[Update 9/21/2016: This post has been so popular on the Fathom blog that we decided to renovate it. Check out the 2016 version of this blog The ROI of (Transformational) Digital Marketing to see how these numbers have changed and what they mean in the context of modern marketing strategies.]
[UPDATE 1/21/2015: This post, originally written several years ago, has been updated twice—including today—in order to remain relevant. It is one of the most popular posts ever published on this blog. I hope you find it helpful. –P.R.]
Before we delve into the nitty-gritty of costs vs. returns and swim in the sea of numbers, let’s start with this premise: Marketing is a necessity. We can all agree here, right? The reason I want to state this upfront is because too often the debate about costs veers into an accounting debate about what numbers are justifying marketing. Don’t get me wrong, I love accountants as much as the next guy (cue shout-out to Fathom accounting staff), but when marketers start talking like accountants, they sometimes lose their grip on reality. And while we should be experimental and innovative, we should always keep our feet firmly grounded in reality as marketers, which sometimes means ignoring the numbers.
Now, on to the numbers …
Contrary to what you might think, public pricing estimates for SEO and inbound marketing are not hard to come by. Outsourced online marketing costs typically fall into a range based on time of a contractual engagement and size of the client and its needs, but can also be linked to individual projects (which are generally broken down into hours and corresponding billable rates, explicitly or implicitly). Data from a December 2011 SEOmoz survey of agencies and consultants across 6 international regions show, for example:
- Hourly rate: $76–$200/hr.
- Project-specific pricing: $1,000–$7,500
- Monthly retainers have a wider distribution than hourly rates/projects
- 2 most common monthly retainer cost ranges: $251-$500/month (13.8%); $2,501-$5,000/month (11.3%)
[Full disclosure: In order to maximize returns for its clients, Fathom operates primarily on long-term contracts renewed annually. Pricing is highly custom—therefore variable—but today’s typical engagement starts at $10K per month. Separate hours-based projects may also be considered on a case-by-case basis. See the full list of services.]
Cost vs. Return
OK, so now you know a little about online marketing costs, but the discussion would be incomplete without putting those costs in a context of return value. To do this, let’s reframe the question as “What (return) does digital marketing give me for the cost?” Does your boss or company execs view digital marketing purely as a cost center (an ‘escalator of costs,’ as the PR 20/20 2014 Marketing Score Report indicates)? If this is the case, as John Twohig aptly notes, you need to preach some Peter Drucker to the skeptics:
“Because its purpose is to create a customer, your business has two purposes and two purposes only: Marketing and innovation. Marketing and innovation make you money, generate sales, produce profit. Everything else is an expense …”
Think your head of sales still won’t buy this? Point her to Fathom’s chief revenue officer, Jeff L. Herrman—a longtime sales guy (and marketing skeptic-turned-evangelist)—who provides an answer from the born-again “cost center” club.
How, exactly, do you know if marketing is, in fact, ‘making you money?’ One big benefit of Internet-based marketing (vs. traditional forms) is that actual audience behavior tends to be easier to track and measure. Case-in-point: Let’s look at one simple example involving video.
Tracking traditional media: Video
In the traditional ad world, you might have a general idea of how many viewers saw your slick (and expensive) 30-second TV commercial during the 11:00 p.m. syndicated X-Files rerun, but knowing how many of those people actually were moved to check out your product/service as a result is a much trickier act.
As a result, the notion of marketing ROI has traditionally been somewhat abstract or simply reduced to a “brand exposure/popularity” model: A publication—TV show, magazine, newspaper, billboard—gets x many viewers of a certain demographic, and the advertiser estimates this exposure is valuable because some percentage of that sizable demographic is receptive to and will theoretically be influenced by the ad. Or, you simply know that your competitors are advertising in those places, so you do it to ‘keep up with the Joneses’ (er, Johnson & Johnson’s).
Of course, in most cases (without doing extensive surveys, which bring their own associated problems of self-reporting and other biases/unreliability), you never even have a general idea of how effective the advertising really is, but its necessity is an assumption you’re willing to live with because good ROI numbers tend to be hard to come by and companies have budgets for this sort of thing regardless. This line of thinking doesn’t evaluate the intrinsic value in a particular channel or the power of integrating multiple channels (both traditional and digital), leaving open the question of the actual business value (i.e., profitable revenue) of any marketing activity.
