Target ROI Considerations for eCommerce Retailers

How much can you afford to spend on advertising?  eCommerce retailers are usually quick to blurt out their most desired target ROI. All advertising programs are measured against this goal without much additional thought.  When marketing is optimized to this goal, the manager is happy. This in turn keeps the director & executives happy that their advertising goals are being met.

Yet profitability does not equal profit.  A “5 to 1 ROI” looks good on paper, but companies grow based on actual profits, not by simply hitting their target ROI.  Assuming adequate margins, what retailer wouldn’t rather have 500 sales at a 4 to 1 ROI versus 20 sales at a 7 to 1 ROI?

As a general rule, there’s an inverse relationship between the size of the traffic volume potential and the ideal target ROI.  The more targeted traffic available, the more competitors move in to squeeze the expected ROI.

Great advertising will certainly help boost your ROI.  The best strategy, however, involves unlocking all the potential in the marketplace.  You won’t know the volume potential without testing the amount of profit returned from different levels of advertising spend.

Additional ad spend at a lower ROI may well bring you additional profits, but you could instead come away with more customers at slightly less initial profit overall.  For three major reasons, this may be better for your company in the long-run.

1. There is a thing called Customer Lifetime Value
If your marketing budget doesn’t take into account the lifetime value of a customer, then it’s safe to say that your business isn’t optimizing enough for the same.  Of course, you need at least a few months of working capital to pull this off, but paying to win a new customer is a fantastic investment when you KNOW that a healthy percentage of these customers will become repeat buyers.

2. Happy customers tend to multiply themselves
Any good ecommerce retailer will benefit from some level of viral marketing.  Happy customers tell others.  You paid for the initial customer.  The additional customer brought to you through word-of-mouth advertising is a gift.  The more customers you win, the more of these gifts you’ll receive.

3. You want to dominate your market. 
Every customer you win is a customer lost by a competitor.  This drives up their marketing costs and edges them out of the market.  To the victor go the spoils.  Every market seems to be dominated by one or two big dogs.  You want to be THE major player in your market.

If it helps motivate you, you can also think of the converse: Every customer you lose because of an overly conservative target ROI is a customer won by a competitor.