How to Measure Marketing ROI

roi of trade shows

No one wants to throw money down the drain, so measuring marketing ROI (return on investment) is an important way to ensure you get value for the money your business spends. It also identifies what’s working and what’s not so you can tweak your marketing to improve performance. This is the first in a series of posts on measuring ROI in marketing.

marketing ROI
Image courtesy of Ten Pound Hammer

ROI – return on investment – comes from financial management. It is used to assess whether a particular investment generates enough revenue to be worth the investment.

Commonly, ROI is used to evaluate decisions where the investment returns a discrete amount of revenue. Examples are:

  • Make vs buy – where a firm evaluates whether it makes more sense (financially) to make their own components or products versus buying them ready-made from a company. Dell owes its initial success to a decision to buy computer components as surplus from manufacturers then install custom selections into a case and ship it to customers who ordered online.
  • Buy a new machine – if a machine makes costs Y and costs Z to operate/ hour, you’d use an equation that looks like this to give you the number of parts you need to sell to cover your desired ROI:

Y + R (desired ROI)

SP (selling price) – Z

  • Hire new production employees — the assumption is that each employee can make X products in Y hours, so hiring more employees results in a finite number of new products.
  • And, many more.

Unlike the uses of ROI shown in the examples above, marketing doesn’t control the cost of producing the product or many other costs associated with the product, such as delivery costs. Hence, instead of marketing ROI, we commonly talk about ROAS (return on advertising spend) as a more reasonable tool for assessing online advertising. However, marketing departments and their agencies didn’t measure ROI (or, more accurately ROAS) but precursors to ROAS, like awareness. Obviously, the more consumers who know your product exists the more opportunity you have to convert them but the correlation between awareness and conversion is not great and varies between campaigns and industries so it’s impossible to provide an average value.

In marketing, measuring ROAS always represented a major problem because you couldn’t readily calculate the additional sales resulting from an advertising campaign. Sure, you could compare sales figures from before running the ads to sales figures during and after the ads ran but you still face the issue that other factors might explain the results that have nothing to do with your advertising. For instance, a holiday might increase demand for your product during the campaign and make your assumptions inaccurate. We’ll discuss this in a later section.

Thus, marketing ROI refers to all marketing activities, not just advertising. For example, a firm incurs costs for content creation, social media, monitoring performance, and many other key aspects of running digital marketing. Marketing ROI and ROAS represent different measures and provide different insights to help you run your marketing more effectively.

Assessing marketing ROI

Most savvy marketing professionals argue that, while marketing ROI is important, it’s equally important to assess factors that contribute to ROI. In the examples above, building a product and then earning money from selling that product (if you discount marketing) is pretty straightforward. You incur costs to build and costs to ship. In marketing, it just isn’t that simple. That’s because conversion is a process that isn’t under the direct control of the marketing department. It involves consumer interactions with the marketing efforts of the business. A conversion looks something like this: 
content marketing plan

The funnel shape comes from the reality that consumers drop off at each stage in the conversion process to that fewer consumers are still in the pipeline at the end to become customers. Of course, this is an oversimplification of the process since consumers don’t move in a steady stream toward conversion. They might drop off and return again at the top of the funnel or, frankly, anywhere along the process. They might skip steps in the process or more through it so quickly that it’s almost as if the step didn’t exist. None of that impacts our discussion.

The conversion funnel concept impacts everything marketers do. Marketers must create strategies for each step in the conversion funnel and try to speed consumers through the process seamlessly.

In recent studies, the top business priority for CMOs is building brand awareness (nearly 40% agree with this) which is the entry in generating sales. In fact, only about 15% of marketers craft marketing campaigns with the goal of generating leads or sales, instead focusing most of the actions on this step. This points to the challenge of effectively measuring marketing ROI, you must assess both intermediate metrics leading to conversion as well as conversion itself. We talk about developing goals and metrics for these intermediate steps and treat them as important, maybe even more important, than conversion since you can’t convert a consumer without first building awareness.

Also, how can you evaluate the value of a marketing campaign to a firm or brand when you have multiple priorities that don’t involve making sales? That’s especially challenging when putting $1 into building brand awareness doesn’t result in a finite return and it doesn’t result in an immediate return. For instance, advertising for a new car (regardless of online or offline) may show results in months or years when a prospect reached needs to buy a new car.

Marketing ROI results from a score of interrelated actions

In the image below, I listed just some of the many marketing tactics necessary to generate revenue. I focus on digital strategies since, as we’ll see later, the ROI of these strategies is much higher than for traditional media and is pushing businesses to spend more of their marketing budgets on digital. Take any one of these tactics, like market research, and drop it from your marketing plan and you likely see a decline in revenue over time. Yet, by itself, the ROI of market research is 0.

digital marketing for small businesses
Data-driven digital marketing

The same is true of customer service. Reduce expenses on customer service and you likely see a decline in revenue over time. I remember a certain big-box electronics firm that thought they might increase ROI by making returns more difficult. On paper, that makes excellent sense — fewer returns = more sales.

