The CEO asks the old-school CMO, “how do I know I am getting what I
am paying for when it comes to marketing? Finance can tell me my return on
assets and return on invested capital. Sales can show me how many new customers
and what revenue was created last month. But, how to I know that all the things
you are doing to build brand awareness, promote our products and to engage the
prospect and customer in “conversations” are really worth what we are spending?
How do I know that we are spending the money in the best way?”
The soon to be ex-CMO replies, “We know that 50% of what we are
doing is working; we just don’t know which 50%!”
The question of how to calculate the ROI for a company’s marketing
spend has plagued marketers historically as the practice of marketing was
considered to be more of an “art” than science.
This was particularly true in the mass-market communication age than
today, where the spreading use of marketing automation and social media
delivery and management platforms makes the calculation of Marketing ROI much easier.
Even so, it is still not an easy task, complicated by the question of “what” to
measure and the need to evaluate marketing programs, communications campaigns,
media channels, distribution channels and key customer segments.
In a recent whitepaper on Social Listening, Brandwatch.com advocated
for measuring three things to determine the effectiveness of social media
marketing: Outputs, Outtakes and Outcomes. These three factors can be applied
to the larger marketing ROI question, although the specific outputs, outtakes
and outcomes to measure will differ based on the marketing and overall business
goals and strategies. The paper is high-level but a clear take-away is
that, while template dashboards of major campaigns and programs can be
developed, it is very difficult to capture all the levels and nuance in a
single “calculator”.
Writing for Hubspot, Mike Volpe proposes that the best marketing
metrics look at the total cost of marketing, including program spend, salaries
of the team, and overhead and relate that cost to the results every business
cares about—revenue and customer acquisition. Here are the top six marketing
metrics Mike believes a CEO should care about...and a good place to begin the
process of determining the ROI of a company’s marketing investment.
1. Customer Acquisition Cost (CAC): Divide total sales and
marketing cost, including salaries, commissions, plus OH allocation for a given
period by the number of new customers added.
2. Marketing % of Customer Acquisition Cost (M%-CAC): Divide the
marketing portion of the total CAC by the total CAC. Monitor this ratio
overtime both as an absolute benchmark and to indicate that something has
changed in strategy or effectiveness.
3. Ratio of Customer Lifetime Value (LTV) to CAC: LTV needs to
be expressed in current value terms and is calculated taking the average
customer revenues, subtracting out cost of goods sold, and then divide the
gross margin amount by the estimated churn or cancellation rate % for that
average customer. Then, simply divide the LTV by the CAC. The higher the
ratio, the higher the sales and marketing ROI. The benchmark ratio will vary by
industry.
4. Time to Payback CAC: This is the time it takes to earn back the
customer acquisition cost, usually expressed in months. To calculate, divide
the CAC by the gross margin generated by the average customer in a month to
yield the number of months required to payback the acquisition cost.
5. Marketing Originated Customer %: This measure shows what %
of your new business was actually driven by marketing. Take all of the new
customers you sign up in a period and look at what % of them started as a lead
that Marketing generated, as opposed to sales prospecting. The % varies
company-to-company depending upon the nature of the sales team and structure.
Revenue can also be used in the calculation, not just the number of
customers.
6. Marketing Influenced Customer %: This measures expands #5 above
to include all new customers where Marketing touched or nurtured the lead at
any point in the sales process, not just the leads that originated from
marketing.
What other marketing metrics would you add to the list?
Have you solved the “calculator” problem?
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