Most marketing ROI calculations are misleading - here’s how you should do it
Understanding ROI is crucial when you’re running a business. That’s why organisations spend so much time and money trying to measure it.
But what about marketing ROI?
While most business leaders recognise the importance of marketing ROI, measuring it can be complicated. For a start, people often confuse marketing ROI with the performance of individual channels or tactics. But they’re two totally different things.
Here’s why many ROI measurements can be misleading, and how to properly calculate marketing ROI for your business.
Why marketing ROI measurements can be misleading
Marketing ROI metrics are often misleading because they’re measuring the wrong thing.
They’re often focused on activity (such as website visits) rather than outcomes (such as new customers). Or only looking at specific details or parts of the process instead of what that process delivers in terms of value for the business.
Numbers can look impressive, but they have to mean something. You need to know the value of the return compared to the investment.
Here are some marketing ROI pitfalls to look out for.
#1 Vanity metrics
Not all metrics are equal. And some metrics that sound great don’t actually tell you much about what’s working and what’s not.
An agency might tell you that you’re getting a great ROI based on the number of people their campaign reached. But this doesn’t bring you any closer to understanding the return on investment.
In fact, metrics like reach and impressions are often cited in the absence of more meaningful metrics like new leads or sales. Be cautious about how much stock you place in them.
Your metrics need to be aligned with your marketing goals, they need to measure the things that can give you real insight - otherwise they can be a smokescreen.
If you want to learn how to make your marketing spend go further, watch our webinar series here.
#2 Not having a complete data set
Beware of incomplete data. A consultant may give you an ROI calculation, but what is that calculation based on - or rather, what have they missed?
Without access to sales data like average lifetime value of an account or customer acquisition cost, you won’t have the data you need to build a proper picture. The data set you use should reflect the outcomes you’re looking for.
Of course this doesn’t necessarily mean your calculation will be wrong, but it may not tell the whole story.
#3 Getting too granular
You don’t need to put every tactic under the microscope to understand ROI. In fact, the integrated, multi-faceted nature of marketing makes this type of granular inspection all but impossible.
You might use telesales, paid search campaigns and radio advertising to generate leads, but unless you know every detail of every customer journey, you won’t know which of those channels was the decisive one.
ROI calculations should focus on outcomes, not tactics. That’s why a holistic view of the results - and whether or not your overall objectives were met - is a much more effective way of measuring marketing ROI.
#4 Only focusing on acquisition
It goes without saying that customer acquisition is an important part of understanding ROI - but it’s not the only one to consider.
There are four core pillars of marketing:
- Define: knowing who your potential customers are, and what your product or service can do for them.
- Find: Identifying ways to target your customers based on their behaviour and habits.
- Win: Devising strategies to close sales and create customers.
- Keep: Monitoring customer churn (loss), and creating appropriate retention activities to keep them.
In order to calculate your marketing ROI, you can’t just look at ‘Find and ‘Win’ - you also need to focus on ‘Define’ and ‘Keep’. To get a true picture of your ROI you should be looking at the entire buyer journey and the marketing spend across all four pillars.
To get a detailed view of how to make your marketing ROI work for your business, read our comprehensive guide here.
#5 Getting caught up on benchmarks
Drawing too many comparisons with others can do more harm than good.
Your ROI might seem poor if you compare it to your competitors but fundamentally, the comparison is moot. Your objectives, your tactics, your spend, your strategy - these will all be different, so how can you compare them with others’?
It’s better to adopt a more inward-looking approach; your ROI benchmarks should be based on your own specific targets, spend and strategy. As Jeff Bezos said: ‘Have an obsession with your customer, not your competitor’
How can you accurately measure ROI?
When it comes to working out your marketing ROI, you can’t measure everything at a molecular level. If you try to - apart from giving yourself a headache - you’ll obscure the picture.
You need to keep things simple. As a starter, here are three key metrics to consider:
- Cost per acquisition - the cost of winning each new customer
- Customer lifetime value - how much the customer is worth once you acquire them. Dividing customer lifetime value by cost per acquisition will give you a simple measure of the overall return on your marketing investment
- Marketing costs as a percentage of sales
The combination of these metrics will give you a broad view of whether or not your marketing campaigns are delivering ROI. Once you know this, you need to go a little deeper and take a look at your pipeline: the quality of the leads and how quickly they’re converting into sales.
If you want to find out how to do this and which metrics to use, our comprehensive guide has all the answers.
What do you do with the findings?
Of course, you’re not measuring your marketing ROI for fun. You want to understand what you should do more of and what hasn’t worked. If you’ve approached your calculations in the right way, you should be able to see areas which tactics or channels you should double down on.
Measuring your marketing ROI properly comes down to clarity. You need to ask the right questions in the right way and know what to do with the answers. It’s about ignoring the distractions and vanity metrics, and instead focusing on finding the tangible outcomes of your marketing strategies.
If you want to make your own marketing dashboard to track your ROI, read our guide here.