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If you’re trying to figure out how to allocate your marketing budget, where to focus your efforts to attract customers, or even how to prioritize your marketing initiatives, the best approach is to base your decisions on past and projected marketing return on investment (ROI). It may sound simple, but to accurately calculate marketing ROI, you need to have the right data, tracking methods, systems, and tools in place to support your efforts.
How to Calculate Marketing ROI: The Importance of Lead Source Attribution
THE ROI-FOR-MARKETING CALCULATION
ROI = (Generated Sales – Marketing Cost) / Marketing Cost * 100
HOW TO ATTRIBUTE THE LEAD SOURCE (I.E. CAMPAIGN)
You need to determine how a lead is created and then converted. There are three types of marketing activities:
- Awareness: It is very tricky to track the ROI of awareness, but awareness is how you attract and retain clients AND protect your brand equity from competition. Examples of awareness campaigns include printed editorial, billboards, awards, and SEO strategies. Even though there is a cost associated with these campaigns, it is often difficult to attribute a lead or conversion directly to them.
- Conversion: This is the measure of how many leads become clients or opportunities. Examples of conversion campaigns include ads, trackable social media campaigns, and events or trade shows. These campaigns have a specific cost and an expected ROI, and if they don’t deliver the desired results, you may need to rework or redefine them as awareness or retention campaigns.
- Retention: Retention campaigns are focused on keeping your clients engaged and loyal, which statistically costs much less than attracting and converting a new lead. Examples include customer events like dinners, customer gifts, email campaigns, and phone call account reviews. These activities can overlap with awareness and conversion campaigns, but the goal is to stay top of mind and support your client according to your brand values and promises.
At my company, Big Bang, the lead source is used as the method for ROI tracking. This means that when we create a new campaign in our CRM, we classify it as a “Lead Source” campaign, specifically for lead generation. For our retention activities, we plan a budget by customer level and consider it an expense related to customer retention, rather than a marketing cost, although we still track it with other activities.
You have to decide what time period you will allot to each campaign, as well as if retention activities are blended or not. To keep things simple, make the lead source the FIRST conversion and do not change it, ever. Treat your retention activities as supporting acts to this original lead generation campaign and part of your internal process/customer journey.
What do you need to track for Marketing ROI?
It sounds basic, but you actually need to be able to gather then calculate the following:
- Campaign Lead Source: As shared above; where did the lead come from? To make things simple, let’s refer to this as a campaign. It could be a larger campaign like a website or something more specific like an adwords or event landing page.
- Campaign Cost: The cost to participate in this campaign, which could be fixed (like website development and maintenance) or variable (like event participation). A single campaign can impact the three marketing activities mentioned above: Awareness, Conversion and Retention.
- Lead and Customer Tracking:These metrics help you understand which campaign brought which leads and which of those leads converted into actual closed sales that generated revenue for your company. This could be as simple as asking a new client how they heard about your company and offering a specific asset or promotion to a group of prospects during an event. You could also embed hidden tracking information online or make “how did you find {Company Name}?” a mandatory field on your online form. The options are limitless.
- An understanding or benchmark of:
- Customer lifetime value to be able to calculate a full value of the campaign investment.
- Sales cycle length to be able to know when to calculate the ROI. If an event was 1 month ago and your sales cycle is 4 months, it is too early to calculate the ROI of this campaign. You can check other indicators, such as status of the leads or a forecast, but the final calculation will have to wait.
- Customer journey to be able to uncover weak spots where prospects or leads might be lost along the way. The goal is to continually tighten the journey of your customer along with all departments in your organization. The role of an optimized customer journey lies with every touchpoint and department in an organization to deliver on the brand promise and value proposition.
It is important to work clean and have financial accuracy when calculating your Marketing ROI. This means you cannot at every whim change your process or accounting framework. You have to take a few moments to plan how you want to calculate these performance metrics and stick to the plan. ROI is especially valuable when you can compare it to industry benchmarks and your organization’s historical data. Trends are easier to uncover with consistency.
What tools and processes help Marketing ROI
To avoid adding to your workload and wasting gathering and processing raw data periodically, the foundation
For example:
- In Salesforce Pardot (being renamed: Marketing Cloud Account Engagement) you simply need to navigate to Reports and Campaigns to see the actual ROI of a campaign—with the Cost, ROI, Opportunities, and Prospects all available from a built-in report.
- In Hubspot, you need to navigate to Marketing > Ads, then in the upper right, click the settings icon, then click the ROI tab.
Marketing ROI Example
ROI = (Generated Sales – Marketing Cost) / Marketing Cost *100
Let’s use a Google Ad as an example. The website is a fixed cost and not used to calculate the ROI. But if you wanted to, you could figure out a cost per visit or acquisition to your site (cost to have and maintain website/visits).
For this simple example, you would name your Ad (let’s say, Ad Group 123) and set up a campaign in your Marketing Automation Platform with the same name that is connected.
So if
- I spend $1000 in a certain month on a given Google Adwords Campaign,
- From the 30 clicks, three leads are generated
- Of the three leads, two have opportunities: one will close in two months, the other will close this week, and one will be nurtured
- The three leads should have the lead source Ad Group 123 in your system
If we assume
- The reporting period is 1 year and then calculated again in the future
- The lead that will close in two months will generate $500 in the first deal and $10,000 in an average lifetime (can be adjusted for different customer profiles)
- The lead that will close this week will generate $700 and another $10,000 in an average lifetime
- The Nurture lead has a 10% probability of closing within this year for another $500. You can include it, or decide to be conservative in the calculation
- Based on this information, you can calculate the ROI for this year and the lifetime value (with and without nurture):
| ABC Adwords Campaign ROI | |||
| Spend | $1,000.00 | Cost per | |
| Clicks | 30 | $33.33 | |
| Leads Generated | 3 | $333.33 | |
| Revenues | This year | Future | Lifetime value |
| Lead 1 | $500.00 | $10,000.00 | $10,500.00 |
| Lead 2 | $700.00 | $10,000.00 | $10,700.00 |
| Lead 3: Nurture calculated at 10% | $50.00 | $1,000.00 | $1,050.00 |
| ROI | This Year | Lifetime value | |
| With Nurture | 25.00% | 2125.00% | |
| Without Nurture | 20.00% | 2020.00% |
In this case, the ROI is positive if you consider longer than a year, but only in the 30% range if you consider the first sale only. This is why defining what success means to your organization is important. While Marketing might not have a seat in every department, the ROI should take into account the goals of the company as a whole, not just the marketing team.
In any company, you would construct your rules based on your company and industry best practices. For example, you might not look at lifetime value because of the business situation you are in OR you might include the nurture leads because you believe there is a real opportunity with them. Ultimately, it’s up to you to determine the metrics that matter most to your organization and adjust your ROI calculations accordingly.