In the past, companies have made huge investments in marketing to drive growth. Despite the value advertising brought to these firms, it has been difficult to measure their impact. The saying coined by John Wanamaker was: “Half the money I spend on advertising is wasted. The problem is, I don’t know which half. ”
Digital marketing tools and further developments have made this puzzle a thing of the past. For modern marketing teams, value and ROI are key indicators of success. Now marketers are responsible for understanding their business implications. Nowadays marketers can track customer behavior online and have an exceptional opportunity to learn about their market position and reputation. This gives us an unparalleled ability to understand how marketing contributes to business bottom line.
Why should you track marketing performance?
It’s no secret that marketing affects 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 in order to improve the health of the company. This means that the investments made in marketing programs are being returned at an increasing rate.
What is Marketing ROI?
Marketing ROI, or return on investment, is the revenue from marketing programs minus the cost of those programs.
Many companies invest heavily in marketing. This includes direct costs such as advertising expenses. This also includes indirect costs such as salaries for marketing teams. Marketing ROI shows that this marketing spend contributed to the company’s revenue. The marketing ROI is given in percent.
The marketing ROI formula is (Total Revenue – Marketing Expenses) / Marketing Expenses.
If you spend $ 20,000 on marketing and your business has $ 100,000 in revenue, your marketing ROI is 400%. In other words, for every dollar invested in marketing, the company made $ 400.
But what if you make a marketing investment and see the value later or over time? For most businesses, calculating marketing ROI is not a straightforward equation. Instead, it is a process of strategic decision making and analysis.
How to calculate the marketing ROI
Measure your marketing spend.
The first step in understanding the return on investment is understanding your investment. Your investment includes ad spend, marketing software, team salaries, and agency fees. Also, consider marketing outside of your traditional team. Does your customer success team use social media to connect with customers? Does your CEO fly across the country to speak at events? These costs are nebulous and need to be estimated, but are still a marketing investment.
Add income to marketing efforts.
For companies that broker a business or two per year, this is easy. You ask your customer how they found out about the company. You can then assign revenue to the marketing channel mentioned.
For many companies, the volume of leads is too large to ask each customer about their journey. In addition, online consumer behavior is very polluted. Many customers wouldn’t even remember the first time they heard about your brand.
With technologies like Insightly, Google Analytics and Looker, customer journeys can be tracked through the marketing funnel. You can find out which ad a customer clicked on, which blog posts they read and how they bought your product. Then you can give the marketing revenue an appropriate “credit” for the revenue generated. The Marketing Evolution team refers to this marketing at the person level or marketing attribution.
How do you assign credit to a customer when they have many marketing touch points? Your team should choose an attribution model. An attribution model is a consistent way of measuring marketing revenue. A common model is first-touch mapping, which credits a customer’s initial interaction with the company. Many companies also use last-touch mapping to assign value to the final pre-purchase interaction.
Whichever mapping method you choose, measure your marketing ROI by knowing which efforts have resulted in revenue. Your team can measure investment by program and calculate the rate of return each program will generate. Depending on your volume and model, you may be able to calculate the ROI more accurately.
How not to measure marketing ROI
Measuring marketing ROI with an attribution model is something new. Most businesses are just starting out with the proper implementation, mapping, and optimization that can be used to calculate marketing ROI.
Here are some of the biggest mistakes made in marketing return on investment.
Don’t undercut the long-term effects by focusing on the short-term value.
Look at this situation. Your team has made unprecedented investments in producing a professional report. You research, write and design a 20-page book that explains trends in your industry. You will publish this report on your website on March 1st. As of March 31, it had only received 25 views and had no leads. If you calculate your marketing ROI for March, you will see a significant loss.
In April, your team added some keywords to the report and distributed the piece to some industry analysts. Your sales team will start using the lead engagement report. It starts to gain traction. You double your web traffic and notice some clues attributed to the piece. Although you released the piece in March, it offers value in April. The value of this report grows with each passing month. Ultimately, revenue dwarfs investment.
Marketing Connections. Online digital marketing efforts live forever and grow in importance over time. What looks like a loss in the short term can be a gain in the long run.
Don’t fall for vanity metrics.
Once you start analyzing your marketing, it can be easy to get excited about the biggest numbers. For example, let’s say you published a short blog post about the best restaurants near your new office. The play generated high web traffic of tourists in the area looking for lunch spots. This high number could tempt you to divert marketing efforts from product posts. Instead, you can increase your traffic by focusing on lifestyle topics. If you cast a wide net, you can keep your fingers crossed that some users actually want to become customers.
But as every teen movie has taught us, popularity isn’t worth it. Key figures such as impressions, web traffic and “likes” worsen your marketing ROI. The exception is that these metrics correlate with sales, e.g. B. If your website is ad supported.
Daniel Hochuli of the Content Marketing Institute sums it up, “Counting vanity metrics as evidence of success is a problem.” Vanity metrics confuse marketing ROI. These are investments that are not linked to returns.
Don’t let “sunk costs” fool you.
In the industry report example, a rookie marketer could post this as a loss. You’ll go ahead and never do an industry report again.
A savvy marketer would likely see a sub-par marketing effort as an opportunity.
You can tweak, improve, and repeat your marketing efforts at any time. They can add value to marketing programs even if they seemed hopeless. By increasing the return over time, you minimize the impact of the investment.
Measure short and long term marketing ROI
Marketing is not a simple input-output and neither is marketing ROI. Marketing teams need to measure both short-term and long-term investments and returns. Here are two schemes for understanding marketing ROI over time:
Short term: Marketing expenses per customer.
If your marketing programs are new you may not have the luxury of demonstrating marketing ROI over time. You want to quickly show the value of your programs. The fastest way to show marketing value is by total marketing spend per customer. This is also known as the total cost of customer acquisition.
This metric takes into account all marketing spend from all customers. Because of this, you can be sure that all of your marketing efforts are considered. Over time, your total marketing spend per customer should decrease. Understanding the total cost of customer acquisition is critical to short and long term marketing planning.
Long term: cohort analysis.
Older organizations have historical data and have the ability to plan for the long term. These teams want to streamline marketing efforts for efficient value. The best way to do this is by cohort analysis.
A cohort of your users are those who have come to your website through the same channel, ad, or content. For example, users assigned to your industry report above are a cohort.
A cohort analysis report tracks a group’s behavior and the income they generate. For the Industry Report cohort, credit your March marketing investment income. You can also use this cohort analysis to evaluate recurring revenue from marketing investments
The cohort analysis requires an investment of time and resources. However, it is crucial for reporting long term marketing profits. By laying these foundations in place, you validate your efforts and investments. In her statement on cohort analysis, Maria Calvello of G2 explains: “Since the process of cohort analysis is to delve deep into groups of people and observe their behavior, this is an ideal way to improve your customer loyalty.”
Marketing ROI is both a simple formula and a long-term analytical process. It is rated both in the short term and in the long term. This can affect an organization immediately or over a period of time. This puzzling nature can make calculating return on investment a daunting task. However, this is a critical step in understanding how marketing contributes to business bottom line.
Cohort Analysis: An Inside Look At Your Customers’ Behavior. Maria Cavello. G2. February 28, 2020.
“Half the money I spend on advertising is wasted. The problem 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. Institute for Content Marketing. February 10, 2020.