By Kelly Borth, Chief Strategy Officer at GREENCREST
In nearly every marketing conversation, I am asked how to measure return on investment (ROI). It is a fair question, but the answer is not always simple to address.
ROI and equally important return on opportunity (ROO), are measured differently for most companies and are calculated on factors that are specific to each organization.
Here are some considerations for formulating ROI and ROO:
Establishing marketing goals
Know the marketing outcomes you desire. Are you trying to generate leads, build exposure, get the phone to ring, grow market share or retain customers?
Also keep in mind that marketing goals and sales goals are different. If direct human interaction is not a factor in the sale, they could be the same. For most, this is not the case. Marketing creates the opportunity and sales books the order. They are different disciplines.
Make your marketing goals measurable — in other words, be specific by stating percentage of growth, number of leads, degree of increase in market recognition, increase in market share and percentage of retention.
Determine tracking methods for what you want to measure. If you want a hard measurement of increase in market recognition, you can establish a benchmark by implementing before and after research surveys of how well-known your company, product or brand is in the marketplace.
Sometimes tracking can be easy, such as the number of leads generated from Internet advertising or an email campaign. Other times, unless we train customer service and sales representatives to ask how that prospect heard of us, we may never know where that opportunity came from.
Tracking percentage of growth and increase of market share require that we understand current measures as well as the sales team’s impact on the overall result. We need to understand what result we are looking for so the marketing campaign can direct prospects to do what we want to measure.
Calculating investment costs
Determining the cost of advertising, creative development, printing, postage and so on is easy. The more difficult factors are what else you are including in that calculation such as technology costs, staff cost and sales cost including sales tools such as brochures and websites.
Understanding all that you want a return on is a big factor in measuring and managing the expectation for return. Typically the more you factor in, the longer it takes to anticipate a return.
Cost of goods sold is the typical calculation for understanding what it costs you to produce a product or deliver a service to a customer. How quickly a company will see a return is based on how much gross profit is derived from the sale.
Another consideration is the lifetime value of new customer. If the sale of your product has the potential to generate future maintenance or service work, add-on components, replacement parts, reoccurring revenue and the like, then your return can more readily be met by factoring the lifetime profit your company realizes from acquiring a new customer.
Factoring the sales cycle
What is the typical time frame from when a lead is generated to when a sale is booked (signed, sealed and delivered)?
How quickly you will get a return on investment is largely based on how quickly you can book the new business. If it is a long sales cycle, you may want to engage interim measurements or milestones to ensure your return is on track.
So, what should you be measuring? There are numerous ROI and ROO measurements — I could easily name 25 off the top of my head. You need to determine which are most important to your organization. Choose no more than a handful so that your team can easily manage the tracking and measurement.