How To Calculate Marketing ROI
Calculating marketing ROI is an exercise in patience and accuracy. The formula to calculate basic, short-term marketing ROI is simple: ROI = (Incremental Profit – Campaign Cost) / Campaign Cost. But marketers know that the formula—while accurate—is far too often misapplied to their efforts.
The formula to calculate basic, short-term marketing ROI is simple: ROI = (Incremental Profit – Campaign Cost) / Campaign Cost. But marketers know that the formula—while accurate—is far too often misapplied to their efforts.
Understanding What You’re Measuring
Before you can use the formula to calculate marketing ROI, you have to understand the parts. And since “campaign cost” is generally an easily defined, fixed value, we have to break down “incremental profit.”
Many marketers shy away from this formula, because “profit” is a complicated word. If the only profits valuable to the company are related to the bottom line, then marketers must have a closed-loop marketing system in order to directly attribute customers to a campaign, first click, last click, and all the happenings in between. And while all marketers want closed-loop marketing, it’s harder to achieve when the rubber meets the road. Rogue has consulted with organizations that struggled to close the loop due to sub-par payment systems, misapplied UTM codes, and even laws regarding healthcare patient data.
If you are struggling to close the loop on marketing reporting, then you may have just found your new goal for the quarter. Without closed-loop reporting, you will never be able to genuinely optimize your campaigns and prove marketing’s value to your organization.
Accounting for the Long-Term Impact
Did you know that 63 percent of marketers can’t quantitatively prove their impact in the short-term and 69 percent can’t prove it in the long-term, according to the CMO Survey? That’s because marketing ROI isn’t as simple as money spent and leads (or customers) gained.
The impact of marketing campaigns outlast the campaigns themselves. These days, many marketing tactics also exist agnostic of campaigns—always-on remarketing, content marketing, search engine optimization, and more. These marketing efforts are undeniably critical, but they are also notoriously difficult to measure. Now when you talk about “profit,” you need to free yourself of a dollar-sign-centric definition and consider the softer—but no less valuable—side of marketing. The marketing ROI needs to be measured in terms of these long-term values:
- Touch points
- Brand awareness
- Customer lifetime value
When marketers rely on first-click or last-click attribution, they assume that there is a single catalyst that causes a purchase. But just as a marketing mix is a critical part of generating leads, lead attribution has to be a story of multiple touch points down the sales funnel rather than a single catalyst.
Each touch point has a certain cost—sometimes counted in the budget, and sometimes counted in personnel hours. By measuring the true process for bringing in customers, you understand both the character of the leads and the efficiencies (or lack thereof) in your process.
When measuring the impact of brand awareness efforts like community outreach, sponsorships, and public relations, make sure that you give them enough time to mature—you may need to wait at least 6 months to begin to show value.
Brand awareness efforts are successful when they generate awareness of your brand; many marketers (or CEOs measuring their marketers’ effectiveness) make the mistake of trying to tie every dollar to revenue. But brand awareness is most accurately measured by site visits, PR impressions, return visits, and an increase in branded search terms. Site visits and PR impressions indicate the number of people receiving a genuine first interaction with your brand; return visits and branded searches indicate your audience’s recognition of your brand and movement toward engagement – which, of course, is what really matters.
Customer Lifetime Value
Conversion or purchase is only the middle of the true lifecycle of a lead. After awareness and engagement comes conversion/purchase; but after conversion/purchase come loyalty and then advocacy. Sales teams recognize that it is cheaper and faster to sell to current customers than to gain a new customer, and marketers deserve the consideration—and budget!—to do the same.
To measure the customer lifetime value (CLV), marketers must have closed-loop marketing and a robust CRM that allows them to track multiple purchases per person. CLV is the metric that keeps on giving: it informs your marketing automation, retargeting campaigns, on-page offers, and lead generation campaigns.
So to get your ROI right, make sure you measure only what matters and avoid the common pitfalls.