How to measure your marketing return on investment
For too long, we’ve taken the approach that marketing spend isn’t 100% measurable. It comes back to John Wanamaker’s famous quote:
“Half the money I spend on advertising is wasted, trouble is I don’t know which half”
This rings true for far too many marketers, even in 2018.
One of the great promises of the digital marketing era was that everything would be measurable - every interaction, every transaction, every single last minute piece of attention.
This is totally possible, especially with the great marketing technology we have access to. It’s also unbelievably rare.
It’s oh so easy to figure out the return on your marketing investment if you’re willing to put some effort in to getting the right tools sorted and the right information in front of you. In this post, I’ll look at how.
There are four key things you need to take care of.
Know how much you spend
This one is pretty obvious. To know how much your investment is returning, you have to know how much you’re investing in the first place.
When I say know how much you spend, I don’t just mean on ad buy, or on agencies - I mean the total spend across the whole customer journey - that’s marketing and sales. Here’s what you need to know:
- Your media spend, both online and traditional
- Your production spend, across all mediums
- Your agency spend, including any one off projects
- Your internal marketing team costs - this is even more important if your internal marketing team is one person or less, as they’re easy to forget
- The cost of your sales team and keeping them operational, because you need to keep them even if they’re not getting any leads
- An apportionment of fixed costs - rent, overheads, management time etc - that you need to keep the team functioning
Add those together and you’ve got the total cost of keeping your marketing and sales machine running.
Now, look back at the number of customers you generated last year, and your business’ total turnover. Voila! You have your customer acquisition cost (CAC) and your overall gross marketing ROI.
I’m not a massive fan of measuring ROI at a gross level - as we’ll find out in part four.
This is all well and good, but this kind of information is available on a pretty irregular basis - management accounts are monthly at best, and high quality accounts annual - and they’re often pretty late. You can’t afford to be waiting 18 months for great marketing intel.
That’s why the most important part of knowing your marketing costs comes down to being able to measure them at least monthly - so you can use them in conjunction with the data you get from my next tip - your systems.
The biggest issue that most businesses face with measuring and managing marketing performance data is driven out of poor systems.
If you’re running your entire reporting suite as a mess of spreadsheets, the following is going to happen:
- Someone will forget to upload some key data
- Someone else will change a key formula
- 1 + 2 = your spreadsheet doesn’t work
- Dave, the office spreadsheet guru, is on annual leave
- Your spreadsheet doesn’t get fixed for 4 weeks
- You’re a month late on your key marketing metrics
- The ship has sailed and you give up
Sound familiar? All this can be avoided with the right systems. You want to stay away from spreadsheets until you don’t need Dave to fix them - otherwise you’re up shit creek without a paddle.
Fortunately for you, there are plenty of marketing measurement systems that enable you to synthesize the data from multiple sources together and build a real time picture of your marketing performance.
At Proposition, we use HubSpot for both ourselves and our clients. It’s not the only marketing measurement and automation system out there, but it’s our preferred choice. It’s easy to deploy, and can be used in a number of ways - right from a small business starting out, to a big business looking for one system to rule them all.
HubSpot’s known as being pretty expensive, which is why we created a guide to building a marketing tech stack for under $100 a month (and still getting all the benefits). Check it out here.
Trends vs noise - what’s meaningful?
Once you’ve got the data, you need to know how to use it. Reporting is only useful if you can make use of it, so it’s important to make the effort to understand what’s going on.
Your higher level, longer term data is generally pretty straight forward - number of customers you add a month, number of sales you make per customer, average sale size etc - but your lower level, small time scale data points can be where you come unstuck.
There are two things that you need to remember when you’re looking at your lower level data:
- Correlation ≠ causation. Simply, just because something looks related doesn’t mean it is. Head here to see some examples that make this point quickly and simply.
- Data moves in two ways - noise and trend. Noise is simply random variance, and can be ignored (regression to the mean explains this well), while trend is an underlying shift in performance caused by a change - intentional, unintentional, environmental, you get the drift.
Learn to distinguish between these two different things, and you’ll find measuring your marketing performance so much easier. It’ll help you eliminate noise and focus your attention on meaningful change, so your marketing results get better, faster.
Know how you make money
Finally, you need to understand how you make money. There are two ways to measure return on investment (there are way more than that, but for simplicity’s sake!):
- Gross - total turnover divided by total marketing investment
- Net - total profit (plus marketing investment) divided by total marketing investment
I prefer net return on investment, and here’s why:
It measures your impact (as a marketer or business partner) on business profitability, not business turnover, and not all turnover growth is profitable. It puts you on the same yardstick as the people who pay your bills or cut your checks, and that can only be a good thing.
Your reward comes from helping a business grow profitably, not recklessly.
To do this, you need to understand how your business makes money. Not just how it makes sales, which is traditionally the realm of the marketer - but everything that goes with that:
- Margins and costs of sale, and how they change with growth
- Human resources, and how much a business can deliver before it has to add extra people capacity
- Overheads and fixed costs, and the rate they increase with growth
- Cash, debt and how financial management impacts growth
Understanding all these things gives you a holistic view of the business’ profit and loss statement, enabling you to be a far better business partner (whether you’re internal or external) than you otherwise would be.
So, make sure you’re paying attention to the entire business - not just marketing. After all, we marketers often like to think that we’re integral to business success - so we sure as hell better act like it.
Now you’ve got everything set up, you need to pay even more attention - there’s no point in reporting for the sake of it. You need to use your newfound understanding of how your marketing makes money to improve your Return on Investment - otherwise known as the efficiency of your marketing.
If you’re following along, you’re ahead of 80% of marketers around the world. It’s time to put your advantage to good use.
November 23, 2018