What is marketing ROI, and why does it matter?
No profit? No business.
That’s why ROI – Return on Investment – forms the backbone of successful business leadership. Marketing ROI, on the other hand, remains a problem for some.
It’s easy to lose sight of what your marketing spend is actually doing for you. Marketing consultants and agencies often lean on ‘vanity stats’ to justify their work, like Facebook views or being followed by X number of influential individuals on social media.
These things are not the end goal of marketing, however. Instead, what justifies your marketing spend is the measurable impact of marketing activity on your bottom line. You need to know what’s working and what isn’t, and why – or which marketing channels work best to broadcast your business’ message to the customers who matter.
That’s what this guide will help you achieve. By understanding how our proven part-time Marketing Directors define ROI and showing how they measure it, you’ll be able to choose the right metrics to measure in your own business. With these metrics, you can construct a marketing dashboard that tracks your marketing spend and what you’re getting back from it. These insights can be used to directly improve your marketing ROI, and therefore your business performance.
The Marketing Centre definition of marketing ROI
Our definition of marketing ROI starts with the ‘R’ and works back to the ‘I’.
Businesses invest in activity designed to convert interested prospects into paying customers – that’s the return.
Start with the lifetime value of a customer and ask: “how much would I spend to win them?”
A five-year contract with a single client worth £200K a year offers a customer lifetime value of £1m. Spending £100K in the first year to win that client? An acceptable investment that’ll pay off tenfold by the time the contract is done. Spending that much on a one year contract? Not worthwhile. The R isn’t worth the I.
Of course, it can be hard to trace customers back to a single marketing activity. That’s why businesses need a wider-ranging set of measures in the form of a marketing dashboard.
A marketing dashboard asks the questions you’ll need to answer if you want to clearly establish your marketing ROI.
You’ll need to know how many leads it takes to generate one sale; how many contacts it takes to generate one lead; which of your marketing activities are generating how many contacts, and how much all of that costs.
That’s your I: the total sales and marketing expense required to acquire each customer. An effective marketing director will talk about this cost per acquisition (CPA) (we discuss what this is and why it’s so important, later) constantly. It should determine every marketing decision your business makes: it’s the cornerstone of your marketing plan.
Common challenges around marketing ROI
Estimating the full investment. Your marketing spend includes the salaries of all the personnel involved, as well as any out-of-house expertise you’ve brought in, and the cost of the actual materials and operations.
Knowing what ‘good’ marketing looks like. Marketing dashboards can generate massive amounts of data, not all of which is relevant. Impressions mean nothing if people who see your campaign aren’t buying. Printing volumes of brochures and leaflets is meaningless if they’re being thrown away or languishing in storage. Customers, staff or consultants liking a campaign says nothing about its actual effectiveness. What matters is the impact of the marketing investment on the development of a new customer relationship.
The top notch marketing director should have a keen understanding of this process. They should embed all their decisions into an overall marketing strategy: one that works from the baseline of your business’ current positioning, establishes goals, and constructs a strategy that establishes how to get from one to the other. They’ll take the time to get it right, rather than rushing out an exciting plan to dominate the hashtags in two days flat.
First touch or last touch? There are two points of view on what really makes conversions happen.
First touch attribution says it’s the first contact that matters most, since it’s what starts customers and clients on their journey to converting: but it doesn’t register the prospect’s existing awareness of your brand before they make contact with your current campaign.
Last touch attribution says it’s the last channel a lead goes through that matters most, because it’s what pushed the prospect over the proverbial edge: but it’s seldom clear exactly what was going through the prospect’s head before they took that action, and how much of that decision was down to you.
Thinking you can measure everything. Marketing is a cumulative activity. So much of its effectiveness relies on the interplay between elements of your campaign in the minds of prospects. That’s difficult at best to measure directly – even a qualitative survey can only collect what customers think they’re thinking – and it won’t be apparent from raw cost-per-acquisition figures.
Measuring marketing ROI
Marketing is a matter of calculation: it’s about knowing the risks created by marketing activities, insofar as you can, and weighing these against predictable returns. It’s about linking input with output; investment with return.
Among the endless array of metrics available to inform these calculations, five stand out as especially important in establishing your ROI. Two are metrics for marketing activity as a whole: three are metrics to help you retain existing customers and extract maximum value from your initial marketing spend. Combined, these measures offer a full, nuanced view of your marketing ROI, and where it’s falling short.
Marketing as a percentage of sales
Take your total sales income and divide it by the amount you’re spending on marketing. Remember to consider the full costs. If you’re exhibiting at a trade show, count the cost of the stand, but also the labour hours spent building and staffing it. This metric indicates how much of your income you’re reinvesting into marketing, and whether it’s too much.
The sweet spot for B2B marketing is between 4% and 8%. Anything less and you either have a monopoly or you’re missing opportunities. Too much more and you’re probably spending inefficiently, driving up your cost per acquisition with activities that don’t deliver direct results.
