Understanding Direct Revenue, Aggregate Revenue and Revenue Generated Through Word-of-Mouth

There are real problems with some of the assumptions made in many current ROI models. Consider a typical scenario in which a professional services business decides to hold a seminar for the purpose of attracting new clients or customers. For this example, let us say that the total expense for all aspects of the seminar comes to $15,000.

Unfortunately, much to the business’ chagrin, “only” 20 people show up of which three become actual clients. Client A generates revenue of $2,500, Client B’s revenue is $4,000 and Client C represents $3,500 of new revenue. Hence, the total revenue generated by the seminar is $10,000. Utilizing the standard ROI formula {(Revenue – Expense)/Expense}, we would state that the ROI for this effort is negative 50%. If this organization is like many, the result of this effort is then reported to management who determine that the seminar was a “failure,” because the revenue generated did not cover the investment costs.

But would this be correct?

The truth is that we don’t know. And we don’t know because we cannot yet fully realize what the impact of obtaining clients A, B and C really is.

For example, we all understand the role that word-of-mouth plays in the building a service business. So if even one of the clients (Client C) refers another client (D) to the firm, additional revenue is realized. If Client D generates an additional $15,000 in new revenue, the seminar’s ROI is now a positive 67%! What’s more, what originally amounted to just $10,000 in new revenue is now $25,000. Had Client C not attended the seminar, Client D would have never entered the fold. Taken even a step further, it’s certainly within the realm of possibility that Client D now refers yet another new client.. That revenue must, in some way also be credited to the investment the business made in the seminar.

Most ROI models and calculations take none of this into account. This is because they are only measuring the direct return on the marketing investment – that revenue that can be directly attributed to the seminar. What they fail to measure is the word-of-mouth revenue that was also generated as a result of the seminar. Over time, this revenue may actually far exceed that which was garnered directly.

The fact that there are two types of revenue (Direct and Word-of-Mouth) leads to a third – Aggregate Revenue or the total of both direct and word-of-mouth revenue. This is the full result of the marketing effort and reflects both the effectiveness of the original marketing initiative as well as the perceived quality of the work performed.

These are powerful metrics that offer enormous insight into how each service entity might improve the ways in which it goes about business generation at the organization, department/practice group and even individual levels.