Measuring Advertising Effectiveness Realistically
Successful retailing pioneer, John Wanamaker, founder of the Wanamaker's department stores in the late 19th century is often attributed with saying that about half of his advertising spending was a waste, but that he didn't know which half was which (Wikipedia). And he was a strong proponent of advertising!
Today, even with all the tools we have at our disposal, measuring advertising effectiveness can still be difficult, especially for small business owners. In fact, it's even more complicated today with rise of the Internet. So some just give up on measuring results and hope whatever advertising they're doing will bring in sales. But that head-in-the-sand attitude can be costing thousands of dollars in wasted advertising.
Worse is that response rates on marketing efforts—even for more trackable efforts such as direct mail and online marketing—can be very small, often in the low single digit percentages, sometimes even a fraction of a percent.
But getting at least a rough idea of what advertising is working can be valuable in both promoting sales and reducing overall marketing costs.
Responses Do Not Equal Sales
Fact: People may respond to an ad, but may never actually buy. So should "response" be measured or "sales?" Realize that a response does not equal a sale. However, it's good to measure both response and sales to help determine how good the company is at converting responses into sales.
How is response measured? Direct response vehicles such as PPC (pay per click) advertising, email marketing, direct mail and promotional codes can assist in tracking advertising response with tactics such as:
- Directing people to specific websites and landing pages
- Analytical tools (such as those in Google Analytics and Google AdWords)
- Counting responses received or sales made using promotional codes
- Special phone numbers, such as 800 numbers
- Direct mail reply cards returned
But if other advertising mediums such as broadcast and newspaper are also used, direct response activities such as those just discussed cannot be given all the credit for making a sale. Why? Because people often need to see an advertising message several times and in several places for them to even remember the ad, much less actually respond or buy. A direct mail piece might be the 35th time the prospect has seen any type of advertising from the company! So which impression actually caused them to think about buying from this company? The 10th or the 35th? That is why measuring advertising effectiveness is so incredibly difficult.
What Numbers are Critical for Measuring Advertising Effectiveness?
One needs to know what numbers are relevant to measure. Then how they are evaluated and compared can either provide insight or create confusion.
An easy trap to fall into is false causation. As noted in the previously referenced article, it could be very easy to attribute results to irrelevant factors. This is particularly tempting when measuring results from social media marketing. Using the business' sales funnel as a guide for relevant numbers to watch can help avoid this.
Though this list is not exhaustive and will vary from business to business, as well as vary from analysis to analysis, metrics such as the following are critical in evaluating advertising results:
- Sales Revenues
- Number of Sales (or Orders) Closed
- Number of Inquiries or Responses Received
- Website Traffic Statistics (number of visitors, number of visitors per traffic source, number of visits to specific landing pages, etc. usually obtained using programs such as Google Analytics)
- Advertising Costs
- Number of Advertising Impressions (this is usually done with more sophisticated surveying and analytic programs)
- Number of Clicks from Internet Advertising
- Number of visits redirected from links created with URL shortening and reporting services such as bit.ly and tiny.url
- Analytics from social media using services such as Hootsuite.com
All of these are for a specific time period such as annually, quarterly, monthly, weekly or even daily for some businesses. Each of these broad metrics can be further filtered by profit and cost centers, by product or service offering, and more.
Some Internet advertising programs, such as Google AdWords, can generate reports offering insight on advertising effectiveness and performance. Check the program's website for available reports and instructions.
How each of these metrics are measured, compared and analyzed will depend on what information is being sought. Example: If a company wants to know the percentage of website visits received from a particular traffic source, they would typically take the number of web visits from the traffic source and divide it by the total number of visits.
A clickthough rate of 1 percent from Internet advertising may be realistic... or optimistic.— Heidi Thorne
What is a Realistic ROI for Advertising?
ROI (return on investment) rates for advertising are all over the percentage spectrum! As well, exact measurements from each advertising effort—as noted in the opening quote—can often be difficult to come by.
A clickthough rate of 1 percent from Internet advertising may be realistic... or optimistic. Direct mail has long had a rule-of-thumb response of around 2 percent, although that varies. And, again, response does not equal sales.
As well, even the best converting websites can have conversion rate of only up to 10 percent (Search Marketing Standard 2013).
An Advertising Effectiveness Case Study
Since I am an online marketer, I definitely want to know how successful my advertising and marketing efforts are.
I had a major difficulty with getting analytics from PPC advertising for one particular site because the ecommerce engine I was using made clickthrough performance measurements almost impossible. So I had to find another way to measure effectiveness.
I chose to measure the percentage of new customers (which would be an indicator of advertising performance) against the PPC advertising investment in dollars. It did appear to produce a decent percentage of new customers and revenues. But the cost was inflating my advertising budget dramatically.
As an experiment, I reduced my PPC investment for this site by 90 percent—yes, 90 percent—to see if it made a noticeable difference. I ran the experiment for one year and then compared results with the year prior.
Here are the pieces of data I obtained from our standard accounting software program for both the current and immediately previous fiscal years:
- Number of new customers gained, obtained from standard accounting software program.
- Sales revenues from new customers only.
- Advertising expenses.
Simple calculations of the percentage of rise or fall from one year to the next were then done, with a comparison to advertising investment. Here's what happened:
- New customers increased by 2.58%
- New customer revenues fell by 12%
- When factoring in cost savings from reduction in advertising costs, the net effect on new customer revenues was a loss of 6% from reducing advertising
Now I had a decision to make. Should I continue with the PPC program or leave it at the reduced level?
On the surface it appears that I should continue with the PPC program because it could have a positive impact on revenues. However, at that time, I was also working on reducing overhead expenses which was a more pressing issue. Additionally, a minor gain in the number of new customers—which can become regular buyers—showed a slight increase, in spite of reduced advertising. This can indicate that shopsite visits might be driven by non-PPC advertising and marketing efforts such as SEO keywords and networking.
So I left it at the reduced level for this profit center for the following year. But at least by doing this exercise, I knew the the impact this kind of advertising could have on my sales picture and could reconsider it in the future. If the only goal was increasing sales at all costs, then I probably would have opted to continue the PPC program.
My decision illustrates some important points:
- Measuring and making decisions about advertising cannot be done in isolation and must be evaluated in light of other business goals and factors.
- Measuring advertising effectiveness sometimes has to be done with limited information. Choosing the best available metrics is critical to getting the best available insight.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
© 2014 Heidi Thorne