By Zuhair Suidan
A simple question, but with a very complex answer.
Once upon a time, it was enough just to be doing marketing – attending industry conferences, sending out mailings, taking customers out to lunch, doing advertising and public relations… After all, you were active, busy, getting the word out, promoting the brand. But no longer. Today’s tightening cost pressures force you to measure the impact of each of your marketing initiatives, and maximize the return on every marketing dollar.
While marketing traditionally spoke in terms of what it does, the people funding marketing, be they the CEOs and / or CFOs, speak in terms of dollars and cents and the impact of expenditures on the bottom line. Marketing Return On Investment (ROI) is the intersection point between marketing and finance, allowing these two critical functions to speak a common language, and facilitating the marketing budgeting process.
Maximizing marketing ROI is not just beneficial for getting through the budgeting process with adequate funding. What has been happening increasingly is that while marketing objectives remain fixed, marketing budgets get slashed midway through the fiscal year. This shifts the burden of marketing ROI measurement and maximization squarely to the marketing side, and forces strict ‘self-policing’ of every marketing expenditure by the marketing function.
The ultimate objective of marketing ROI measurement and maximization is to understand the impact on the bottom line of every marketing initiative, and then select the marketing investments that would yield the highest returns. To do this, one needs to be able to measure incremental sales as well as incremental cost of goods sold, and relate them to incremental marketing investment. Formulaically, marketing return on investment equals the present value of the future stream of incremental sales minus the present value of the incremental cost of goods sold minus incremental marketing investment, and the result divided by the marketing investment.
If you can do this, you are well on your way to answering if your marketing is yielding the expected results. The main challenge is that in marketing, it is often difficult to attribute incremental sales to a specific incremental marketing initiative. Also, the sales cycle can be lengthy, in particular in business to business, high price capital goods purchases, complicating marketing ROI analyses as part of the budgeting cycle.
While you should always seek to attain as close a measure of each marketing initiative’s impact on sales, if you are starting from scratch and cannot do it, you need not give up in despair. There are a number of levels of marketing impact measurements that you probably can handle right now, or with relative ease. Here are some levels of marketing ROI measures, starting with the most basic first:
- List the marketing initiatives you are involved in. A ‘laundry list’ is all that’s called for at this level. Just identify the kinds of things you do, e.g. participating in industry conferences, issuing press releases, telemarketing, distributing brochures, doing mailings…
- Quantify the exposures of the above listed initiatives. If you attend industry conferences – which, where, how many / how many people go through your booths / how many demonstrations do you do / how many business cards do you collect / how many follow-on contacts do you pursue? If you put out press releases, how many get published / what is the circulation of the publications in which they get published / how effective are the articles written about you as a result of these press releases?...
- What is the impact of your initiatives in terms of ‘moving the needle’ of increasing awareness of your brand and the favorability of your offerings? This is important to understand since awareness and favorability are important drivers in the sales process. To answer this question, you need to do some before and after measurements in the form of surveys.
- How many customer contacts result from your marketing initiatives? How many customers start walking into your showroom? How many calls come in? How many visit your web site? When any of these prospect activities take place, do you ask them ‘how did you find out about us?’ That question alone can give you a good measure of what marketing initiative (or combination of initiatives) had the primary impact on getting people to take this critical step in the sales process.
- How much did you sell as a result of your marketing initiative? Per the discussion above, this is typically the measure most sought after in marketing ROI analyses. Once you know incremental sales, you can work with incremental cost of goods sold and incremental marketing investment to determine the incremental marketing ROI.
- What is the lifetime customer value? Your marketing investment will likely not only generate a sale, but also help create a repeat customer. The true marketing ROI should not just include the first sale but also repeat sales and any referrals of other prospects from the new client that you acquired.
So is your marketing worth the investment? If you know, and the answer is showing a healthy return on the marketing investment, you’re in good shape. If you don’t know and / or can’t answer the question, you better get ready. The questions coming from the CEO / CFO may be as close as the next budget review.
Suidan Associates - www.Suidan.com, +203-972-6000 – can work with you on setting up a practical framework for measuring and maximizing your marketing ROI. We welcome discussing it with you.