Tracking Internet media: Video
Fast-forward to today’s marketing landscape. Revisit the X-Files commercial and contrast it with an Internet video. After quickly self-publishing on your website and/or other video channels (bypassing the cost of network airtime), you can find out not only how many watched, but how long they watched and what they did immediately after watching (leave, repeat playback, explore your website, subscribe to your email newsletter …). You can then use this knowledge gleaned from the data to refine the campaign and other marketing campaigns for better results, i.e., greater ROI.
Aside from the direct impact on awareness and/or potential sales & new customers from any one kind of marketing channel—e.g. your site’s video collection or external portal profile—there is additional value in capturing data from one platform and being able to apply it to your inbound marketing across platforms. Imagine you learn over time that people who watch your product demo videos on YouTube are twice as likely to go on to buy the products as those who don’t. You can apply this insight to your future email marketing campaigns or paid search ads, making sure that when readers click thru an associated original message, they see the compelling product video on your landing page next to the lead-capture forms.
ROI of Digital
Now the fun part. Most marketing executives don’t know how to measure the ROI of public relations, SEO or social media, 3 big components of digital marketing. Are you one of them? What do you do?
Well, you could do a search for “online marketing roi calculator,” and you’ll get a bunch of tools of varying quality, many of which are exclusive to specific channels (e.g. paid search, email). Most are tied to a specific marketing agency and some explicitly predict ROI based on your usage of a given company’s services (or ask you to fill out a lot of information). If you’re not interested in searching for the right calculator or crunching a bunch of numbers, read on to save time.
Average ROI by channel
First, we need to understand that breaking down ROI by channel will not accurately reflect what your marketing is doing as a whole and how different channels support each other in service of a broader objective. To get a much greater understanding of why you want to look at cohesive smart media plans with each channel or sub-channel playing specific roles (and measure different effects based on those roles), read ROI Research‘s Scott Haiges and Maura Lewis on “The ROI of Digital Marketing” (PDF).
That being said, what is the average ROI for different arms of digital marketing?
For SEO, you can look at Rand Fishkin’s approach to weeding out non-performing projects or Chris Boggs’ 3 models of ROI for SEO. For this and other marketing channels, you may favor comparing the success of your own campaigns to industry benchmarks, e.g. $22 average ROI for “search” (via the DMA 2011 “Power of Direct” report, still the most current edition I could find as of Jan. 2014).
Other 2011 benchmarks include (results rounded to nearest dollar, via Direct Marketing Association):
- Email: $41
- Search: $22
- Internet display advertising: $20
- Social networking: $13
- Mobile: $11 (Big winner for growth: >50% annually)
- Catalogs: $7
Go beyond the average
Keep in mind that just like they’d tell you in a Rogaine commercial, individual results may vary. Ultimately, all of the previous ROI numbers are averages and as such, should only be starting points in calculating the relative value of each of your own sets of marketing activities. The true ROI of individual campaigns is going to depend significantly on several factors, including:
- Quality and general competitiveness of the service/product/brand being marketed.
- Maturity and competitiveness of the individual company’s industry.
- Competence of the staff/agency responsible for marketing.
- Merits of individual campaign(s) (sometimes a function of the previous factor).
- Capacity to accurately track conversions and sync sales and marketing via marketing automation/CRM systems.
Finally, you need to find what Bob Heyman of MarketingSherpa calls your “digital watchdog” to deal with the problems of intra-agency measurement. He helpfully points out 4 big problems in such measurement (skill set, bias, silos and standardization), noting that it’s “just too important to leave to the wolves.” A big theme is that marketing agencies tend to be focused on creativity and not on results in anything other than name. These agencies need to be introduced to the concept of revenue marketing (stay with me, I don’t use buzzwords lightly) and held to high standards of data collection and reporting. Highlighting the ROI Research point made earlier about looking at the entirety of a marketing plan, Heyman emphasizes:
“As long as you allow each channel to measure itself its own way, you can’t expect anyone to make sense of the whole picture.”
Standardization of reporting allows a deeper understanding of high-ROI activities vs. low-ROI ones.
ROI for tomorrow
It should now be clear that measuring digital marketing costs in terms of ROI is not always simple or to be taken lightly. To the contrary, you need to have a solid understanding of it in order to a.) get the required budget to produce the revenue your company needs; b.) ensure you’re not throwing money away on the latest trend; and c.) avoid throwing money away, period.