Want to know the ROI of your marketing, but aren't sure where to start? Here's how to tell if your investment is measuring up.
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Recently, I received a question that a lot of marketing people and business owners/managers struggle with: measuring the value of their marketing.
Here’s an excerpt of that question which comes from a subscriber who works in marketing at a defense contractor (I have removed their name and company):
The question I would like to ask is about calculating ROI for marketing activities. It’s been a question I’ve asked myself for a while now: how can I clearly prove the value of a marketing department without spending thousands of dollars on complex tracking software (like Marketo and others, that wouldn’t even let me show all the value)? I feel the value of our work is often on a “sentimental”/”top of mind” level for leads and customers, therefore very difficult to show.
So, do you know of methods or tools that can help demonstrate how and where marketing departments typically bring value to a company? Knowing this won’t bring new business by itself, but it could help higher management have a better idea of how to leverage marketing resources at their disposal in combination with sales…
Sorry if the question isn’t so clear, but as I said, it is an ongoing reflection…
As long as companies have been investing in marketing, the question about its value has persisted.
To answer it, I have good news and bad news. Let’s start with the bad.
A study by Fournaise Marketing Group found that 73% of executives don’t believe that marketers are focused enough on results to truly drive incremental customer demand. Ouch!
The marketing world still has what I like to call a Wannamaker Hangover. The retailing titan John Wannamaker (1838-1922) was alleged to have said "Half the money I spend on advertising is wasted; the trouble is I don't know which half."
That perception, like a wicked hangover, just won’t go away easily when it comes to the C-suite’s perception of marketing effectiveness and marketing people. There’s still a “spray and pray” approach to marketing. Hope springs eternal that the marketing activity is going to do some good.
Now the good news. It doesn’t have to be that way. Times have changed. Marketing can be more closely measured than most realize. And marketing’s effect on sales and revenues can be closely tracked and continuously tweaked.
Here’s how to measure and “metric” your marketing, put in terms that management is thinking (or saying out loud). These are the types of tough questions marketing people should be ready to answer in order to play a more valued and trusted role. Warning: there will be math.
How much does it cost to get a new customer?
This is your Customer Acquisition Cost (CAC). It determines the total average cost you’re spending to acquire a new customer.
To calculate it, add up your sales and marketing costs (for a specific time) and divide by the number of new customers. Your sales and marketing costs should include advertising, salaries, commissions, bonuses and overhead.
Here’s the formula:
(SALES + MARKETING) / (NEW CUSTOMERS) = CAC
So for example if your sales and marketing costs were $250,000 and you gained 25 new customers, your CAC would be $10,000.
You’ll want a low CAC, obviously. But once you establish a benchmark, an increasing CAC will indicate a possible problem with your sales or marketing effectiveness.
How much of that new customer cost is for marketing?
To answer that, you’ll need your Marketing % of Customer Acquisition Cost (M%-CAC). This figure is the portion of your total CAC, calculated as a percentage of the CAC.
To calculate it, take just your marketing costs and divide by the total marketing and sales costs.
Here’s the Formula:
(MARKETING COST) / (SALES + MARKETING COSTS) = (M%-CAC)
So if you have a marketing cost of $50,000 and a sales and marketing cost of $250,000, your M%-CAC would be 20%
If this cost is going up it could mean that your sales team might be underperforming, you’re spending too much on marketing, or perhaps you’re investing more to improve lead quality and sales productivity.
Is what we’re spending on getting new customers worth it?
This is where you find out what your customers are worth and subtract what it costs getting them. It is known as Ratio of Customer Lifetime Value to CAC (LTV:CAC).
First, calculate the lifetime value of the customer, which is the revenue a customer pays during the average time you keep a customer (minus the gross margin). Then divide by your average customer churn. Then, divide that number by your CAC.
Here’s the formula:
So if you have an LTV of $500,000 and a CAC of $50,000, your LTV:CAC ratio would be 10 to 1.
The higher your LTV:CAC the greater your marketing and sales ROI. If your ROI gets too high, however, you may not be investing enough in your sales and marketing, which could slow down your total company growth.
For a comprehensive review of LTV, check out this infographic on calculating LTV from KISSmetrics
How long does it take to recoup the cost of getting new customers?
This one rhymes: it’s called Time to Payback CAC. It shows how many months it takes to earn back the costs you spent acquiring new customers.
To calculate it, take your CAC and divide by your (margin-adjusted) revenue per month for your average new customer. Margin-adjusted means how much your customers pay on average per month.
Here’s the formula:
(CAC)/(Margin-Adjusted Revenue) = Time to Payback CAC
So if your margin-adjusted revenue is $2,000 and your CAC is $10,000, your Time to Payback CAC would be 5 months.
The sooner you can start making money off of your new customers, the better. Most companies try to make each new customer profitable in less than a year.
How many new customers does marketing bring in?
While this question can often be rife with office politics, here’s how you can start with the numbers. This is known as Marketing Originated Customer %.
This ratio shows what new business marketing drives. It is determined by which portion of your new customers originated from marketing efforts.
To calculate it, you’ll need to know which customers originated with a lead generated by your marketing team. Then take the total new customers and divide by those numbers which were marketing-generated leads.
Here’s the formula:
(TOTAL NEW CUSTOMERS)/(CUSTOMERS STARTED AS MARKETING LEAD)
= MARKEING ORIGINATED CUSTOMER %
The math is pretty straightforward on this one. Say you have 1,000 new customers in a month and marketing generated 675 of the leads for those customers. That gives you a 67.5% contribution.
This shows your marketing team’s contribution to acquiring new customers. Marketers worth their salt like this measurement because of its connection to revenues.
How much does marketing help close sales?
As any sales person will tell you, marketing doesn’t generate all the leads. But does that mean marketing is not providing value? You can answer that with the Marketing Influenced Customer %.
It takes into account all the new customers that marketing interacted with while they were leads before becoming customers. Lead nurturing with marketing automation software is an example of this.
To calculate it, just take all the customers in a given period and find out what percentage had any contact with marketing while they were a lead.
(MARKETING INFUENCED CUSTOMERS)/(TOTAL NEW CUSTOMERS)
= MARKETING INFLUENCED CUSTOMER %
Example: 1,000 new customers and 820 of them interacted with marketing gives you Marketing Influenced Customer % of 82.
With customer buying lifecycles getting longer, the impact of marketing on a lead will most increase. This ratio indicates how effective marketing is at lead nurturing and helping sales close deals.
Don’t lose sight of the forest for the trees.
Today there are an almost unlimited number of marketing metrics that can be measured. And with the ascent of big data, it will increase. That’s why it’s easy to be distracted from measuring the metrics that matter. Keep an eye on these metrics to guide your analysis of all the others.
What metrics guide your marketing decisions?