Measuring ROI – Lesson 1: Don’t just look at Web Analytics
Return on investment is a sexy KPI right now; everything and everyone claims to provide easy calculations of ROI, value added services that show ROI, and other far-fetched promises. Probably one of the hardest things a web analyst can do is measure ROI — true ROI. We’ve become accustomed to using the term “return on investment” to include subjective value propositions; soft and cuddly marketing statements. True ROI is just not available through analytics tools and web analysts do not have the luxury of full financial disclosure.
Unfortunately, as data-driven decision-making has become more popular, so too has the search for more meaningful business-oriented metrics. You know, stuff that actually means something to say, your CFO — money. Somewhere along the way, we lost sight of the true definition of ROI; people have been bastardizing the term ever since. Let’s look to Wikipedia for a refresher:
Rate of return, or return on investment is the ratio of money gained or lost (whether realized or unrealized) on an investment relative to the amount of money invested.
What’s missing in this definition? Oh right, all those wonderful value-add statements marketers (myself included) use to inspire confidence in products and services. Statements describing potential positive ROI should never include subjective benefits, because that’s not ROI. With respect to web analytics, the same is true.
Regardless of how much data you collect using your web analytics weapon of choice, you’re not seeing the whole financial picture. If I had to wager my salary towards the truth of that statement, I would probably win 99% of the time. Web analysts simply aren’t plugged into each and every profit and loss source within an organization, and frankly we shouldn’t be.
The typical web analyst is a highly detail-oriented individual, that includes figures in context of what is being observed online. So we have to ditch the use of ROI as a KPI and look to more specific calculated metrics that make sense, such as return on ad spend (ROAS), average revenue per order/user (ARPO/ARPU), and maybe just aggregate revenue figures.
Does that mean we should live a sheltered life? Hell no.
There are wonderful departments known as finance, with highly skilled numbers people just like us that have access to a heck of a lot more business information than we do. I encourage you to reach out to these financial gurus and ask a ton of questions. Don’t expect each and every profit and loss center in the company, but if you’re lucky, they might just give you an aggregate ratio to aim for to determine a winning versus losing product, campaign, or change initiative.
January 31st, 2010 at 8:40 am
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February 3rd, 2010 at 12:55 pm
Hi Garry,
How about looking at ROI from a micro versus a macro perspective? I think that in some instances one can indeed use it as a KPI (albeit micro versus macro).
This methodology does not give the whole picture. But in some cases it will placate your client as they may be focussed on one small part of a bigger picture and really need to see the value of one small part of their entire online marketing plan.
Dunno – what do you think?
February 3rd, 2010 at 7:55 am
Hi Garry,
How about looking at ROI from a micro versus a macro perspective? I think that in some instances one can indeed use it as a KPI (albeit micro versus macro).
This methodology does not give the whole picture. But in some cases it will placate your client as they may be focussed on one small part of a bigger picture and really need to see the value of one small part of their entire online marketing plan.
Dunno – what do you think?
February 3rd, 2010 at 4:04 pm
I agree. I think the point I was trying to get at was, if we really want to define and talk about ROI as a metric, let’s be discrete and diligent about it and ensure that we’re talking about what ROI really entails and make it super clear we’re not talking about another metric such as ROAS.
February 3rd, 2010 at 11:04 am
I agree. I think the point I was trying to get at was, if we really want to define and talk about ROI as a metric, let's be discrete and diligent about it and ensure that we're talking about what ROI really entails and make it super clear we're not talking about another metric such as ROAS.
February 3rd, 2010 at 4:07 pm
True – Some people just banty about these terms without really knowing what they are talking about. It drives me nuts. Gotta separate the drivel from the facts.
February 3rd, 2010 at 11:07 am
True – Some people just banty about these terms without really knowing what they are talking about. It drives me nuts. Gotta separate the drivel from the facts.