According to a recent major study, 68% of marketers cannot determine the ROI of their initiatives. Being a guy who knows finance, I was surprised by that!
But this statistic underscores a common complaint by CEOs of their CMOs. If you’re on the 68% side, this is something you can and should overcome. If you’re a marketing exec in a small to medium sized business like I am, moving to the 32% side will show your chief executive that you’re serious about running the marketing operation.
Many marketers may get hung up by feeling responsible for communicating ROI of individual initiatives, (i.e. SEO, email, direct mail or billboard advertising). Though it may be simple to see promotion costs associated with an activity, it can be very challenging to accurately determine how much labor is spent on that activity, especially if your team members wear many hats and perform many functions.
If you have had trouble quantifying ROI, may I suggest forgetting about the details and focusing on the big picture: begin with your overall marketing ROI. Stress the importance of a single ROI measure being a direct reflection of your highly integrated, multi-channel strategy. All our activities today lead to and through the sales funnel, and I want to express this with a single number.
How do I do it?
ROI is Income/Investment x 100, expressed as percentage. I’d suggest that any investment that yields a return greater than the long term average of the S&P500 is a great baseline. That means your ROI should be at least 111%. If you invest $10,000 in the S&P500, you might be happy having $11,100 at the end of the year, assuming average market risk.
But if you’re spending $10,000 to generate $11,100 for your company through marketing initiatives, that may not be winning you the big praise and the big raise. A target ROI of 150%-200% suggests you’re giving your chief executive a 50%-100% ROI, and I think this makes a great target.
Step 1: Let’s look at the Income
Firstly, what are your sales channels? What is your involvement in those channels? This will help you understand what your top line will look like.
- If all your revenue comes online, it is likely you can take credit for total sales.
- If you have a sales team (or customer service team) that reports to marketing, take all the income (and apply all the labor costs of these teams to the investment component in Step 2.
- If you have a human component to sales that doesn’t report to marketing doing outbound activity, apply 50% or 33% of their sales to your income number depending on marketing’s involvement. Agree to these terms with other stakeholders including your CEO. Do not apply their labor costs. Follow the conservatism constraint when determining these percentages.
- If you’re supporting sales with lead generation, track specifically which leads convert and apply at least 50% of the credit for that revenue; again agree to terms. If it can’t be measured, don’t count it, but plan how to track and count it in the future.
Step 2: Investment
What teams report to marketing and what are those total costs? Line item all labor and promotion costs that you’re responsible for (i.e. Customer Service, Marketing, Website, IT, Sales). Your CFO has this if you don’t.
Step 3: Calculate
Take the number from Step 1, divide by the number from step 2, then multiply by 100 to express as a percentage. If you’re above 150%, your CEO may have difficultly finding better uses of the money. If you’re under 111%, re-evaluate activities.
Put this metric together quarterly. It really helps me steer the boat and can aid terrifically in decision-making, and certainly puts to rest the age-old debate that may be going on right now in your office:
CEO: “What exactly is marketing worth? How can we quantify your contributions to the business?”
CMO: “We’re pleased to say we’re tripling your investment, sir. Let me show you how.”
In this hypothetical ROI calculation below, you see two channels with a total of $200,000 attributable to marketing. You can see marketing only taking credit for half of the phone sales channel. You can also see total labor and promotion. As indicated above, be sure to evaluate total labor costs based on departments that marketing is responsible for. Don’t take sales labor if they don’t report to you. In this hypothetical, they do not, so I’m only accounting half of the revenue. To arrive at ROI, divide Income by Investment, multiply by 100, then add a % sign.
Income for Q1, 20XX
Web Sales 100,000
Phone Sales 100,000 (200,000 x 0.5)
Total Income to MKT: 200,000
Investment for Q1, 20XX
Total Investment: 60,000
ROI : 200,000/60,000 x 100 = 333%
Start compiling your numbers, and if you have any questions, email me here – I’d be happy to help!