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How Do You Measure Internet Lead ROI?

AutoUSA recently conducted a survey in which we asked Internet department personnel to share some key metrics.

 

In one question, we asked:

How much total gross does your Internet department generate for every $1,000 spent on Internet leads from all sources (SEM, independent and third-party leads, classified site subscriptions, etc.) ?

 

Of the 183 responses, the answers broke down:

3X or less: 33%

4X-6X: 18%

7X-10X or greater: 20%

Don’t Know: 29%

 

These answers reveal there is quite a large disparity between auto dealers’ return on investment (ROI) on Internet spending, as well as a surprisingly large percentage that don’t even know their ROI.  So I wanted to know: what should a dealership target for a reasonable Internet marketing ROI?

 

One of the experts we consulted for measuring this metric was David Kain, President of Kain Automotive. He suggested that 5X ROI was the absolute minimum that a dealership should strive for, and ideally Internet departments should be seeing 7X ROI on their Internet spend.

 

But how do you calculate your ROI? Basically, ROI is what you get for what you spend. Here is a simple formula:

(Gross Profit – Marketing Investment) / Marketing Investment = ROI

This formula represents three steps.

 

1)   Marketing investment should be simple to figure out as it is the total cost of a campaign. For instance, if you spend $1,000 per month on a Pay-Per-Click campaign, $1,000 per month on independent leads and $1,000 per month on a subscription site, then your total marketing spend on Internet leads that month is $3,000. For the sake of simplicity, I’m going to suggest here that the cost of overhead, while included in some ROI measurements, should not be included when figuring out ROI for Internet leads, regardless of source. So in this formula, don’t worry about including labor costs (for staff), web site maintenance costs, etc.

 

2)   Gross profit is the next metric you’ll need to figure (my first GM used to say, “Volume is vanity. Gross is sanity.”). If you can pull the actual grosses on all Internet deals, that’s great. If not, take the number of sales and multiply it by your dealership’s average front and back combined gross profits. So if $3,000 in marketing spend delivers 10 sales at an average of $3000 combined gross, then your total Internet-related gross profit will be $30,000.

 

3)   Next, you need to subtract the initial marketing investment ($3,000) from your gross profit ($30,000) for a total of $27,000.

 

4)   Divide that number by your initial marketing investment ($27,000/$3,000) and in this scenario you end up with 9X ROI, an excellent result.

 

Why is it important to know your ROI? Any time you spend money on anything, whether on Internet leads or a marketing campaign, it is an investment. Like any investment, it should be measured, monitored and compared to other investments so you know where you should be spending your money.

 

Also, knowing the ROI for all your lead sources gives you leverage. How many Internet marketing budgets were slashed in 2009 and 2010? Perhaps some cuts were deserved, but do you know which ones? Cutting back on a lead source that returns a high ROI is only going to hurt the bottom line.

 

Of course, our question focused on the overall Internet marketing spend, not on the ROI of various lead sources. But applying this formula to your separate lead sources is highly recommended and gives a better measurement of success than just closing percentage or other metrics. After all, ROI is what goes to the bottom line.

 

I’d love to hear some feedback: how do you calculate your dealership’s ROI on your Internet leads spend? What do you consider a good ROI? In my next blog, I’m going to give some tips on how to drive your team to improve ROI.

Views: 539

Tags: Internet, auto, leads, manager, marketing, sales

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Comment by Philip Moore on August 24, 2012 at 12:00pm

Part of the problem is laziness - but only part.  There is a recent book by British market researcher Philip Graves called Consumerology that demonstrates the limitations to what surveys can provide.  Survey design can obviously skew the results (JD Power has this problem) but an even bigger limitation is the way the human brain recalls information.  I strongly recommend reading Consumerology for anyone contemplating the use of surveys to drive business decisions like where to spend marketing dollars.  The stakes are too high to rely on such a potentially inaccurate instrument.  Big brands use experimental design and market testing to determine budget allocation for media - you should too.

Comment by Tom Gorham on August 24, 2012 at 11:53am

Keith, I am laughing because what you're saying is so typical.  I have TV as a source option and of course it gets chosen by some clueless salespeople.  I also see "Location" listed for people who are hundreds of miles away.   Call them on it.  Explain the seriousness of losing the "real source" that provides them with an income.

Comment by Keith Sponburgh on August 24, 2012 at 8:05am

ROI as described here is a dangerous measurement.  Partly because some expenses are virtually impossible to link with sales (remarketing, reputation management, etc) but that doesn't mean they don't have an impact.  There is also a human element to consider, chances are your sales team a) doesn't really care, b) thinks all customers just drove by, c) picks random sources if you yell at them about using 'drive by'

 

I recently had some fun with the sales team.  I removed 'Drive by' from the source list and added a variety of completely fake sources.  Great news for our ROI- websites that we don't pay for because they don't exist were responsible for over $50,000 in gross last month!  My ROI is off the charts, I deserve a raise :)

Comment by Philip Moore on August 24, 2012 at 7:56am

I appreciate the KISS principle, however calculating ROI on gross profit will confound the results.  Gross profit calculations without understanding overhead can be "grossly" misleading.  NADA, NIADA, and Northwoods University have all published average daily carrying cost estimates between $25 - $30.  So a unit with a $3000 gross that sells in 30 days really makes you, at best, $2250.  A $3000 gross on a vehicle that sells in 90 days only makes you, at best, $750.  If all you use is gross profit, you could just as easily make the choice that only makes you $750 as the one that makes you $2250.

