In my discussions with clients, I use the term “return on investment” a lot. Generally, I use this term to mean what a client gets in return for investing in search engine marketing. The term is widely used as a financial measure. If I give you $1 and then 30 days later you give me $1.50, then my return on investment is 50% (although it would be much more on an annualized basis).
But return on investment is a concept that has much greater significance beyond measuring the performance of financial transactions. Everything you do is an investment (in time, and sometimes money), which results in a return on investment.
For example, what is the return on investment of having a salad and lean meat with vegetables, versus the double cheeseburger with fries? What would your return on investment be for getting up every morning and running for a half-hour? Eventually, it will be having a lean, healthy body. In this scenario, the return on your investment may not be realized for months or years to come, so making the decision requires you to compare the discomfort of short-term sacrifices versus the long-term benefits of improved health. Here’s a suggestion: think long-term. Make the decision today that will maximize your future prosperity.
In the world of advertising, where the concept of return on investment is extremely important, it is often very difficult to measure. If you spend $10 thousand on a Yellow Pages ad, do you really know how much business you are getting from the ad? Maybe, if you have the right controls in place. But can you compare the return on investment from one Yellow Pages ad versus the return on investment from another Yellow Pages ad? Sure, if you have the resources. But beyond the tens of thousands of dollars it would likely cost to run such an experiment, it would take months to generate the necessary data.
Return on investment is one area where search engine marketing, especially paid search, has traditional marketing beat hands down. You can spend a fraction of the money that traditional advertising costs, split-test lots of different ad copy and web page copy, and begin generating data immediately. Forget about taking months to learn anything and make decisions. You can know in a matter of days if something is going to work (depending on the volume of search traffic you have to analyze).
Another factor in choosing to promote your business via search engines is that what you learn can be used to improve the performance of your other marketing. For instance, let’s say you are trying to decide between two different marketing slogans. Split-test paid search ads that use the slogans and see if one outperforms the other. If there is a clear cut winner, then that is a very good indication that that particular slogan is more effective. Thus, your off-line marketing that used the better slogan would likely generate a higher return on investment.
More than just trying to sell you on the idea of using paid search, the main thing I want you to remember is that EVERYTHING has a return on investment. Every single minute you spend awake has a return on investment. If you spend five hours every night watching TV, that has a return on investment (a poor one). If you spend some of that evening time reading books related to your industry, that also has a return on investment (a positive one).
With regard to marketing, sometimes you just don’t know what the return on investment will be. But rather than just signing up for something blindly, THINK ABOUT IT. Try to estimate what your conversion rate might be, and how much you might earn from every sale that results from a particular marketing initiative. Work out several different scenarios to make sure what you’re doing makes sense. Ask yourself, if you spend this much, your conversion rate is X, and your average revenue or profit per conversion is Y, is the marketing going to have a positive ROI? What if X decreases? What if Y is less than you expect? You’re not going to have solid answers because you’re dealing with the unknown, but the process of thinking through your return on investment may shed some light on the situation and help you make better decisions.
Everything has a return on investment. The better you understand the ROI for the decisions you make, the better your decision making will be.