your campaign. Every campaign is different. Two Web sites with the exact same bidding patterns, advertisements and click-through rates can yield drastically different ROI. How come? Because one site has a better landing page strategy than the other. Or one has better shopping cart usability. Or one can use its call center in a different way. Life only begins in the search engines – that’s a fact that all good SEM managers realize. Which means that trying to use generic information – like how much SEM tends to help businesses across a whole industry – won’t necessarily tell you where your target ROI ought to be. Your business is unique; your ROI goals should be, also.

Problem 2: Seeing ROI, ignoring volume. Let’s say you want to hit a certain ROI. You’ve worked out that, to reach that target, you need to spend $5 per conversion-which (also based on your calculations) will bring you about 10,000 conversions. But maybe you’ve only looked at the worth of each individual transaction, ignoring the broader picture. Adding an extra $5 per conversion (upping the price to $10) might bring in less ROI on each conversion, but might more than make up for itself in net gain. Maybe doubling your spend will triple your volume – bringing in 30,000 conversions, rather than 20,000. If you’re not thinking in net profit terms, your ROI targets might really be selling your business short.

Problem 3: Who comes up with this stuff? If the answer to “Who came up with my ROI targets” is you, then the follow-up question might be a bit painful. The follow-up question is this: Does that person understand SEM well enough to decide a target ROI? Think about it: SEM is entirely different from any other kind of advertising arena. Unlike TV, print, radio, or even online banner advertising, search is a space in which consumers solicit information about products and services like yours – rather than receiving it uninvited. That difference alone sends a lot of the conventional marketing wisdom out the window when it comes to SEM. That difference, and a whole of other ones, means that even highly qualified, brilliantly savvy marketing managers might not understand the potential of an SEM. That means they won’t be able to foresee the true potential ROI.

Why it’s bad news. While marketers are coming up with mistaken ROI targets, they’re also using those mistaken targets as their only yardstick for measuring campaign health. So a lot of marketers who think they’re doing well have, in fact, just underestimated where their ROI target should actually be. We can’t tell you how many marketers have told us, “I’m really satisfied with my SEM management; we’re beating our ROI targets consistently.” It’s a question that forces us to wonder: “Yes, but are your targets selling your business short?”

The answer to that question will depend from campaign to campaign. But for every campaign, it’s a question that serious marketers need to think about.

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