Do you calculate the Return On Investment (ROI) of your marketing campaigns?
If you can’t measure it: Don’t do it.
There is no end of literature talking about the need for marketing to be able to speak the language of the CEO and CFO and start to clearly measure the result that they are looking to get from their activities in the form of a contribution to bottom line revenue.
The start of being able to do this is to calculate the return on investment being generated. That is – given the investment (costs) you are committing what revenue (return) are you expecting back.
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Step 1. Define your ‘Return’.
Be clear on what the ‘return’ is you are after. In most cases the bottom line should be additional revenue. However, there may be additional measures that also make sense. You may be running a campaign to speed up progression through a certain part of the funnel. In this case you will want to be able to measure the increased speed achieved, however, you should still also be able to relate this through to increased revenue over a period of time.
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Step 2. Identify Your Costs (Investment)
The costs of a campaign will have a number of elements. There will be the actual campaign costs themselves, however there will also be additional costs that can sometimes be left out: Marketing time – number of hours spent time average hourly rate. There will also be a sales element – how much time will sales be spending following up the leads and taking them through to closed customers?
Another cost that needs to be taken into consideration is the cost of producing the goods – COGS.
Step 3. Calculate the revenue you expect to generate (Return)
There are three pieces of information you need:
- How many leads do you anticipate this campaign will generate?
- How many of those leads will convert to new customers?
- What will the average spend of these customers be?
From here you can calculate the expected revenue.
You can also choose to add a further level of complexity to your calculation if the customers you have tend to be repeat customers. While you will have gained short term revenue from this transaction, there is also the life time value of the customer to be considered. What is the discounted NPV of the cash flow that you would expect from this customer over their lifetime with you?
Step 4. Calculate the ROI
The calculation in its simplest form is:
Return (Revenue) – Investment (Cost) / Investment (Cost)
The result (%) generated will help you understand if the campaign is worth engaging in or not. Theoretically, any number greater than 0 is producing a return. However, there is risk in anything, and you may decide that there is a threshold for campaigns that you are willing to invest in.
Make sure you track your predicted ROI and then compare it to the actual returns generated. These results over time will enable you to refine your campaigns and tactics employed selecting more wisely where to invest your marketing $’s.