Kevin Hillstrom: MineThatData

Exploring How Customers Interact With Advertising, Products, Brands, and Channels, using Multichannel Forensics.

October 30, 2006

Measuring Return on Investment

The good folks at Direct Magazine shared this article about e-mail return on investment. The comments in the article appear to be accurate, if ROI is measured as net sales divided by marketing cost:
  • Catalog drives $7.09 net sales for every marketing dollar spent.
  • E-Mail drives $57.25 net sales for every marketing dollar spent.
  • Online Marketing drives $22.52 net sales for every marketing dollar spent.
While e-mail clearly has the best ROI, the following table below shows it is least powerful in driving sales volume. Because e-mail has almost no cost, any amount of sales generated by e-mail makes e-mail marketing appear to have a great ROI.

ROI Comparison, Catalog, E-Mail and Online Marketing












Catalog E-Mail Online Mktg.





Circulation / Searches
100,000 100,000 225,200
Response / Conversion
5.32% 0.17% 7.50%
Responses
5,318 172 16,890
Average Order Size
$100.00 $100.00 $100.00





Net Sales
$531,750 $17,175 $1,689,000
Gross Margin 50.0% $265,875 $8,588 $844,500
Less Cost
$75,000 $300 $75,000
Less Variable Expense 13.0% $69,128 $2,233 $219,570
Net Profit
$121,748 $6,055 $549,930





ROI per Direct Magazine
$7.09 $57.25 $22.52

Given the return on investment stats in the article, and an assumed cost of $0.003 per delivered e-mail, the same circulation of 100,000 customers results in catalog driving thirty times as much sales volume as e-mail. The same assumptions results in online marketing driving ninety times as much sales volume as e-mail. You can use this template to plug in your data, your assumptions, and see how your story turns out.

I think it is important to see a variety of ways of analyzing data. It is important that you develop a balaned approach to understanding ROI. The Direct Magazine example, and this example, provide two opposite, but appropriate, ways of measuring ROI.

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