For B2C marketing, you may need to spend something more like 15% to launch a new product or service, or 20-25% if you’re starting up a new brand that needs to build recognition. The challenge with such activities, of course, is not knowing the sales figures in advance; estimations based on the previous year can only tell you so much.
Cost per acquisition (CPA)
Take your total marketing budget for a given period of time. Divide it by the number of new customers or clients acquired during the same period. The result is your cost per acquisition: how much you’re spending to secure each prospect’s business. As we said at the start, this is a crucial metric: if it’s costing you £2000 to win a £1,500 client, something’s gone wrong.
It’s possible and recommended to do this for each individual channel, based on last touch attributions, so you can compare the discrete components of your marketing machine.
How often you measure this will vary, depending on the activities involved. A paid Google Adwords campaign may demand daily monitoring; a longer-term one to improve visibility of a core product may be best reviewed quarterly.
However often you measure, you’ll need to respond to your findings. If the CPA for a channel is too high, you need to find another option.
In some cases the margin can be extremely tight: one of the businesses we work with was persuaded to stop advertising in the Sunday Times over a £1 difference in CPA. It was the right choice to make, since their products started in the £20 range, and that extra £1 per conversion soon added up.
With a higher price point, B2B service-providers can afford to target a higher CPA: a CPA of £1500 or more can be worthwhile for clients who shell out five figures for an ongoing contract.
The point is less about cutting cost per acquisition; more about knowing and managing it.
Customer lifetime value (CLV)
This is the revenue you can realistically expect to achieve from a customer, divided by the time you can realistically expect them to be with you. It’s a metric of return – more accurate than looking at individual transactions, because it indicates how much a customer is worth over the long-term, as a result of the whole multi-channel marketing process.
It also helps to assess exactly what customers have bought during this time – one product, or a cross-section of the range? If you know what customers have spent, why they stopped spending, and whether they wanted something you didn’t offer at the time, you can build up customer profiles to improve your marketing. This includes identifying opportunities to add new products or services, or to cross-sell to existing customers.
Churn is another way of expressing ‘customer retention’, focused on the rate at which new customers replace former ones. The basic formula to determine churn rate looks like this:
|Customers at the start of month||1000|
|Existing customers who left by the end of the month||50 (50 / 1000 = 5%)|
|New customers who left||12|
|Total leavers in the month||50+12 = 62|
|Basic churn rate||62 / 1000 = 6.2%|
A zero churn rate is a pipe dream, but yours should stay as close to zero as possible, indicating long term loyalty from your customer and therefore long term ROI. Marketing efforts need to address your existing customers, keeping them on board and extending their CLV. You’ve spent money to get them; spending a little more can help keep them. As a rule of thumb, we recommended B2B businesses aim to spend 30% of their marketing budget on engaging existing customers.
Customer retention cost (CRC)
This is the partner metric to churn. Take the amount you spend on retaining customers, and divide by the number of customers retained. Business leaders often think about marketing in terms of attracting new customers and converting them to sales, overlooking the after-sales activities that form a crucial part of the marketing matrix. Retention saves money - the trick is in balancing your spend on retention with the income from returning customers.
Our proven part-time Marketing Directors find that it costs three times as much to acquire a customer as it does to keep one. Combined with the inevitability of losing customers over time, this means the bulk of your spend should still be targeting new customers, but we advise allocating around a third of your marketing spend to customer retention activities. After-sales service, follow-up contacts and repeat custom incentives aren’t especially expensive activities, and they extend CLV significantly, which ultimately benefits the bottom line.
Your marketing dashboard
What should it look like?
Marketing dashboards can be basic – a monthly report by email – or sophisticated illustrations of performance. However far you go with the concept, your dashboard needs to show your marketing efforts in measurable terms, enabling you to react when things aren’t working as well as they could be.
Your basic marketing dashboard needs to show marketing spend, client wins and client retention. These figures are your fuel gauge and your speedometer: they tell you how well you’re doing, and how much you’re putting in to doing it. Read these figures against each other and you’ll have an idea of how much further you can go. In other words, how sustainable your business is.
Other key metrics – the other dials on the dashboard – will vary depending on what you’re trying to achieve.
If your current campaign is all about lead generation, your dashboard needs to show cost per lead, cost per acquisition and conversion rates – showing how much it costs to create a new customer. (Remember, lead generation is still about making sales in the long run: you need to know how well you’re capitalising on the leads once they’re generated.)
If you’re trying to build your brand, the dashboard needs to include awareness metrics: social media likes and reblogs, web content views and press mentions.
Dashboards for long term marketing efforts generally prioritise cost per lead, cost per acquisition, client retention and average client value. These are the top level benchmarks for a marketing strategy across discrete campaign efforts. The next level down is activity metrics – those indicating customer or client behaviours that reflect how the majority of your business is done. If most of your sales take place over the phone, you’ll be tracking the number of calls made, how many decision-makers were contacted, and how many of those converted.
