Measuring Marketing ROI - Boardroom Bottom-Line Metrics
By Vee Tardrew - September 03, 2013
Reporting metrics goes way beyond just measuring success or failure – it proves to your C-Suite that your hard work and hypothesis are paying off, both literally and figuratively. But are you able to accurately and efficiently measure your progress to prove growth?
Hands up if you can tell me - to the penny - the total revenue generated by your blogging efforts last month? Ok, ok, I know - that's a tough one. How about the click-through-rate of your last email campaign then? I'm sure you could answer that one quite easily or at the very least, pull it up within a few minutes.
As a content marketer, I can tell you that marketing can get quite hung up on our metrics. We celebrate website traffic spikes and increases in the number of leads generated. We silently cheer when our tweet is retweeted by someone we consider influential. We high-five when an A/B test result improves our conversion rate by even a fraction. Yes, we love our metrics and are sometimes surprised when superiors don't have the same reactions that we do.
Now before I go jumping up and down about how nonsensical this is - let's first consider the CEOs perspective. CEOs are there to deliver value to shareholders, and that comes down to the pounds and pennies. No-one (in the C-suite, at least) gives a hoot about your genius YouTube video that went viral. But show the board how much revenue that little video generated for the business and I guarantee you a very different response!
Executives deal with profit and loss, growth and revenue. They need to have the numbers that are going to help them determine the strategy and steps to take in order to achieve the business objectives. And if we’re to be considered as strategic partners at the board table, then we need to speak their language and present our marketing reporting in metrics that are valuable to them.
Marketing Measurements for ROI Metrics
Return on investment itself is not a complex calculation. In fact, the formula is rather simple:
ROI = (Return – Investment) / Investment
The difficulty comes in itemising the input costs and then extrapolating other values - other than straightforward ROI - that show hows marketing contributes to the bottom-line.
Performance can be measured in two variables, that of profit performance indicators or programme performance indicators. Let’s dive into what these are.
Profit Performance Indicators:
COST PER LEAD (CPL)
It’s no surprise that the C-suite will want to see the lowest number possible here. Fortunately leads generated via inbound marketing cost on average 61% less than those generated by outbound strategies. You will need to calculate the costs of the entire campaign and divide the total by the number of leads generated to establish your CPL. The more leads you are able to generate for the campaign the lower your cost per lead will be.
LEAD CONVERSION RATE
So, Jillian from Sales just told you that she closed one of your leads as a customer - well done! That said, how well are you monitoring how many of them are converting? If your answer to the latter is, "Not that well" then it's a good idea to have closed-loop reporting set up that showcases your activity on leads from a sales perspective. Closed-loop reporting simply means connecting your marketing software with your CRM to ensure an end-to-end view of the contact's interaction and activity, most notably being able to track which marketing generated leads have closed as customers. The conversion rate of your leads speaks volumes about the quality of the leads you're generating and which channels are most effective.
THE COSTS TO ACQUIRE A NEW CUSTOMER (CAC) / COST OF CUSTOMER ACQUISITION (COCA)
Your customer acquisition cost (or CAC) will show you – and your executives – precisely how much you spend to bring in a new customer. Add up all costs (both marketing and sales) including programme costs, advertising, salaries, commissions and bonuses, agency fees and overheads. Take this number and divide it by the total of new customers for the same period. This is your CAC. There is no real benchmark for a CAC as it will vary dramatically between businesses and industries due to vastly different structures and models. With this number worked out, you will be able to calculate what percentage of that spend is attributed to marketing by deducting sales costs from the total. From a benchmarking perspective, you could expect to see anything from around 10-30% where there is an external sales team, between 20-50% with an internal sales team, and 60-90% where most sales are concluded online or without sales intervention.
Your churn rate is essentially your cancellation rate or the percentage of customers who cancel your services or cease their relationship with your business. It's calculated by dividing your number of clients lost by your starting number of clients, and then multiplying this number by 100 to get a percentage. This metric is also critical when calculating your customer lifetime value, and in determining whether or not your efforts are having a negative or positive effect on customer churn. A higher churn rate indicates a need to deploy activities that increase customer delight and loyalty. But how much is that customer worth to your business in the end? Well, let's measure.
