Measuring Marketing ROI for Dummies

By: on May 31, 2016

Are you struggling to determine your marketing ROI—aka how much revenue your marketing campaigns are generating compared to the cost of running those campaigns?

You’re not alone…

“Nine out of ten (90 percent) global marketers are not trained to calculate return on investment (ROI), and 80 percent struggle with being able to properly demonstrate to their management the business effectiveness of their spending, campaigns and activities.”

Source: The Fournaise Marketing Group
 

Indeed, measuring marketing ROI is tricky, especially if you’re new to it.

To help, we’ll take you through the basics. We’ll overview the challenges of measuring marketing ROI and offer some examples of how it’s calculated.

Here’s what we’ll cover:

(Click on a link below to jump to that section.)

Why Measuring Marketing ROI Is Tricky
Helpful Formulas for Calculating ROI
Common Attribution Models
Tools That Make It Easier
Next Steps

Why Measuring Marketing ROI Is Tricky

Calculating ROI, specifically for marketing, is challenging. Here are a few reasons why:

Variables can be defined in more than one way.

ROI measurements must be based on well-defined variables to be useful. But, many companies struggle to know what to include in these variables. Part of the problem is that there are many ways to define “cost,” “revenue” and “investment.”

For example, “revenue” could be defined in any of the following ways:

  • Total revenue generated by a campaign
  • Gross profit (revenue minus the cost of goods)
  • Net profit (gross profit minus expenses)

Similarly, “costs” could include ancillary spend (items such as website upkeep, marketing software implementation, management time or even the cost of sales). Or, it might simply reflect direct marketing costs (such as advertising).

Marketing campaigns can be lengthy and multi-touch.

It’s not always clear when or where an investment will make an impact. For example, content you wrote yesterday may not deliver results for a month or longer, and the buying cycle can involve multiple parties at either end. These factors make it difficult to tie revenue to specific marketing efforts or touch points.

Extraneous events can affect campaign results.

Factors outside of your control can impact your campaign’s results. For example, a revenue spike might be due to a great campaign move OR it might be the result of an improved economy. It can be difficult to know which factor influenced your numbers.

Bottom line: Take the time to clearly define your variables so that your calculations accurately and consistently reflect what you want to measure. That way, you won’t need to revamp your formulas after the fact (which will hurt your ability to compare ROI over time).

Helpful Formulas for Calculating ROI

Now that you have your variables well-defined, there are basic formulas you can use to calculate ROI. We list a few of these formulas below:

  • The most basic formula uses two variables: gross profit for units sold from the marketing campaign and the marketing investment for the campaign.
    It’s a good choice for businesses that don’t care about assessing the value of individual touch points:
Gross Profit – Marketing Investment
Marketing Investment
     

  • This formula uses Customer Lifetime Value (CLV) instead of Gross Profit, providing a present value financial evaluation of a customer.It’s a good choice for companies that want to assess things such as customer acquisition costs, customer retention/loyalty initiatives, cross-selling programs, servicing and support costs etc.
Customer Lifetime Value – Marketing Investment
Marketing Investment
     

  • This formula for ROI deducts certain expenses from the calculation.It would work well for businesses that run marketing campaigns with many incremental costs that they’d like to exclude from their ROI calculations:
Profit – Marketing Investment – Overhead Allocation – Incremental Expenses
Marketing Investment
     

  • This formula calculates the ROI of marketing content and would work well for content marketers:
Total Revenue Generated by Piece of Content – Total Cost
Total Cost

 

Remember: There’s no one “best” formula. What’s right for you depends on what you hope to measure. Again, take your time deciding which to use so that your final calculation reflects what will be most useful for your organization.

Common Attribution Models

While basic ROI formulas help demonstrate the value of marketing, they don’t necessarily assign credit to all marketing channels along the path to a conversion.

However, there are ways of attributing revenue to marketing campaigns. These are called “attribution models.” Below are some of the most common types:

Single attribution. This method attributes the entire value of a closed deal to the first or last program that touched it—usually the top or bottom of the funnel.

Pros: Quick and easy to implement. Low cost.
Cons: Doesn’t account for the influence of multiple touch points or lead nurturing.

Single attribution with revenue cycle projections. This method adds revenue projections to a single-touch model to help account for the time-to-investment payoff.

Pros: Provides long-term projections.
Cons: Projections are based on past performance and may miss underlying changes.

Multi-touch attribution. This model seeks to assign value to each of the touch points involved in a successful deal. A weighting strategy which assigns more value to certain touch points is sometimes used.

Pros: Highlights all contacts and touch points.
Cons: Weighting can be prone to bias

And finally, there’s an attribution model that can help account for those non-marketing and extraneous variables that we mentioned earlier:

Marketing mix. This model takes into account all other independent marketing and non-marketing factors that contribute to sales. For example, it might include influencing factors such as pricing and the current economic climate.

Pros: Very detailed/nuanced results.
Cons: Requires a high level of analytical skill.

To sum up: There are many attribution models to choose from. Choose that which reflects what touch points you’d like to track and excludes any variables you don’t want to track, so your final number matches your desired level of specificity. Also, choose an attribution model that matches your level of analytical skills, so it won’t be difficult to replicate.

Tools That Make It Easier

Measuring marketing ROI with pen and paper or spreadsheets is possible but more work than it needs to be. Thankfully, there are tools that can make the process less painful.

Marketing analytics software: These systems offer features and functionality to track the effectiveness of campaigns and provide dashboard and reporting capabilities that highlight performance. Overall, they help companies gauge ROI on companies’ marketing and sales efforts.

SAS offers a marketing analytics solution to help companies gauge ROI

Marketing resource management software (MRM). MRM systems typically include capabilities for planning, budgeting and tracking marketing activities. This not only helps companies track and use their marketing resources more efficiently, it can also track costs and investments for calculating ROI.

Marketing automation software. Many marketing automation systems come with advanced reporting and analytics tools to measure marketing initiative performance. Managers can see which campaigns and channels are driving leads, along with the cost and revenue of those initiatives. This is helpful for both calculating ROI and employing an attribution model.

Hubspot’s marketing automation solution offers attribution reporting functionality

Next Steps

We’ve listed a few tools here that can help you calculate your marketing ROI. However, if you still need help, here are a couple of steps you can take to narrow down your options or learn more:

  • Email me at lukewallace@softwareadvice.com. I’m available to help you start the software selection process or to answer any other questions you might have about calculating marketing ROI.

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