If there’s one thing that gets marketers’ eyes rolling at this time of year, it’s the question: “What is the return on that investment?”
A few years ago, this made sense. Marketing was ALL about brand awareness, audience building, and lead generation. The money-making part happened after those leads were tossed over the fence to Sales.
Every investment in marketing was a loss leader.
Today, things look a lot different.
Marketing has its hand in every stage of the buyer’s journey—from its traditional stomping ground of awareness and evaluation, through purchase, implementation, and on to loyalty.
This is great news for marketers. Their stock is on the rise. The CMO has a seat at the top table and the CEO is on speed-dial.
But it comes with additional responsibilities—one of which is demonstrating return on investment.
Let’s explore a few of the thorny issues this creates and how to navigate them smartly.
Calculating return on investment (ROI) for your content marketing activities can be tricky but, as a marketing leader, it is important for a couple of reasons.
First, you must demonstrate to your CEO and other leaders that the investment was worthwhile. This ensures that your content marketing budget is preserved, if not increased, for subsequent years.
Secondly, it’s an important way of benchmarking your content marketing performance against other businesses.
And third, although many organizations have moved beyond the old ways of thinking and working, it helps demonstrate the worthiness of marketing alongside sales, its erstwhile “big brother”.
Simply having an answer to “the ROI question” is often more than half the battle.
It’s powerful when you can trip off “three hundred sixteen percent; why, what’s yours?” instead of squirming awkwardly and making hand-wavy arguments about marketing being an investment in the future of the business.
The calculation itself can be fraught, as we’ll discuss, but need not be terribly precise.
Returns on marketing investments are usually substantial. The 316 percent example might be real, and it wouldn’t matter if a more rigorous calculation revealed the answer should be 290 percent or 340 percent. They’re all large and very attractive numbers.
The key is to understand where your ROI number comes from and be able to explain and defend the underlying assumptions.
I’m sure you’ve heard about marketing attribution and the complexities inherent in assigning value to channels, touchpoints, and messages based on their relative impact on sales.
Attribution is important because it allows you to adjust future investments in favor of channels and tactics that have the greatest impact
Attribution is important because it allows you to adjust future investments in favor of channels and tactics that have the greatest impact.
This might sound straightforward but in practice it requires untangling the individual impacts of a complex mix of digital and traditional tactics, in a world where prospects exhibit stealthy, online behavior and show an ever-increasing appetite for different forms of content.
Attribution models require granular data on the touchpoints that each customer had with the company prior to making their purchase.
This requires advanced analytics that run on every digital platform and channel used by the company, as well as ingesting data from offline campaigns.
If your company makes only a small number of high-value sales, you can perform an attribution analysis on each one, and distribute the value of the sale across the contributing touchpoints.
However, if your company makes large numbers of sales, your starting point is to calculate what an average transaction is worth. This can then be multiplied by the percentage of sales attributed to a particular marketing tactic to generate a weighted value for that tactic.
There is an insane amount of data available to help you—or overwhelm you, so start with the biggest contributors and refine your analysis over time.
If your company isn’t yet equipped with the detailed analytics needed to build a full attribution model, an intermediate solution is to construct a revenue architecture model.
This is a spreadsheet showing where your target annual revenue is expected to come from and can be made as simple or complex as your data and enthusiasm allow.
A simple revenue architecture should account for four main streams:
- Recurring revenue (from sales made in prior periods)
- Renewals and repeat business (from existing customers purchasing again)
- Referrals (sales based on warm introductions that close rapidly and easily)
- New business (the remaining revenue you need to generate from marketing and sales efforts to hit the annual target)
A more complex model might include dozens of dimensions and factors – such as The 12 Dimensions of Revenue Architecture, developed by Revenue Architects.
The nuances of revenue architecture modeling are beyond the scope of this post, so do your homework before choosing this route to avoid implementing data-driven revenue attribution.
Unless you are running a very mature and highly measured marketing operation, I recommend assigning zero ROI to any activity that is designed to fuel future business.
