Return on Investment
(ROI) is a widely used performance metric for pay-per-click (PPC)
and online advertising. Below, we outline correct use of this metric
in advertising decisions and introduce Value at Risk (VaR) as a
complementary performance risk measure.
Pre-launch Analyses
Before launching an advertising campaign, its financial
viability needs to be ascertained. The standard tools used are borrowed
from capital budgeting, namely net present value (NPV), internal
rate of return (IRR), and the “quick and dirty” payback period.
Thus, ROI is not part of the arsenal of tools at this stage of analyses.
To analyze the risk associated
with a campaign, you can perform NPV simulations and sensitivity
analysis. On the other hand, VaR, which measures the probability
of losing at least a pre-specified amount of your marking budget,
can be an instructive risk analysis tool. VaR can be used as an approximation of the "maximum
reasonable loss" over a chosen time horizon. Unlike sensitivity,
which measures change in value due to a change in an input factor
(click rates, number of clicks on ads, etc.), VaR concentrates on
the worst-case loss.
Dos and Don’ts of ROI
ROI can be used to test the effectiveness of a new
marketing campaign. ROI’s main strength is providing real-time quantifiable
feedback. To insure the measurement of total effectiveness of a
campaign such results need to be adjusted for repeat customers and
purchases of complementary items. Smart marketers implicitly or
explicitly incorporate such an adjustment into their actual real-time
data feedback. If actual ROI ends up being less than a pre-specified
cut-off level, the marketer should not necessarily abandon the campaign,
but needs to analyze and learn form the results.
Another role for ROI is performance monitoring
and refinements to ensure that the campaign is on target.
ROI should not be used to measure the effectiveness
of a branding campaign. Brands are earned; not bought.
Appropriate Roles for VaR:
VaR can also be used to complement
ROI in monitoring campaign risk and to make appropriate adjustments. |
