Every effective business owner knows they have to market their products and services. The marketplace is simply too crowded and competitive, attention is too scarce, and shifting consumer behavior and more openness to abandoning brands that aren’t serving their needs means that not marketing is tantamount to giving up.
The question then is: What can I expect in return for my marketing spend? There are numerous metrics by which companies define marketing success:
- Brand awareness
- Net promoter scores
- In-store foot traffic
- Website traffic
- Qualified lead development
- Customer acquisition
- Sales conversions
- Engagement rates
However you define your Key Performance Indicators (KPI) and goals, ultimately, what every company wants to know is: Are my marketing dollars improving my profitability over the short and long term?
A marketing ROI ratio is a useful and relatively straightforward calculation for answering that question. Subtract your marketing costs from your attributable sales growth and then divide that number by your marketing cost. So if you spent $100 that resulted in $600 in new sales, the figure would be: (600-100)/100 = 5.
Meaning, you made back $5 for every dollar you spent, an ROI ratio of 5:1, which many marketing experts peg as a very good return (though it varies by industry and cost of goods sold).
The devil is always in the details, however. Determining which sales can be attributed to a particular campaign or marketing strategy can be difficult. Marketers hoping to boost their performance stats may attempt to paint with a very wide brush, claiming everything they did was a factor in winning those new sales.
Realistically, that’s unlikely, so brands should expect a more granular and analytically-vetted explanation.
Another issue is timing. The fruits of a particular campaign might not ripen for weeks or even months after it has started. Because of the waiting game, leading metrics (proxies that can be used to approximate the actual metrics that are slow to arrive) are sometimes used to track campaign ROI in closer to real time.
For example, ecommerce platforms want to see transaction volumes and average sales prices to determine ROI, but may have to use leading metrics like web traffic, email signups, or social media engagement rates, to get an idea ahead of time of how things are shaping up.
Businesses that rely heavily on lead generation and new customers will want to know the volume of new leads and how many are being converted, but will use things like webinar attendance and form fills as stand-ins until those numbers arrive.
Watch Your Ratios
Marketing ROIs are often judged by ratios because they are easy to understand and respond to.
A 5:1 ratio is right in the middle of a normal distribution and is considered strong for most brands and industries. A 10:1 is outstanding and anything above that is extremely rare and desirable. Low ratios can indicate internal or external forces limiting the effectiveness of your marketing and potentially imply its time for a change of course.
By setting a realistic ROI ratio at the outset of a new campaign, everyone is clear on the overarching objective, and, presuming smart tracking tools are in place, they can follow the progress in near real time and fine tune their contributions in light of changing circumstances. Also, as long as the right tracking mechanisms are in place, everyone can quickly determine if a campaign was successful or not.
But what counts as marketing cost for purposes of determining ROI? Basically every variable cost accepted specifically for marketing to be accounted for, including:
- Content production
- Ad spend
- Outside agency contracts
- Paid SEM
- Strategic consulting fees
The salaries of full-time, in-house marketing teams are not included because they are fixed costs.
Another commonly asked question is: how low can I afford to go? Could a growing business survive on a 2:1 return ratio? Possibly, but it would be tough. That’s a huge amount of money to spend for not much in return.
Typically businesses pay at least 50% of what they charge for a product, but a brand or company in an industry with high cost-of-goods-sold (COGS) are already devoting a lot of resources just to acquire their wholesale materials and are living with thin margins. They simply cannot remain profitable on a 2:1 ratio.
It’s possible, for example, a SaaS (software as a service) company, with minimal incremental unit costs after the initial development, could potentially survive at that ratio, but even they shoot for something higher. Fundamentally, for-profit businesses are in business to do better than just break even.
Seeing the Bigger Picture
Much of the focus on marketing ROI is on the short term results of a specific campaign, but growing firms also need to look further down the road and examine the lifetime value of adding new customers. Winning one sale from one person is fine, but converting a lead into a customer and then that customer into a repeat customer is a lot better for the brand’s long term outlook. Understanding the lifetime value of loyal customers and brand advocates provides a fuller picture of what your marketing is buying.
Marketers need the trust of their partners to do their best work. They win that trust by scrupulously tracking ROI data and other metrics that verify that their work is producing positive outcomes. Smart marketers understand where a big lift is needed and what a minor tweak will do to drive up profitability and widen shrinking margins.
The benefit of determining marketing ROI also goes beyond merely justifying past decisions, it helps guide future ones, shows where a brand is most effective and should focus its outreach — as well as areas that need improvement.
Hanlon is a strategic and accountable marketing partner that helps brands grow faster and more sustainably with analytically-vetted and digitally-empowered strategies. Ask us how we can move the needle on your next brand adventure.