Historically, companies would make large investments into marketing to fuel growth. Despite the value advertising brought to these firms, it was challenging to measure its impact. The adage, coined by John Wanamaker was, “half the money I spend on advertising is wasted; the trouble is I don’t know which half.”
Digital marketing tools and advancements have made this conundrum a thing of the past. For modern marketing teams, value and return are key indicators of success. Now, marketers are responsible for understanding their business impact. Today, marketers are able to track online customer behavior and have an extraordinary opportunity to learn about their market position and reputation.This gives us unprecedented ability to understand how marketing contributes to company profit.
Why should you track marketing performance?
It’s no secret that marketing impacts your company’s bottom line, but how? An efficient marketing process drives customers, lowers costs, and shortens the sales cycle. Marketers are responsible for tracking performance to improve the health of the business. This means returning the investment made into marketing programs at a growing rate.
What is marketing ROI?
Marketing ROI, or return on investment, is revenue generated from marketing programs, less the cost of these programs.
Many companies make strong investments into marketing. These include direct costs, like ad spend. They also include indirect costs, like marketing team salaries. Marketing ROI shows that these marketing expenditures contributed to revenue the company generated. Marketing ROI is presented as a percentage.
The marketing ROI formula is (total revenue - marketing expenses) / marketing expenses.
If you spent $20,000 on marketing, and your company generated $100,000 in revenue, your marketing ROI would be 400%. Put another way, for every dollar invested in marketing, the company made 400 dollars.
But, what if you make a marketing investment and you see the value of it later on, or over time? For most companies, calculating marketing ROI is not a simple equation. Instead, it is a process of strategic decision making and analysis.
How to calculate marketing ROI
Measure your marketing spend.
The first step of understanding return on investment is understanding your investment. Your investment includes ad spend, marketing software, team salaries and agency fees. Additionally, consider if you’re spending on marketing outside of your traditional team. Is your customer success team using social media to connect with customers? Is your CEO flying across the country to speak at events? These costs are nebulous and need estimation, but are still marketing investment.
Attribute revenue to marketing efforts.
For companies that broker one or two enterprise deals per year, this is easy. You ask your customer how they heard about the company. Then, you can attribute revenue to the marketing channel they mention.
For many companies, the volume of leads is too great to ask each customer about their journey. Further, online consumer behavior is fraught. Many customers would not even remember how they first learned about your brand.
With technology like Insightly, Google Analytics, and Looker, customer journeys can be tracked through the marketing funnel. You can learn which ad a customer clicked on, which blog posts they read, and how they purchased your product. Then, you can give a marketing effort proper ‘credit’ for the revenue it generated. The team at Marketing Evolution terms this ‘person-level marketing,’ or marketing attribution.
If a customer has many marketing touchpoints, how do you assign credit? Your team should choose an attribution model. An attribution model designates a consistent method of measuring marketing revenue. A common model is first-touch attribution, crediting the initial interaction a customer had with the company. Many companies also use last-touch attribution, ascribing value to the final interaction before purchase.
Whichever attribution method you choose, you measure your marketing ROI by knowing which efforts resulted in revenue. Your team can measure investment by program, and calculate the return that each program generates. Depending on your volume and model, you may be able to calculate ROI with more granularity.
How not to measure marketing ROI
Measuring marketing ROI with an attribution model is somewhat novel. Most firms are just beginning proper implementation, attribution and optimization that allows for calculating marketing ROI.
Here are some of the biggest mistakes made about marketing return on investment.
Don’t undercut long-term impact by focusing on short-term value.
Consider this situation. Your team makes an unprecedented investment into creating a professional report. You research, write and design a 20-page book explaining trends in your industry. You publish this report on your website March 1st. By March 31st, it’s received a paltry 25 views and hasn’t brought in any leads. When you’re calculating your marketing ROI for March, you chalk it up to a major loss.