Finally, dashboards can include pipeline metrics – how many people you have at each stage of your planned customer journey and how long they’ve been there. This is especially useful in a sales-driven environment, where repeated direct marketing is used to secure conversions.
What should you do with it?
Marketing dashboards report on your marketing efforts in terms of cost and results. Your team should be telling you what they’re doing – posting this many articles online, attending these trade fairs, calling these target businesses – but the dashboard tells you how well they’re doing.
This allows you to check up on your all-important ROI, and also informs your marketing strategy for the future. If your dashboard is updated every month, every quarter will see you harvesting enough data to review and revise your marketing, which will keep your strategy agile and responsive to changes in customer or client behaviour.
These regular reviews also give you more granular data that builds up a sense of your business’ cycles, which will help with forecasting customer demand and planning your production, sales or service operations accordingly.
One crucial thing: don’t keep the dashboard to yourself. If the whole business can see the report, the whole business understands how it’s performing, and everyone gains insight into what they’re contributing to that performance. This grounds marketing in terms of the other business operations, meaning other teams know how marketing contributes to their success and what they can expect from the marketing strategy in the medium term.
Using marketing ROI
Once you’re aware of marketing ROI – what it is, how to measure it, and how it fits into your overall marketing strategy – the final stage is to implement that awareness into decision-making.
There are two main points of impact for marketing ROI on strategic decisions, and one key factor to bear in mind.
Once you’ve decided a particular marketing channel is underperforming, you need to identify a new approach that will perform better. A/B testing, sometimes called split testing, is a structured method of perfecting the way you use a particular marketing channel.
A/B testing presents a randomised 50% of your prospects with an altered version of a web page, email message or scripted phone call, and the other half of your prospects with the original version. Compare the marketing dashboard’s results for the variant against the original ‘control’ version, and you’ll know if the changes improve or reduce ROI.
Repeated A/B tests over the short or medium term allow you to optimise particular marketing channels during a campaign, and provide insights into what your customers like to hear and see from you. Those insights then feed directly into medium term planning of the next marketing push: you’ll be more likely to achieve your best possible ROI next time.
A clear grasp of your marketing ROI also helps you set your marketing spend for the next month, quarter or year.
The main thing to remember here is that some channels take longer to show returns than others.
PPC and media advertising pick up fast – if they’re going to pay off, you’ll see them doing so within days of the campaign starting.
Inbound marketing channels, such as white papers and company blogs, won’t look like they’re paying off at first. Content takes time to be indexed by search engines and shared by readers. As a result, it can take up to six months for inbound marketing activity to be truly effective. Many businesses fail to wait this long, killing their campaign before it can achieve success. The old adage is true: one advert is seen; the next is noticed; the third generates interest. Only the fourth provides the winning result.
So, how do you know a channel’s working for you? When you know your customers have seen the material you’re putting out in that channel (that’s what viewing/readership metrics are good for) and been influenced by it (that’s the role of first and last touch metrics). That’ll help you allocate marketing spend, along the lines we’ve outlined already:
- 4-8% of revenue for most B2B purposes
- 10-25% for B2C, depending on the business’ established reputation and whether you’re currently launching a new product
- Around a third of that amount on retaining existing customers
Key point: data isn't everything
Digital marketers often get lost in the details of data, overlooking the factors that quantitative metrics can’t track.
We can measure how many prospects are engaged by each of our channels, and how far along the customer journey each potential conversion is, but we can’t track what causes them to convert. Brand awareness – particularly the influence of thought-leadership, endorsements and reviews from third parties – is invisible to your marketing dashboard.
A properly integrated marketing strategy accounts for this data blindness, recognising that not every factor in a decision to purchase can be measured in terms of what the seller has done. It doesn’t overload itself with irrelevant metrics, and it doesn’t fool itself into thinking metrics can tell its creators everything.
Often, a decision to buy will be the result of a customer engaging with several different brand touchpoints. It’s therefore up to businesses to invest in multiple channels, and not rely on any single activity or approach to generate results – regardless of how scientifically it can be measured.
The bottom line
To make money, you have to spend money. To sell a product or service, you have to market it. Put those truths together and you can see the importance of marketing ROI: it proves that you’re getting your money’s worth from your marketing spend.
Finding your marketing ROI means starting with what you get, in terms of prospective customers or clients successfully converted into actual buyers, and working back to what you give: your marketing budget.
Optimising your business for maximum marketing ROI involves choosing the right metrics for measuring success: we recommend marketing as a percentage of sales, cost per acquisition, customer lifetime value, churn rate and customer retention cost.
You’ll need a marketing dashboard – a system to regularly check these metrics, along with the secondary figures that focus on the particular goals of your current campaign. By reviewing this dashboard you can gain insights into which marketing channels are performing and which are not. These insights enable both short term adjustments to your current marketing efforts, and long term planning of your overall marketing strategy.
You’re ready to start working on that strategy. Take our Marketing 360 healthcheck to establish what’s best for your business; sign up for our newsletter for regular advice from TMC’s expert directors; and download our eBook for deeper strategic insights.