Measuring Marketing ROI

Rethinking Marketing ROI

by Jeff Winsper
President
Black Ink

For most marketers, the fourth quarter is budget time: How much are you going to get next year? What are you going to do with it? And, most important, what are we (the business) going to get for it?

Marketers understand that being able to measure and report their ROI is increasingly important. Unfortunately, many marketers do not feel sufficiently prepared to provide hard numbers. In fact, according toresearch conducted by Black Ink , when it comes to determining the appropriate investment in marketing, only 16 percent of marketers surveyed made their decisions based on the historical return on previous investment. Most used revenue projections or the previous year’s budget as the basis for budget planning.

Data collected by the Columbia Business School/NYAMA found that while marketing efforts are under greater scrutiny than ever—and it’s increasingly important to spend only on activities where financial impact can be measured—only 57 percent of marketers surveyed base their marketing budgets on any kind of ROI analysis.

In other words, most marketers use data and analytics to report on past performance as opposed to inform future funding.

So why the disconnect between the acknowledged importance of being able to provide quantifiable data on marketing’s contribution to the business and the lack of ability to—or confidence in—report on such data? Two issues exist. The first is the lack of a clear and consistent definition of what marketing ROI really is. The second involves accessing the data necessary to understanding the value of the last dollar spent against the next dollar invested—data that resides not only in marketing, but in sales, finance, operations, customer service, partners, etc.

What Is ROI And What Does It Mean To Your Business?
First, let’s talk about what marketing ROI isn’t: Marketing ROI is not e-mail opens, click-throughs, page views, impressions, reach, frequency, GRPs, likes, shares, CPM, AVE, etc. These are metrics and are associated with campaign ROI, which is not marketing ROI. Media-mix modeling, marketing attribution, and business intelligence are not marketing ROI, either, although all of the data associated with these measures and models function as input into determining marketing ROI.

In short, marketing ROI is the incremental improvement in your business that you see as a result of marketing. If you look for a formula for marketing ROI, you find a deceptively simple equation: ROI % = (Gain – Cost) ÷ Cost

It’s deceptively simple because it’s not a true measure of marketing ROI.

The more appropriate formula is: ROMI (return on marketing investment) = (Revenuem – Variables) ÷ Variables

(Click on chart to view larger version.)

Many variables influence both gain and cost that need to be taken into account for a complete and accurate measure of ROI. Variables associated with your company are typically more controllable: price, distribution, overhead, promotion, markets, etc. Variables associated with the economy and markets are much less so: competition, weather, inflation, consumer confidence, regulation, etc. And while taking all or some of these variables into account doesn’t necessarily change the formula, it greatly increases the complexity of uncovering true marketing ROI. Somewhat counterintuitively, this added complexity also contributes to increased accuracy in the number.

The other, perhaps most important, variable that needs to be accurately accounted for in calculating marketing ROI is the ROI of the customer. Not all customers are created equal: some represent greater lifetime value than others; some are more difficult and, therefore, more expensive to acquire; some will be receptive to marketing, others not; and some may be customers of your competitors. For instance, a promotion focused on new customer acquisition (an incentive to drive trial) impacts your revenue and customer ROI one way, while the same promotion, if used by an existing loyal customer, impacts it in another (since they are more likely to purchase without incentive). With this in mind, it’s possible or even likely that any given transaction via the same channel at the same time may represent a different cost, gain, and ROI.

Become Technology-Enabled
Do a quick Google search on marketing ROI, and 56,900,000 results are returned in 0.24 seconds. The majority of the results on page 1 are technology and software solutions, many of which are marketing automation applications that include reporting functionality around campaign ROI, which, as we’ve discussed, is not marketing ROI. Other technologies, such as business intelligence and dashboards, offer features and functionality that can also help contribute to marketing ROI, but only if the methodology and approach are sound.

But fundamentally, marketing ROI is not a technology issue; it’s a business and financial issue. As such, it requires enterprisewide collaboration and executive-level sponsorship. I have identified four key areas that should to be addressed to make marketing ROI a reality and to enjoy the benefits of true transparency and accountability: organization, operations, data, and technology.

1. Organization: There is executive-level focus and attention being paid to marketing ROI, with departments, functions, people, and processes aligned, ready, and willing to work together to measure, monitor, and improve marketing’s contribution to the business.

2. Operations: Data-driven decision-making and quantifiable, meaningful metrics drive the organization forward. People know where they stand, what to do, and whether it works.

3. Data: Data is well integrated and of high fidelity; it is seen as an asset to the organization.

4. Technology: The technology infrastructure and applications of the organization are helping to drive the success of the enterprise. Well-planned and deployed technology enables people to focus on what matters most.

It’s important to note that while all of these areas need to be addressed, any barriers must be overcome in the proper sequence (although much can be done simultaneously). In other words, the most robust technology solution is not going to yield the desired results if data is not accurate, available, and integrated. Data integration will always be an issue if the enterprise is not data- and metric-driven across all operations (not just departments). Enterprise issues such as this start at the top and take executive commitment, leadership, and, typically, a champion. Most marketers, while they can start the ball rolling, cannot make all that needs to happen happen on their own.

Conclusion
True marketing ROI will continue to increase in focus and importance, not just for marketers but also for the entire enterprise. It’s a journey that many marketers have yet to embark on, and those who have are challenged to connect the data and dots that will yield the greatest impact. The proper definition of marketing ROI is critical to actually being able to measure, monitor, or improve it—and it is clearly much more than the metrics associated with your last campaign. Technology is part of the answer, but not the whole answer. It’s not the place to start the journey, and it is not the destination; it is a tool to help measure and monitor. More than just technology, true marketing ROI requires people, processes, and methodologies to succeed.

The ability—and will—to improve ultimately lies in your hands: you, the marketer.