 

Borrowing from operations research, companies like CarMax look at the metric daily rate of per unit profit (DROPP) to understand how much money actually drops to the bottom line from any process, tool, or initiative you undertake.  It's also not that complicated to calculate.  The key is just getting everything calculated using the same time frame (usually monthly).

 

The first thing you need to know is your inventory turn.  The simple way to calculate this is #of vehicles in stock times number of selling days divided by number of sales over that period.  So if you are looking at a typical month (30 days), you stock 100 cars, and you sold 70 units; the turn calculation is 100*30/70 = 43 day turn. 

 

The second thing you need to know is what was your average profit on those 70 units.  If you averaged $3000 and it took you 43 days, on average, to sell each unit then your DROPP is $3000/43 = $69.76

 

Here is where DROPP gets useful.  You can do split sample testing for anything that you can restrict to a portion of your inventory.  So if you want to know how a different comp structure would impact dealer profitability, you could randomly select half your inventory and put an additional $250 spiff on them.  The key is random selection because if you put the spiff on the dogs, the results are not going to represent what might happen if you spiffed everything.

 

Here's how the test would work.  You randomly select half you inventory for the $250 spiff and announce it to your sales team.  So if you were the dealer above who stocks 100 units and averages 43 day turn, 50 of the vehicles would get the spiff.  Any new vehicles coming into inventory during the test period would be randomly assigned to either the test group (with spiff) or the control group (no spiff).  After 30 days you see how many sales you had in each group and calculate the DROPP.  You might see results like this:

 

Test group: 40 sales, average profit $2750

Control group: 35 sales, average profit $3000

 

Test group DROPP: 50*30/40 = 37.5 day turn; $2750/37.5 = $73.33 DROPP

Control group DROPP: 50*30/35 = 42.9 day turn; $3000/42.9 = $69.93 DROPP

 

So even though the gross profit on the units without the spiff are $250 higher, the DROPP with the spiff indicates the dealership will make $3.40 more per unit per day with the higher commission.  That may not seem like much, but this dealer stocks 100 units and sells cars 350 days a year.  That means this decision is worth $3.40*100*350 = $119,000/yr.  Another way to say that is if the choice had been made looking only at gross profit, the dealer would not have paid the extra spiff which would have cost him $119K.

Comment by Tom Gorham on August 24, 2012 at 7:28am

Brian, I am anxious to see that also.  And Bill, I will be there.  It looks like a great seminar.

Comment by Bill Jenkins on August 24, 2012 at 7:03am

I'll be very interested to see what your research reveals, Brian. Your guidance is always top-notch!

In the meantime dealers should be working to install the methods for multi-channel attribution for leads and sales. Top eCommerce companies live and die by their effectiveness in that, and the same is becoming true for auto dealers.

Chicago-area dealers who are members of CATA can get a jump-start on these important methods by attending a free seminar for dealers on September 18th. Sign up form is here: http://bit.ly/STTjsS

Comment by Brian Pasch on August 24, 2012 at 2:49am

Tom, you are on point and I am working on that type of research myself to help dealers better understand how to allocate their marketing dollars. 

Comment by Tom Gorham on August 23, 2012 at 8:46pm

I like this article because I believe ROI is important BUT as the chart at the left shows, if you are judging by email leads, you are fooling yourself. 

Essentially, as Brian said, consumers are impacted by multi-channel marketing.  They do not follow a linear path to the sale.

Michael is right that it is immeasurable.  But we are moving toward the day when it is measureable. 

AutoTrader is experimenting with tagging customers in an attempt to follow them to a sale according to Chip Perry.  Dataium is following customers backward and forward. 

The day is coming when you will see all of the (online) influences a customer encountered prior to a sale... all of the points of conversion.  The challenge will be how to use that knowledge.

In any event, if you went strictly by the ROI version as stated, you might fire a source that you thought was providing 10 cars a month and find that you lost 30 cars a month.

Comment by Brian Pasch on August 23, 2012 at 5:02pm

Josh

Simple formulas are good for some things but they are no good for attributing the "influence" of car sales.  I have had the opportunity to view enterprise analytics which show consumer shopping behavior on and off the dealership website.  I have seen the influence of paid and organic search, social media, Tier 1 and Tier 2 advertising, etc. and the formula of attributing lead costs and ROI is complex.

It is common for dealers to use Google Analytics traffic to measure the effectiveness of paid search or third party sites like Autotrader.com.  The reality is that the path for conversion is not linear and consumers are impacted by multi-channel marketing more than any single influence.

I'll go on record that before dealers cut Cars.com or Autotrader.com investments, there are MANY MORE investments that should be on the chopping block FIRST.

I have personally validated cases where the dealer would attribute a "lead" to SEO strategies or paid search strategies when in fact the initial influence and traffic to the dealer's website was Autotrader.com or Cars.com 

I have also witnessed how retargeting banners have "re-engaged" a consumer that was touched by both third party classified sites, paid search, and socia media.

So who gets the credit?  Now add the fact that when consumers walk-in to the dealership they can not accurately document the reason why the were influenced to come to the dealership.  

Next year you will start to see a whole new breed of analytics based marketing data that will start to better construct models that define "influence" and attribute the investments in marketing, branding, and online investments more accurately.

In the meantime, an angle to take is the maximize the dealer's digital budget FIRST, and then allocate the remaining funds for newspaper, radio, and cable TV.  Currently, most dealers have this the other way around.

Comment by Michael on August 23, 2012 at 4:44pm

Autotrader.com and Cars.com have the same email submission metrics as sited in my prior post. Dealers/GMs that are dependent on the above entities, especially ATC, are not realizing that exposure is more influential to traffic to the store vs. emails alone. It is 2012 now, not 2001. TY

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