Response Rate vs. ROI: Which Marketing Metric Is More Important?
By: Melissa Cober ~
Determining the success of a marketing campaign without solid numbers to analyze is like throwing darts in the dark; you may have a vague idea of where to throw, but it’s still a toss-up as to whether or not you’ll actually hit your target. If you are conducting marketing campaigns without measuring that campaign’s metrics, you are missing out on valuable insights that will tell you how to move forward with your future marketing efforts. Today, we will explore two metrics that are commonly misunderstood: Response rate and return on investment (ROI). Let’s take a look at why they matter, and how you can calculate them.
Response rate measures how many people responded to a marketing campaign. You can calculate this by dividing the number of responses by the total number of possible responses. For example, let’s say your company has conducted a direct mail campaign in which you sent 1,000 postcards, and you received 50 responses. Your response rate was 50/1000, or 5%.
Response rate is a very straightforward marketing metric, and because of this, many people like to rely on response rate as a benchmark for marketing success. Sometimes you’ll even hear people say that you must hit a certain response rate in order to have achieved success. Unfortunately, this can be a little misleading. An acceptable response rate varies from company to company, and from campaign to campaign.
Why is response rate too simplistic by itself? Because it does not take revenue into account. Many would consider a 5% response rate to be a “successful” marketing campaign; but what if, out of those 50 responses you received, no one actually purchased anything from you? Then your marketing dollars were wasted, regardless of that 5% response rate.
This is where ROI comes in. Rather than measuring the number of responses alone, ROI calculations actually put a dollar value on that marketing campaign, and can subsequently paint a very different picture. ROI, in its most basic form, is calculated by dividing a campaign’s profit (or revenue minus investment) by its investment. So, let’s say that your 1,000 postcard campaign cost you $500, but you only got 3 responses this time. That’s a .3% response rate… Looks pretty dismal, right? But let’s say that out of those 3 responses, 2 made purchases for $400 each. That’s a total of $800, so you actually made a profit of $300. Divide that by $500, and you’ve got a 60% ROI, even with a .3% response rate.
That’s not even taking into account whether or not these new customers will make repeat purchases in the future. They may have much higher lifetime values.
As you can tell, some companies will be able to break even with a much lower response rate than others. Depending on the product, even different marketing campaigns within a single company may require different response rates. This is why response rate alone is not enough to judge whether or not your campaign was successful; many more factors need to be considered. It should be noted, however, that this is a very simplistic ROI formula that is meant to give you a general idea of a marketing campaign’s success, and is best used comparatively.
Now, does this mean you should stop calculating response rate altogether in favor of ROI measurements? Not at all. Response rate still has a lot of insight to offer, especially if it is used to compare campaigns. A significant decrease in response rate from one campaign to the next may mean that people are not responding well to a change in your marketing materials, and this may not always be reflected in your ROI calculations. Using these two marketing metrics side by side is really where you will gain the most insight. So, next time you undertake a direct marketing campaign, don’t let response rate alone dictate your marketing decisions. Calculating both response rate and ROI will give you a much more well-rounded picture of your marketing success.