Wrong.

The firm quickly discovered that customers preferred to shop from competitors with more liberal return policies. Thus, this seemingly brilliant decision caused the decline of revenue to the point where this major retailer is now defunct. Some marketers now consider firms using theories from evolutionary biology and chaos theory to build more robust marketing strategies because they recognize that marketing actions might result in unintended consequences.

Assess the RIGHT metrics

To improve performance, you need to have the RIGHT metrics. What constitutes the RIGHT metrics varies depending on the type of business you have, your target market, and factors impacting that market. Jack Welsh says this about metrics:

You might, for instance, have a strategy around innovation aimed at producing the leading products in every cycle, or you might have a strategy to become the low-cost global supplier, or you could have a strategy to globalize a company, taking its strengths in one market and translating them to every market.

Some metrics, such as Net Income are universal — applying equally well to all businesses. Other metrics, such as time to market (used to assess how long it takes a firm to bring a new product or product improvement to the marketplace).

Regardless, applying these metrics blindly might not be the right marketing strategy. During the recession in the 1980s, the same GE wizard, Jack Welsh recognized his philosophy of running the company based on performance against metrics was shortsighted. By concentrating on net income, you might not invest in innovation that costs money now and may not provide returns until sometime in the future. You also might postpone equipment maintenance, leading to greater costs as poor maintenance leads to increased frequency of equipment replacement and downtime.

set realistic expectations
Image courtesy of Digital Examiner

Having the right metrics is the key to planning a successful marketing strategy and tracking your performance so you can optimize that performance; having the wrong metrics leads you to focus on improving the wrong things which doesn’t help your marketing strategy and may even lead to poorer performance.

For instance, Jack Welsh, former Chairman of GE, recently stated that an overemphasis on metrics assessing short-term shareholder wealth was

On the face of it, shareholder value is the dumbest idea in the world

Digital marketing faces its own analytic problems. Specifically, concentrating on gaining large numbers of followers on Twitter or Facebook fans may have no impact on your performance. We call these vanity metrics. For instance, your social network may not contain those in your target market or may contain folks without the desire to buy your brands. If you Google the value of a Facebook fan, the answers are all over the map; ranging from almost $0 to respectable values.

By focusing on improving these marketing metrics, you expend scarce resources on the wrong things. This leaves fewer resources to concentrate on elements of your marketing strategy that DO have the potential to improve your performance.

I developed a list of KPIs (key performance indicators — those factors that most directly impact performance metrics) specifically for digital marketing activities. The list is below. Please feel free to add to the list or vote for your favorites.

An alternative to marketing ROI

I’m not advocating that we go back to the dark ages when we spent money on marketing without any inclination as to what worked and what didn’t work. In words attributed to Wanamaker:

Half the money I spend on advertising is wasted; the trouble is I don’t know which half

What I advocate is creating custom algorithms (predictive analytics) based on your own marketing activities and the results achieved from these activities. There’s also a bit of multi-attribution modeling inherent in this method.

Here’s what I propose:

  1. Set marketing goals in terms of both revenue and factors contributing to revenue, such as clicks, shares, likes, reach, awareness, brand image, etc.
  2. Calculate the costs of marketing activities associated with achieving these goals.
  3. Assign a value to activities that don’t directly contribute to achieving a goal, such as market research.
  4. Use Google Analytics with goal setting to understand what activities contribute to achieving goals
  5. Evaluate content and channels to determine which help you achieve your goals
  6. Calculate the change in performance based on marketing activities
  7. Create a custom algorithm where the change in revenue is a function of inputs (marketing activities) and outputs (expenses associated with activities)
  8. Increase your budget for those activities with the highest Beta and decrease the budget for those with low Betas or which didn’t figure in the model
  9. Repeat on a routine basis

Solutions to your marketing ROI problems

  • Don’t think just because other businesses measure something, you have to
  • Understand your target market and what motivates them to purchase your product
  • Data has a cost, so measure those things that have the greatest potential to impact your performance

The Right People

In order to be effective, metrics have to reach the people; those who have the authority and expertise to plan or make changes to the firm’s marketing strategy. Unfortunately, research suggests that analytics may not reach decision-makers in a format they can use. Creating interactive dashboards with data visualizations allows decision-makers to quickly assess the impact of marketing actions to make decisions that optimize performance.

A related problem is that decision-makers may not understand the metrics they get. Or, they don’t know what decisions will impact these metrics.  Similarly, decision-makers may be inundated with data and might miss critical information hidden by too much unnecessary information.

Solutions

  • Identify influencers and make sure they get reports detailing the performance of your marketing strategy
  • Graphical or visualization software can significantly improve how well managers understand reports and reduce the cognitive load associated with handling large amounts of data.  Here is a good overview of available visualization software.
  • Training will help decision-makers understand how to interpret analytic reports.

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Hausman and Associates, the publisher of MKT Maven, is a full-service marketing agency operating at the intersection of marketing and digital media. Check out our full range of services.