Before looking at what the new potential is for calculating the ROI of marketing, let us first look at the “old” ROI of marketing. What do you measure at the moment to determine success? In the majority of cases, this is not necessarily what you want to measure but what you can measure. These are things like response rates, clicks, impressions, likes, fans, views and dwell time for digital campaigns and for off-line marketing it would be things like sentiment surveys, brand value and so on. It has become a “given” that increasing all these numbers does increase sales so we do not need to prove anything more than this.
However, this means that for much of the activity that you have done to date you cannot directly tie your marketing investment to an increase in turnover, which is usually your prime goal with marketing activity. It is almost impossible to measure this accurately because often you are doing a multitude of activities in your marketing mix and you cannot identify which one actually convinced your customer to buy. What is also true is that it is unlikely that it was just one thing that converted them into a customer. How do you then determine how much each part contributed to the acquisition of a new customer? And, for example, if it was one email that you can say worked, was it the copy, the design, the timing or the personalisation that worked?
It is due to these challenges that we saw the rise of the use of control groups. These are customers that are “held out” from campaigns so we can observe what the result might actually be. For direct to customer campaigns this is a very workable solution. But for “above the line” activity it is still impossible to separate which customers received which messages. To solve the problem of ROI calculations for “above the line” we conduct market research through surveys and focus groups (often at great expense).
The difficulty has always been how to connect marketing activity to sales and when business cases are put forward for new projects, there is often a “double count” because of this as more than one project will claim the result. As a result, the rest of the business has got used to this lack of precision, so there is no expectation to measure marketing activity against sales. This has led, for example, to one large credit card provider being heard say: “we only know that sales and marketing activity is working if we switch it off”.
So how should marketing measurement be done? In our view, measurement should start with what marketing goals have been set, which in turn would then be embedded in your marketing strategy. Your marketing strategy is hopefully based on looking at the goals your business is looking to achieve with its P&L (Profit & Loss). This is where the basis for the ROI calculation for marketing should be made.
So, we need to start with your P&L structure, i.e.: Turnover (Gross Revenues) – Cost of Sales = Gross Profit. Gross Profit – Admin = EBITDA (Earnings before Interest, Tax, Debt, Amortisation.) EBITDA – Interest, Tax, Depreciation = Net Profit. Your marketing costs and investments will sit in the “Admin” bucket while the results of your marketing efforts sit in the “Turnover” bucket. Your challenge as a marketer is that very often you will not see this entire picture and therefore it is hard to understand the ROI on your work or the projects that you run.
The calculations for the ROI on marketing are: Turnover (Gross Revenues) – Cost of Sales = Gross Profit. Gross Profit – Admin = Profit /Marketing Investment (Initial Cost Ongoing Cost). This calculation is a percentage that will tell you how well your investment has performed. The levers that you are affecting with your marketing efforts are “Turnover”, “Cost of Sales” and “Admin”. You can calculate the ROI for any project within marketing and even for individual campaigns this way. But this is not a new way to calculate the ROI of marketing and in the Telco world it has always looked like this. The telco industry though is in the minority, as the majority of businesses are not set up with the processes, systems and organisation structures to measure like this.
Now, with digital technologies and the way that people are behaving when making a purchase, it is possible to track their entire buying journey. This is not just your sales process either, it is possible to track everything that contributes to your customer’s decision to buy and equally importantly not to buy. At this point, you may argue that this only applies to digital marketing, but we now know that only 4% (Source: eConsultancy) of us do not research online before making a purchase. The trick is to have the processes, systems and organisation structure that allows for the attribution of these results. And this means that you need to break your organisational communication silos.
Becoming a customer-centric business will therefore unlock a better engagement with customers that will have direct commercial return. It will also spur the emergence of commercial marketing which will turn the nature of the marketing function within a business on its head.