Fun With Numbers

As reported in Direct magazine (which I’m sure has no vested interest), the Direct Marketing Association released a report which found that, in 2007, US banks and credit institutions spent $13.4 billion on direct marketing advertising, and [allegedly] generated $178.8 billion in sales on that investment.

My trusty, handy-dandy, Windows XP-supplied calculator tells me that that’s $13.34 in sales for every dollar spent on direct marketing.

Upon seeing this ROI, two questions immediately came to mind:

  1. Is $13.34 in sales per dollar invested good? In other words, without a point of reference — specifically, the ROI on TV, print, or radio advertising — how do we know if $13.34 is good or not?
  2. How do they know what the ROI is in the first place?

Relying on some data collected as part of research I’ve done in the past, I can tell you this: About two-thirds of financial services firms surveyed said that, of their “traditional” budget (i.e., direct mail, TV, radio, print), less than 40% of it went to direct mail.

So here’s my [first] point: Unless the return on spending on TV, radio, print, etc. is greater than $13.34 per dollar spent, then financial services firms are under-investing in direct mail.

[pause]

OK, now that you’ve stopped laughing, have dried the tears from your eyes, and can focus again, let’s turn our attention to my second question.

Also using the same survey data source, I can tell you that when asked what kind of lift they have seen from their cross-channel marketing efforts, one in four financial services firms said that they didn’t know, and an additional 14% said they don’t measure it.

Now I realize this is not an apples-to-apples comparison, since the question was about cross-channel efforts, not just single channel efforts. But what it implies to me is that many financial services are not — or can not — measure the return on their marketing investments.

So here’s my [second] point: How in the world do they know that their direct marketing efforts returned $13.34 in revenue per dollar invested?

The report from DMA follows other reports from other sources that claim that [fill-in-the-blank-with-your-favorite-channel-or-marketing-approach] has the highest ROI on marketing dollar invested.

Unfortunately, all this ROI posturing is useless to marketers. Even if email or social networking had a higher ROI than direct mail, so what? The reality is that you can’t put all your marketing dollars into email or social networking.

Bottom line: What will differentiate the marketing winners from the marketing losers over the next few years will be the ability to figure out how to allocate — and optimize — marketing investments across channels and media.

p.s. I’m currently conducting research into what financial services firms are doing from a customer/marketing analytics, modeling, and measurement perspective. If you’d like to participate in the research (which would involve spending 10-15 minutes to complete a spreadsheet-based survey) please email me at the email address on the About page. You’ll get a copy of the report when it’s done, of course. No FI is too big or small to participate.

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2 thoughts on “Fun With Numbers

  1. Ron – one other point of note – Average ROI is not the way to allocate resources. To determine whether the balance is correct between investments, we need to consider the marginal benefits of each.

    When I’ve done analysis for various companies in the past, I’ve needed to stress this many times – if we analyze on an apples to apples basis then we will naturally see different average ROI’s. What’s most valuable is to look at the marginal benefits of investment strategies. It’s this metric that helps us reallocate resources in a non-linear world.

    If we only ever looked at averages, we’d find that all investments would logically flow to the area with the highest average ROI. As you correctly state, this ignores the scale that can be achieved through different channels.

  2. Ron, A round of applause for exposing this to the world (well, our world anyway!). You know the old saying, Liars Figure and Figures Lie. Seems to fit here.

    I totally agree with you. It’s all about how you allocate marketing spend across channels — and it depends upon the business that you are in. Practically every Direct Marketing alert that I’ve read lately quotes some channel as being the best new one with the highest ROI — more than any other channel ever before. I just read another article saying that Mobile Marketing is now the channel to “watch” as IT will be the channel that results in the highest ROI of any direct marketing channel. While I definitely believe in the value of all of the marketing channels that we have available to us today, I really believe that the key is to look at what you sell, then scientifically derive which channels are going to be most responsive for your business. One business’s email marketing ROI does not equate to the same ROI for another business.

    Another excellent post!

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