Measuring your ROI is important because marketing isn’t magic. Just the act of spending money on marketing doesn’t mean you’ll actually make money, or even make what you spent back up. Marketing is a pointless waste if it’s not generating a return for you.
I can’t imagine any company that is serious about their marketing efforts not measuring their ROI. The only reasons I could really think of are:
- They’re just starting out and haven’t gotten their KPI’s quite figured out, but will start measuring ROI soon.
- They’re completely clueless, and just throwing money at something and hoping it works without having any understanding of whether it actually does. They’re probably not spending much money and are viewing what they spend on marketing as a sunk cost of doing business, rather than an investment in their organization’s future.
- They’re relying on a shady internal marketing hire, an unreliable agency, or an untrustworthy freelancer for their marketing needs. Any trustworthy marketer, agency, or freelancer is going to insist on ROI being measured, it’s the only metric that matters in demonstrating that we’re doing our jobs and earning you more money than you gave us.
As for how to measure ROI, there are two reasonable approaches:
- Actual income from online sales – (Hard Costs* + Agency Fees) = ROI
- (Average value of a sales lead * Number of leads generated) – (Hard Costs* + Agency Fees) = ROI
*Hard Costs is a term meaning your ad spend, if you’re not familiar.
Which formula you use depends on the type of business you’re marketing. If it’s direct sales, like you’re selling t-shirts online, then in the short-term formula #1 makes sense. You can tie actual income generated from online sales driven by your marketing activities to how much money you generated for the business.
If you’re selling something with a longer sales cycle, like high-end real estate, it makes more sense to use formula #2. In some industries the sales cycle can be extremely long, with the sales team nurturing new leads to purchase for a year or more.
Obviously in such a situation taking only the money generated during your marketing activities would be inaccurate in that more than likely the sales made during your marketing efforts come from leads introduced a year or more before you began your marketing, and it may be another year or more before the leads you’ve delivered to the sales team actually convert into paying customers. Looking at how much money you’ve made the client right now isn’t an accurate picture of the value you’ve provided.
However, your client will be able to understand how much a qualified lead is to them, and with that information you can estimate the value of the leads you’re bringing in now.
Once you’ve been working with a client or as a marketing employee of a business with a long sales cycle for long enough, you can also start looking back at the previous year and measuring how much actual revenue you contributed to their business from leads you delivered who converted into paying customers, using formula #1.
It’s not at all hard to understand how measuring ROI works, or the benefits that having this information provides, so I really can’t imagine why someone would neglect to measure it. Neither the marketer nor the business can understand if their efforts are working without that information.
by: Zachary Chastain, Senior Digital Marketing Strategist at FUEL