This includes any tactic whose objective is to grow your audience, build brand awareness, ensure client satisfaction, or support recruitment and retention.
This is not to say that those activities are worthless. Far from it. They are critically important to the future growth and operation of your business.
But their value is difficult to measure in financial units, hence I’m describing it as intangible.
It doesn’t make sense to assign them an arbitrary value for the sake of including them in the calculation.
ROI is calculated by dividing value gained by the investment made, so the investment made to create these gains in intangible value should also be excluded from the denominator.
In other words, Tangible ROI = Tangible Value Delivered / Investment Made to Unlock Tangible Value.
Various approaches have been developed for assigning value to your audience, brand, and customer satisfaction
If you are running an advanced marketing operation or simply wish to complicate the analysis, various approaches have been developed for assigning value to your audience, brand, and customer satisfaction.
Audience valuation models place a financial value on the depth and dimensions of the company’s audience—often based on its email database.
These models use historical statistics, such as lead generation and conversion rates, to estimate how effectively the audience can be monetized over time through lead nurturing, product development, andbusiness model improvements.
Brand equity refers to the value premium that a company generates from a product with a recognized name compared to a generic equivalent.
Customers willingly pay a higher price for products sold by companies with positive brand equity—effectively paying a premium to do business with companies they know and trust.
Brand equity can therefore be estimated by multiplying the volume of named goods sold by the price difference between the named product and its generic equivalent (or competitor’s less-known product.)
Customer satisfaction is most easily valued by studying its inverse, customer attrition—also known as churn.
When a customer cancels or fails to renew their purchase, it creates a clear and tangible loss in future value. The effectiveness of tactics that work to enhance customer satisfaction can be measured in terms of reducing customer churn.
In all three cases, it is important to establish a valuation method, calculate a baseline starting value, and then measure incremental value created across the investment period.
While the absolute value will be sensitive to the method chosen, the incremental value should at least be useful for comparing year-over-year performance and for comparing value creation againstexpectations.
The last issue I want to highlight here is how to treat sales at the beginning of a year and marketing spend at the end of a year.
What happens when your team closes a sale within the first few days or weeks of a new accounting period?
You can be almost certain that it was impacted by marketing efforts made during the previous period.
Similarly, marketing efforts taking place during the closing days or weeks of a period will likely not bear fruit until after the period is over.
This is a well-known phenomenon that can lead to some odd results if not recognized and acknowledged.
Poorly constructed ROI calculations can cause marketing teams to artificially skew spending and sales reporting to better align with a reporting period.
My recommendation is to first compare marketing and sales for the last month of the previous accounting period with the same month in the current accounting period.
If the two months look approximately the same—as may be the case for an established or low-growth business—then the effects of the two end months can reasonably be ignored, since they will cancel each other out.
If the two months look very different—for example, if there has been a significant increase in marketing spend or marketing effectiveness during the year, leading to increased sales—then a subjective process ofreallocation must be attempted.
The simplest approach is to exclude any sales made during the early days of the period and any marketing spend made during the last days of the period from your ROI calculations.
If there’s one thing that I want you to take away from this post, it’s this: Marketers must learn to speak in beans.
It’s no use hiding from the financial questions and pretending marketing still doesn’t contribute directly to revenue. Those days are gone.
Anyone in a marketing leadership position needs to plan, deliver, and report their activities with a financial mindset.
This is not to say that all marketing activities should be expected to deliver a positive return.
As we’ve discussed, there are intangible benefits to many marketing tactics for which it’s difficult—and arguably irrelevant—to calculate a financial return.
Begin by establishing some ground rules with your leadership team—particularly your CEO and CFO (or equivalent).
Directly address the difficulties inherent in calculating marketing ROI and agree which elements will and won’t be included in your year-end calculations.
Be sure that you exclude the spend associated with any non-contributing activities from your calculations, otherwise you will artificially diminish the ROI result.
And, be consistent from period to period.
If every time you report ROI it is calculated in a different way, there will be no means of comparing the marketing team’s performance—or the performance of the marketing tactics you choose to implement—from one period to the next.
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