Measuring return on investment (ROI) in marketing is sort of like finding the Yeti - much talked about, theories abound...but there's little conclusive documentation.
This mostly stems from confusion on what to measure. Or, it could be because we spend too much time defending that there even is an ROI in the first place, rather than figuring out how to measure it. So, to save you a wandering trek through your analytics searching for that mythical ROI, here’s how you can measure it directly.
Use Closed-Loop Reporting
Closed-loop reporting brings two otherwise separate teams (and their data) together in a way that links specific sales to specific marketing referrals.
First, consider the two teams that are connected in closed-loop reporting: marketing and sales.
Marketing team members and sales team members are positioned in different places along the sales funnel, so their goals are different. Marketing people are using tools to measure data from their marketing efforts, and sales people are using tools (most often a CRM) to keep track of customers and leads.
The idea of a closed-loop is simply that you close the loop (get it?) between the two departments. The sales team reports back to the marketing team, informing them of what happened with the leads the marketing team sent their way. The marketing team is better informed of what works and what doesn’t and can make changes as needed.
One way to do this is to track the submissions to the forms on your landing pages. Ideally, you'll have some bottom-of-the-funnel forms that would indicate to the sales team that the visitor is ready to be contacted.
Without closing the loop, your marketing team is operating somewhat blind, missing out on crucial insights as to whether or not their efforts (based on guess-work interpretations of their marketing data) actually worked.
Here’s how closed-loop marketing works:
- Your lead enters your closed loop by arriving on your website. At this moment, a cookie is set so that you know what referred that visitor to your site. Every URL that leads to your website--whether it is from social media, emails, or some other inbound method--should have a specific tracking URL that clearly designates what brought a visitor in. This is why when you make your website the center of your closed-loop universe, it’s easier to make closed-loop reporting work.
- Your lead’s activity is tracked using a cookie. Now that the visitor is on your website, it’s important to know what they do once they’re there. What pages are they looking at? Did they follow the path you assumed or hoped they would as they made their way towards a possible sale? Which lead form did they fill out? This is a tricky step, and if you don’t have a marketing tool (we use HubSpot) that integrates and makes it easy to track this information, you’re going to need some technical assistance. The point with this step isn’t simply to track a visitor’s actions; that’s easy enough with nearly any analytic tool. It’s to be sure you always keep the referral source attached to that visitor action data set.
- You capture your lead’s information on a form. At some point, you want to know more about your visitors than simply how they got to your site and what they did once they got there. You’ll need to know their name and some contact specifics. To achieve this, you can direct them to a form where they can give you that information. This is why using landing pages, with copy and lead forms tailored to specific audiences and referral traffic, are so useful. Once the visitor fills out the form, the information is sent over to the sales team. They can use the customer information to qualify the lead and (hopefully) close the sale.
- Your customer’s path is in the data. Once that lead becomes a customer, consider what you now know. You know the referral source that brought them to you, how they used your site, and who they are. Specific sales and actions can be attributed directly to the referral sources and marketing techniques that got the ball rolling. This information can help you adjust your marketing strategy regularly.
To make closed-loop reporting happen, you’ll basically need two tools:
- Marketing tools that have closed-loop reporting baked in, such as Hubspot’s Sources. Remember, the second step can be tricky; your tool must keep the data from referral traffic connected to the activity and completed lead forms that follow entry to your website. It is not enough to simply have a set of referral traffic data which is separate from website visitor data.
- A CRM that plays nice with those marketing tools. You’ll need to connect that marketing data to the specific customer in your CRM. When a sale is marked as complete in the CRM, it updates the marketing software. Ideally, this is automatic so there’s less room for error.
With closed-loop reporting, you can directly link revenue to the marketing activity that generated it. For this reason alone, it’s one of the reasons we use HubSpot and closed-loop reporting for our clients.
Use Formulas With Current Financial Data
You can have all the numbers and data in the world, but do you know what to do with them? Determining ROI can vary based on what you’re working with and what you want to discover.
Before you can calculate anything, though, you’ll need to have some specific data handy:
- Sales growth. How much your sales have grown (or declined) over a period of time.
- Marketing costs. Cost of media, production, and/or employee time, depending on what you determine is considered a true marketing cost.
- Average organic sales growth. Cumulative data gathered at regular intervals for a long period of time that reveals true sales growth (or decline) trends.
- Customer lifetime value. Based on customer segments, you’ll use the cost of goods sold, profit, and other factors to discover how valuable customers are in financial terms.
Basic ROI Formula
This formula calculates in basic, round numbers how your marketing efforts have affected your sales. There are no finer points; this is all about broad numbers.
Sales Growth - Marketing Costs / Marketing Cost = ROI
If your sales grew by $50,000, and you put $10,000 into marketing, your ROI will be 400%. It’s a crude approach, but it’ll give you some idea of whether or not your strategy’s paying off. Be sure to be tracking your sales growth and marketing costs accurately.
