There’s a wonderful ambiguity to marketing. It’s creative, ever changing, and no matter how many books are written on the subject, there really is no formula. Best practices exist, but there’s always something that comes and changes the game.
Figuring ROI; now that isn’t exactly creative. It’s a simple formula: ROI = (R – C)/C : where R is your income return from the marketing effort and C is your marketing cost. Hasn’t changed since the first person tried to figure out which 50% of their marketing wasn’t working. But while the cost is easily figured, trying to accurately track the income is a little difficult sometimes.
Before digital marketing, the classic question to ask a customer when money changed hands was “and where did you hear about us?” Of course, the response was always their last interaction with the brand – the yellow page listing that they looked up to call, the outdoor board they drove past and suddenly decided to get off the highway, the trade show booth they stopped at that weekend. But that assumes that there is no value in a brand, nothing causing them to pass three other companies in the phone book for yours, to choose that exit instead driving on to the next one, or causing them to come to your trade show booth in the first place.
Redefining Return as Results
We’ve always talked about “return” because it’s what accounting wants. They want to know that money out means more money in. And rightfully so, we all like our paycheck. If we start to look at “return” as simply “results” of investment, we can start to define if a marketing campaign worked a bit better.
This isn’t some way to skirt out of generating a return from marketing. We stand by our premise that we grow customers for a living. This is about finding the formula before the formula.
Five Ways to Measure Marketing ROI
- Top of the funnel leads
You can’t make sales unless you have leads. Inbound marketing, the idea of having customers come to you instead of you going to the customer, builds itself on the need for a large group of top funnel leads in your system at all times. Once in the funnel, marketing strategies such as marketing automation and content marketing slowly convert these leads to customers.
While top funnel leads do not have a direct return today, they are a definite result. We can even form a formula to figure out the return of that lead from the initial marketing cost.
To update the ROI formula for top funnel leads, we need to know a few additional elements. Namely, the total number of top funnel leads generated (G); the percentage of top funnel leads that convert to become a customer (F); the cost of the conversion marketing (D); and the value of the customer once they convert (L). We can then update the ROI formula to be:
ROI = ((G * F * L) – ((G * D) + C)) / ((G * D) + C)
In this we can project the total ROI from a top funnel marketing campaign by figuring the total cost of the initial campaign and conversion marketing ((G * D) + C)) and the potential value of the customers that will convert (G * F * L).
- Email subscribers
One thing that you may notice is missing from this list of ROI values is any value placed on social media subscribers. Then why include email subscribers? While there is no direct formula to calculate here, we believe that an email subscriber is worth a much higher dollar value than almost any other return that isn’t a direct sale.
Why place so much value on an email subscriber? To start, email is incredibly trackable. Knowing which customers are opening and interacting with email content is easily gained and the data transferred to other marketing media. Secondly, email delivers an ability to deliver continual, intelligent, and informative content to a potential customer in a way that social media does not. With social media algorithms continually changing and restricting the ability for a brand to deliver this consistent content to a potential customer, email gains even more value.
The promise of regular informative emails, or special offers and announcements, can be used to gain top funnel leads. As your email lists grow to include more people that are interested in your product or service – but just not interested to buy right now – you’ll find that this is a low cost avenue to start generating long term revenue.
- Employee retention
It’s estimated that replacing an employee costs somewhere between 1½ to 2x their annual salary. And as anyone who handles HR will tell you, the ancillary costs that aren’t as measurable mount even higher. While many companies do not think about marketing internally, it is an important campaign to consider.
Employees may not be a direct sales channel for your company, but increasing their retention rate can make a large impact on the bottom line. In that case, we can update the ROI formula very easily where the return (R) simply becomes the cost of recruitment.
ROI = (R – C) / C
- Lower acquisition costs
Advertising people love trying new things. New media, new creative angles, new print techniques. The expectation of new is always that it will generate a lot higher return than the previous effort. Sometimes it does, and sometimes it doesn’t.
When it doesn’t generate a higher return, there’s a chance that all is not lost. Often times we ignore that the costs of a certain campaign is simply lower than the execution that it replaced, making our ROI instantly higher.
For example, the cost of email is significantly less than postage for direct mail. Even if both only returned $10,000 in sales, the ROI percentage on email may see a 100% or higher increase just from reduced costs. Paying attention to the ROI formula instead of just the top line sales number makes a difference.
- Customer retention
This whole time we’ve been trying to calculate the return on customer acquisition. That magical C in our formula. But what if we didn’t need to acquire a whole new round of customers each time we went searching for revenue?
Customer acquisition costs a lot of money. You have to find your customer, qualify your customer, convince your customer, overcome objections, and finally close the sale. It’s a lot of work. But your current customers already know you, they’re qualified, they don’t have as many objections. You don’t have to acquire them each time you want to make a sale, you just have to give them a reason to stay.
When was the last time you focused a marketing campaign towards your current customers? Including their addresses in the last mailing campaign to thousands of new customers doesn’t count. We’re talking about talking to them directly, offering them an inside look at your company that new customers can’t see.
Your current customers come from a different outlook on your business. The way that you speak to them changes. It’s more familial, with an insider’s knowledge. They’re also your best brand advocates and the walls that you have to overcome to sell to them are a lot lower. This not only decreases your potential costs (C) but also increases the chances for revenue (R).
When Not to Measure ROI
Remember that advertising is a wonderfully creative, changing and inexact science. And that means that sometimes, not everything needs to be broken down into a formula, but into a spreadsheet, measured, and tweaked. There are times when you just don’t need to measure ROI.
When are some of those times? It’s the times that you’ve probably struggled with already. When building a brand, what’s the value of delighting a customer? What’s the value in learning if a new execution works or not? There must be, or companies wouldn’t try to gain first mover advantage, to do things like the Fiesta Movement or Subservient Chicken. They would have just run another TV spot, another magazine ad.
The Easiest Measurement
If you’re not currently measuring any ROI on marketing, where is the easiest place to start? Digital marketing. If you’re not looking for a complicated formula with some light algebra thrown in, digital makes it incredibly easy.
Google Analytics will track conversion goals on forms for leads and sales with a simple setup. Making sure that all of your digital campaigns, from inbound links to Facebook ads, are all tagged with a Google UTM code will separate out your digital marketing efforts in Analytics. You can then easily tell which media, which campaigns, or even down to which individual AdWords are converting for you.
While calculating ROI sometimes is a complicated job, it doesn’t have to start there. Start small and begin increasing the effectiveness of your marketing budget.