Measuring Marketing ROI – Why Marketing is Not an Expense

Has your boss or client ever asked you the dreaded question, “How will this marketing specifically impact lead generation and sales?”

When I’ve spoken on this topic in front of fellow marketing professionals, my audience has typically answered the question with statistics featuring increases in Facebook “likes” or number of Twitter followers.

Unfortunately, unless a Facebook “like” converts to a completed contact form on your website, this metric otherwise has no impact on sales.

Let’s face it… most heads of companies look at marketing as an expense. When sales or profits are down, expenses are usually reduced or cut. My philosophy is marketing is an investment, not an expense to be cut. Like any investment, you should expect a return. So, how do you measure Return on Marketing Investment (ROMI)?

There are several versions of calculating ROMI, but the typical ROMI formula looks like this:

Return on Marketing Investment equals the revenue gain from a marketing program minus the cost of the program, divided by the cost of the program.

ROI = (gain – cost) / cost

For example: Let’s assume that you started a new advertising program, and it cost $50,000 in its first year, and it gained $600,000 in incremental sales during the same year, and that the gross profit from these sales was $200,000.

If you subtract your incremental advertising dollars ($50,000) from the profit generated ($200,000), you see that you have generated $150,000 of net operating profit.

Your ROI is

($200,000 – $50,000) / $50,000 = 3 = 300 percent

In other words, on average, each dollar you spent on the new program brought in three dollars of profit.

Benefits of ROMI

The benefits of ROMI are very real. ROMI allows you to:

▪ Analyze and identify which marketing programs and tactics are working

▪ Identify which tactics are under-performing and can be improved or dropped,
which allows you to reallocate marketing budget dollars to programs that
are delivering results

But make sure you proceed in a deliberate manner as you evaluate what may appear to be an under-performing marketing program. For example, let’s say you have a quarterly webinar series. Registration for your webinars is typically low, in the single digits. Should you phase out this tactic?

Maybe not, because closer examination of the metrics – in this case your webinar attendee-to-lead ROMI metric—assuming you’re tracking that—reveals that webinar registrants have a high conversion rate to becoming legitimate leads. What appears, at first glance, to be a low-performing marketing program is actually a high performer.

On the other hand, in addition to low webinar attendance, your webinar attendee-to-lead metric is also low. Maybe you need to evaluate the relevance of your webinar topics to customer needs. Do a brief outreach survey to your webinar database and ask them for topics they’d find meaningful.

▪ Another benefit of ROMI is identifying ways to improve marketing programs

For example, you’re piggy-backing monthly printed direct mail with your monthly prospect email program to hit the target both online and offline. Your direct mail response rate metric is low compared to the “open” and “click-through” rates of your email program.

Perhaps you could improve your direct mail tactic by reserving it exclusively for a promotion.

While the objective of ROMI is measurement, the ultimate goal of ROMI is improvement of your marketing programs to increase leads and sales.

Other ROMI benefits include:

  • Builds proactive accountability of the marketing staff
  • Justify to management the time and effort you’re putting into various
    marketing channels is paying off
  • More accurate budgeting and marketing planning

The last benefit is the biggest of all. Having marketing ROI numbers confirming what marketing efforts are working gives you the ability to forecast future results, instead of forecasting spending.

Forecasting bottom line results based on historical conversation rates that ROMI reveals and the average revenues captured by ROMI is perhaps the single most important factor that marketers can rely on to begin to change the perception that marketing is a cost center.

Armed with marketing ROI calculations, marketers can justify their budget requests by forecasting the results they expect in the future—and quantify them in terms of the marketing and sales of leads and revenue.

This changes the whole dynamic of the budgeting process. When a marketer talks about market spending, management thinks only of costs. But when you talk about future results, they think of the revenue and growth that justifies costs.

Next blog… I’ll give examples on how you can start tracking your activity and measuring your results.

Rick Verbanas has brought his passion for marketing to Fortune 500 companies, small businesses and not-for-profits. He strives to stay current in the latest marketing best practices, and provides a weekly roundup for your news and enjoyment. To subscribe to future blogs, please enter your email address on the left hand side of the page.