Campaign Specific ROI Formula
This formula determines the success and ROI of specific marketing campaigns.
Sales Growth - Marketing Costs / Marketing Cost - Average Organic Sales Growth = ROI
If, after a campaign, your sales grew by $50,000, your marketing costs were $10,000, and for the past year you’ve been seeing a 5% increase in sales, your ROI for that specific campaign would be 395% (400% minus the 5%).
This approach works best if you’ve been calculating ROI each month for several months. Since you’re trying to pinpoint the success of a specific campaign, ideally you should have the ROI for the months prior to launching it. Otherwise, you won’t have anything to measure the campaign’s success against. The reason you want to look for organic sales trends (up or down) is because, as you can see in the formula, you will remove them from the calculation since they’d have happened anyway, with or without the campaign.
Per-Customer Marketing ROI Formula
Customer lifetime value (CLV) is how much profit you get from a specific customer for the duration of their purchasing relationship. If you are already calculating CLV, you can use that in your marketing ROI measurements.
CLV - Marketing Costs / Marketing Costs = ROI
This ROI calculation is helpful because it helps you see how much you spend to acquire new customers versus what they bring in to your business. You could determine an average of CLV data to figure out what the average ROI is for your customers. This will give you an idea on if you’re spending too much (or too little) to acquire or keep customers.
Use Google AdWords For Valuation
It can be challenging to get support for content creation as part of your marketing plan. Paying for content seems like an expense, not an investment. That’s where Google AdWords comes in to assign numeric value to that content. You’re giving your marketing content equivalent value based on Google AdWords.
- Find the search terms that your content ranks highly for. Look at your website analytics to discover these.
- In your Google AdWords dashboard, calculate the cost if you’d have purchased ads based on that search term instead of receiving the benefit of organic search like you currently are.
As David Meerman Scott points out, you could either be paying that money monthly or yearly to get those clicks, or you could pay one time to create the content and get the clicks organically.
If you want a more in-depth ROI analysis of this technique, consider what the Content Marketing Institute suggests, which is to evaluate specific posts, or groups of posts, and then determine how many hits they get based on traffic numbers from your site analytics. Then, calculate the cost per click (CPC) using Google AdWords keyword planner. Plug that data into Excel, and use a linear extrapolation formula to understand likely growth (and the estimated value) for that specific content.
Use Single Or Multiple Attribution With Projections
Marketer Jon Miller points out a tricky problem with marketing ROI, and that has to do with what he calls the “tyranny of time.”
You know very well that online marketing can take a significant amount of time from when you launch a campaign to when it pays off, particularly with the content or relational marketing that comes with social media. The sales funnel you work with isn’t the same as issuing a coupon with an expiration date.
Additionally, Miller points out some challenges with attribution, that is, knowing which marketing campaign or effort lead to the sale. Single attribution means you give credit for the revenue to either the marketing technique at the top of the funnel (first touched), or the one at the bottom that closed the sale (last touched). It’s not particularly accurate for understanding the value of each marketing process through the sales funnel, but it does give you some idea of trends with regard to opening and closing a sale.
A better approach is to use multiple attribution, which basically dissects a successful sale and traces it from the close all the way back to the start, noting what touched it along the way. As Miller notes, you are only noting those touches that led to the next action that furthered the prospect down the sale funnel.
Once you know who and what was directly involved with the sale, you can either divvy up the resulting sale by dividing it by the number of successful touches (six touches means they each get a value of ⅙ of the sale), or you can dig deeper and assign a value based on the amount of time that went into each touch, or maybe the program or team that was involved. The idea is that you’re assigning a value to types of touches along the sales funnel that you will use with your projections.
Projections, whether you use linear extrapolation or simply set an identical timeline for identical marketing events or sales, mean that you defeat the tyranny of time and see how valuable a marketing technique was over the long run.
Use An Asset-Based Approach
Assets are easily measured on your balance sheets. If you consider the content and marketing campaigns you create as a tangible asset, you can measure it as easily as you do other assets.
To do this, you’ll need to track each type of content and campaign that you create as if they were an asset you were building, almost like an investment account. Each time you deposit into that account (adding content, continuing/creating a campaign, gain higher search engine rankings, improved numbers on Alexa, growing social fans, etc.) you will also track the expense in financial costs, time, and anything else your team is tasked to measure. The value of the asset (deposits - expenses = value) is the ROI. When viewed as an investment account, any positive value is your return.
This approach views marketing as cumulative, something that builds on what you’ve done in the past instead of one-off measurements that exist alone and separate from your other marketing.
If you never calculate your marketing ROI, everything you do in regards to marketing can only be viewed as a cost and not as any form of investment. When budgets are tight or sales are down, costs get cut. Investments don’t.
