It’s no secret that all of us in marketing are under increasing pressure to show results. Every marketing effort and expense must be quantified and justified. However, sometimes the numbers aren’t what they seem. Higher response rates don’t always mean better results. Conversion rates don’t always tell the whole story. And average order value can be misleading. So how can you make sure your programs receive the credit they are due?
Let’s take two direct marketing campaigns in the same industry, selling the same kind of product or service, both with a target audience of 100,000 people. The first has a response rate of 1.2%, the second a response of 1.5%. The second one is better with the 1.5% response, right?
Not necessarily. Suppose the campaign is two-step. That means the initial responses are just leads that now must go through the sales process.
The 1,200 leads from the first campaign go into a process that converts a third of them to customers, while the 1,500 leads from the second see only a 20% conversion. So the first one produces 400 customers, while the second produces 300. Now the first campaign, the one wit the lower response rate, is in fact better because it delivered more qualified leads. Right?
Maybe not. The 400 customers had an average order value, or AOV, of only $400. But the 300 had an AOV of $600. So it looks like the first mailing generated only $160,000 in revenue (400 x $400), while the second generated $180,000 (300 x $600). Okay, so now we’ve got it. The second campaign is better after all!
Ah, let’s not be too hasty. Because it turns out that those 400 sales in fact encompassed 450 products or about 1.13 products per customer. In fact, it was each product that had an AOV of $400. Meanwhile, the 300 customers from our second campaign indeed represented only 300 sales. So we really got $180,000 from the first mailing after all (450 items x $400). It turns out that both campaigns are the same!
Or are they? Because we haven’t even discussed the profit margin on the products or services sold, downstream purchases, any effects of non-payment on some customers’ part, the impact of referrals, the relative cost of the original campaigns, and so on.
In the end, it’s not a matter of response rate, conversion rate, AOV, or any one metric alone. It’s about the metric that wraps them all together, ROI: what did we earn in profits, for what we spent.
You’ve surely heard the famous remark that only three things matter in real estate: location, location, location. Similarly, in direct response, the three most important metrics are ROI, ROIand ROI. Marketing’s ultimate goal should be to deliver as much revenue as profitably as possible. And that involves managing a host of mathematical interactions that we must manage from start to finish.