Victor Ho writes in this Inc. posting that he has discovered “one single metric you need to determine marketing ROI (return on investment).”
Most Fortune 500 marketing VPs look at the revenue to cost ratio: incremental revenue driven by a marketing campaign divided by the cost. It’s a deceptively easy metric, but if you use it properly, I guarantee you’ll be able to make the bold marketing decisions you need to grow your business.
His example: A restaurant that tests a text message campaign:
It cost them six dollars to send the text to a few hundred of their current customers. Four percent of the recipients of the text came to the store and spent a total of $110. The revenue to cost ratio of this campaign was 18x. Was this a good result? Rule of thumb for most companies is that 5x is a decent return, and 10x is a home run. Considering that the restaurant only had to incur incremental costs for the food of about $30, and spent six dollars to get $80 in gross profit, this was a great result. We recommended that this merchant expand the size of loyalty program, and start running bi-weekly campaigns. Implementing these simple tactics and investing less than $600 could increase the restaurant’s revenue by over $10,000 per year.
Of course, I’m sure you will see the limitations in this type of metric for the AEC community, especially if you are designing and building multi-million dollar institutional, commercial and industrial projects, with many variables, decision-making layers, and assorted other complexities in determining profitability.
In most cases, if we try this sort of simple calculation, we’ll be reduced to spending our time focusing on cultivating/maintaining relationships with existing clients and possibly encouraging some referral business.
We need other metrics to figure out our go/no go models, where the cost of pursuit can be measured in the tens or hundreds of thousands of dollars.
Simple metrics are tempting, but let us remember we have a long-cycle, high ticket selling environment.