In April, your team adds a few keywords to the report and distributes the piece to some industry analysts. Your sales team starts to use the report for lead engagement. It starts to gain traction. You double your web traffic, and you start to notice a few leads attributed to the piece. Even though you published the piece in March, it’s providing value in April. In each subsequent month, the value of this report grows. Ultimately, the revenue it brings in dwarfs the investment.
Marketing compounds. Online, digital marketing efforts live forever and gain traction over time. What looks like a loss in the short term has the potential to be a long-term gain.
Don’t fall for vanity metrics.
When you begin analyzing your marketing, it can be easy to get excited by the biggest numbers. For example, say you published a short blog post about the best restaurants near your new office. The piece generated high web traffic from tourists in the area looking for lunch spots. This high number might tempt you to divert marketing efforts away from product posts. Instead, you can increase your traffic by focusing on lifestyle topics. If you’re casting a wide net, you can cross your fingers that some users actually want to become customers.
But, like every teen movie has taught us, popularity isn’t worth it. Metrics like impressions, web traffic, and “likes” worsen your marketing ROI. The exception is if these metrics correlate to revenue, like if your site is ad-supported.
Daniel Hochuli of Content Marketing Institute sums it up, “It’s the act of counting vanity metrics as evidence for success that is a problem.” Vanity metrics muddle marketing ROI. They are investments untethered to returns.
Don’t get tricked by ‘sunk costs.’
In the example of the industry report, a rookie marketer might chalk it up as a loss. They will move on, and never create another industry report again.
A savvy marketer would likely see an underperforming marketing effort as an opportunity.
You can always optimize, improve and iterate on your marketing efforts. You can bring value into marketing programs, even if they seemed hopeless. By growing the return over time, you minimize the impact of the investment.
Measuring short & long-term marketing ROI
Marketing isn’t a simple input-output, and neither is marketing ROI. Marketing teams need to measure both short and long-term investments and returns. Here are two schemas for understanding marketing ROI over time:
Short term: marketing spend per customer.
If your marketing programs are new, you may not have the luxury of proving marketing ROI over time. You are looking to show the value of your programs quickly. The fastest way to show marketing value is total marketing spend per customer. This is also called total customer acquisition cost.
This metric takes into account all marketing spend across all customers. Because of this, you can be sure that all your marketing efforts are being accounted for. Over time, your total marketing spend per customer should decrease. Understanding total customer acquisition cost is crucial for short and long-term marketing planning.
Long-term: cohort analysis.
Mature organizations have historical data, and opportunity to plan for the long term. These teams want to optimize marketing efforts for efficient value. The best way to do this is with cohort analysis.
A cohort of your users are those who come into your website through the same channel, ad, or piece of content. For example, users attributed to your industry report, mentioned above, are a cohort.
A cohort analysis report tracks the behavior of a group, and the revenue they generate. For the ‘industry report’ cohort, you credit their revenue to March’s marketing investment. This cohort analysis also allows you to value recurring revenue by marketing investment
Cohort analysis requires an investment of both time and resources. Yet, it is crucial in reporting on long-term marketing gains. By laying this groundwork, you validate your efforts and investment. In her explanation of cohort analysis, Maria Calvello of G2 explains, “since the process of cohort analysis involves taking a deep-dive into groups of people and observing their behavior, it’s an ideal way to improve your customer retention.”
Marketing ROI is both a simple formula and a long-term analytic process. It is assessed in both the short-term and the long-term. It can impact an organization immediately, or over a period of time. This enigmatic nature can make calculating return on investment a daunting task. Yet, it’s a crucial step in understanding how marketing contributes to the bottom line.
Cohort Analysis: An Insider Look at Your Customer’s Behavior. Maria Cavello. G2. February 28, 2020.
“Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” Gerald Chait. B2B Marketing. March 18, 2015.
The Right and Wrong Ways to Use Vanity Metrics. Daniel Hochuli. Content Marketing Institute. February 10, 2020.