LIFETIME VALUE OF CUSTOMER (LTV)
So now you know how much it costs you to generate a customer, but how much will that customer spend with your business, i.e. is the cost to bring them in worth it in the end? The lifetime value of the customer (LTV) is the metric you’re looking for in this case. You’ll need to work out your average customer revenue for the period under review and deduct your gross margin. Then divide this value by your estimated churn percentage. This gives you your LTV.
The next step is to establish the ratio between what you pay to acquire a customer and the value gained. This is your LTV:CAC ratio and is a means to present sales and marketing ROI. A good target is around 3:1. Anything less means you’re probably losing money with each new customer (not suitable for long-term profitability and growth) while a higher ratio indicates you may be under-investing in sales and marketing efforts.
It is also worthwhile to show your executives precisely how long it takes for that return to be realised by indicating the time to pay back the CAC. For this, you’ll need to establish your margin-adjusted revenue by calculating your average monthly revenue per customer, less gross margin. Then take your CAC and divide by your margin-adjusted revenue. This will give you a value in terms of months. Most businesses with a monthly recurring revenue model will be looking to make customers profitable within a year, but this can be as long as 18 months. Anything over that is not ideal, and your pricing and/or marketing costs should be reviewed.
Proving Marketing's Impact on Lead Generation and Customer Acquisition
Indicating the percentage of new customers that were either generated initially by marketing or influenced by marketing in their buying decision gives a view of your overall marketing effectiveness.
Calculate the percentage of customers that originated from marketing by dividing the new customers that originated as marketing leads by the total new customers for the period.
Benchmarking values depend on industry and team structures. Where there is an active external sales team, i.e. doing their own prospecting, we expect around 20-40%, companies with an internal sales team would probably see between 40-80% and 70-95% where most sales are concluded online or with little human intervention.
You’ll also want to highlight the percentage of customers that were influenced by marketing in their buying decision, even if they did not originate as marketing leads. Look at all new customers signed up in a particular period and compare what percentage had interaction with marketing material or activities in the period prior to purchase. A higher percentage indicates that your marketing campaigns are effective in prompting buying behaviour, which naturally results in revenue for the business.
Getting granular with your activities and channels help you report on the efficiency of your programmes.
Programme Performance Indicators:
Your call-to-action button entices your prospects to click through to your landing page where your offer is housed. Here you want to establish whether it is doing its job by looking at the number of views received in relation to the number of clicks to determine your conversion rate. The higher the conversion rate, the more effective your CTA is.
Your landing page outlines the value the offer holds for your prospect. If it conveys this well, they will go on to download the offer by completing the form. Here, again, you will consider the number of page views compared to the form submission rate to establish its conversion rates. Considering prospects are already somewhat familiar with the crux of the offer (via the CTA, social media post or email message) you should anticipate a high conversion rate. If yours is on the lower end, you may want to consider implementing an A/B test on specific elements to improve performance.
Promote your offer via email to your established leads. As with any email, you’ll want to have a look at the delivery, open and bounce rates and importantly, the click-through-rate to your landing page; a vital metric for campaign performance measurement. In order to report on source performance, isolate the conversions that can be attributed to email clicks.
Throughout your campaign period you should blog around your offer’s primary keywords in order to attract search-based traffic (as well as to have content to share out on social media leading to your offer). Measure the efficacy of your blogging by tracking page views, keyword rankings in organic search and the conversion assists.
Another integral channel for promoting your campaign is social media. Use views, shares and re-posts as well as traffic and leads directly attributed to social media to establish the engagement and conversion rates of your social promotion.
Use what you know from your sources of leads generated during your campaign to establish the channels that work best for you. By measuring conversion by Source, you will know where to plug additional efforts and budget with your next campaign.
These metrics will give you a good start to prove your marketing ROI to the board, but they are certainly not exhaustive. If you have been tracking your marketing ROI for a while now, I’d love to hear in the comments what metrics you're using to present to the board, and what other indicators you find useful.