How To Define Return On Interactive Investment

Share on

In today's measured and sourced world, if advertisers can't attribute their traffic to you, you're going to get cut off the buy by the local business owner. Advertisers want to know what's working, and will quickly discard the media they don't think are pulling for them.

Three years ago, as we continued to broaden our client base at Luce Performance Group to include radio station websites and standalone, pureplay sites, we developed the ROII (Return on Interactive Investment). We needed a real way to set Internet expectations, and we needed something for traditional advertisers at the local level to give them realistic expectations -- before they advertised on a website -- of how many people would click their ads and how many of those people would eventually come into their business.

The building of the ROII took place over three years. We filtered and test-marketed it for a year in the field on all types of businesses, worked out the kinks, and two years ago put in play the first real way for brick-and-mortar advertisers to calculate those expectations. It's been a great success, for both advertisers and our sales reps. We always try to hit a minimum of a 20 percent ROI threshold, much like the traditional ROI calculator. I will work with some numbers that you might expect in a smaller market, or on a website that is just gaining traffic, rather than from a large national site like an AOL site or CNNnews.com. We'll stay a little more vanilla so it's easier to understand the metrics involve.

The ROII has 13 calculations. It's done electronically so made easy for you to use -- no pencil and paper needed. For our example, we're going to use a sports retailer that sells remote-controlled cars, boats, and helicopters, as well as BB guns and ammo for these guns. It's an all-around store for hobbies and the supplies that keep them going. We're going to take a one-month, at-a-glance look, to keep the figures short and sweet. Of course, you should sell as much long-term business as you can unless your site is new and you expect to increase your rates soon.)

Investment: $1,000
Our number for this client was $1,000 a month for a simple 728 by 90 leaderboard ad with outstanding creative -- creative, as you know or may not know, makes a huge difference.

Minimum Impressions: 150,000
This is something you can take right off your Google Analytics or whatever service you're using to monitor your metrics on your website. Impressions are the total number of page views from visitors. Let's say you have about 30,000 visitors coming to your website monthly, and, on average, they go five pages deep. Five times 30,000 equals 150,000 impressions or page views.
 

Campaign Clickthrough Rate: .05 percent
This is your target campaign clickthrough rate, and it will vary depending on the client, the product, and what kind of creative you are working with. Most campaigns turn a .02 percent to .08 percent click through rate. Yes, that's less than one tenth of 1 percent, so you need a lot of traffic coming to your site.
That's an average range, but in many markets, depending on the call to action from a display ad, I've seen much higher clickthrough rates -- in one campaign, I documented a rate higher than 1 percent.

Expected clickthroughs: 75
The calculator does the math. Based on your impressions and your expected clickthrough rate, you should get at least 75 clicks on this campaign -- real clicks, not fake ones. This is a minimum. Doesn't seem like very much, right? Let's see if the campaign does its job. We have a ways to go.

Conversion/Action Rate: 5 percent.
It's called AR, or, as I like to call it, "TTD" -- through the door. This will vary depending on the type of business and the product; there are different action rates based on categories of business. For a typical retailer such as this hobby store, I would go with the average of about 5 percent. That is, 5 percent of those 75 people who clicked the ad went on to a different splash page, bounce page, or advertisers' website. They did something more than look at the ad -- they took an action.

Expected In-Store Inquiries: 4.5 percent
We then move on to people actually showing up inside the store. Five percent of 75 gives you four in-store inquiries. I call this "ITD," for "in the door." Remember, you have TTD and ITD. Through the door is your expected action rate. In the door is the ultimate end result: people shopping on site inside the store of a traditional storefront, brick-and-mortar-type business.

Client Closing Ratio: 90 percent
At this hobby store, the client says that 90 percent of the people who come in buy something. It's a destination type of business; this is not a drive-by type of store where people find it when they have nothing to do. People go there for the compelling prices and outstanding service.

Initial Average Sale: $100
Incremental average sale: $200
Lifetime value: $300
Total average sale: $600
The client says a new person in his store is worth $600 minimum over a period of the next few years.

Expected Sales Return: $2,400
Roughly four in-store visits from the 75 people who clicked the ad, with a 90 percent closing ratio. Those four sales, each at a $600 value, are worth $2,400 to the store owner or business.

Profit Margin: 50 percent
This is the gross, taking out the cost of the product or anything associated with the cost of selling the product and less fixed expenses. We're not looking for net margin. It's important for you to know the vocabulary of retail.

Expected Net Sales Return: $1,200
The money the store made from that $2,400 after they took out the cost of selling the product or, in this case, the cost of the product and associated costs, from $600 in sales to each new customer.

Return on Interactive Investment: 20 percent
The customer put $1,000 into the campaign for one month, for a leaderboard running on the homepage. At the end of it all, including cost of product, they made an additional $200 off that investment. That's 20 percent.
 

In many cases, advertisers get a lot more than 20 percent on their ROII. We see some in the 300 percent-500 percent range, with those high figures coming from websites that have huge numbers locally and great creative.  Your ROII is your guideline; very rarely have we failed to meet the expectations set out on the ROII. We always try to lowball the numbers so we can deliver more than expected, and we usually do. Use it and help your interactive clients set REASONABLE expectations! You can see ROII on the homepage of luceperformancegroup.com, complete with definitions.

Sean Luce is the Head National Instructor for the Luce Performance Group based out of Houston, Texas. He can be reached at sean@luceperformancegroup.com.