The barometer most businesses use to gauge the value of the marketing is return on investment (ROI). But actually tracking and understanding marketing ROI can be tricky. Here are some clarifying points.
At Marketing 360®, we talk ROI all the time. We preach how marketing is an investment (and not a cost), so naturally, the goal is to get a positive return on that investment.
But this is one of those things where the devil is in the details. Most businesses end up just tracking their overall revenue, hoping to see growth that coincides with the implementation of a marketing campaign.
This works – when revenue is up. We’re happy to assume a marketing strategy is effective if things, overall, are going well.
It also happens if revenue is flat or down. It’s easy to use marketing as a scapegoat when things, overall, are sputtering.
One of the main takeaways you’ll get from this is that ROI is more difficult to measure than most people realize. It gets conflated with other metrics and all too often is not given the time-frames needed to complete the picture.
Yet it’s possible to be detailed enough in your analysis to clarify the return on your marketing – without overcomplicating things. Let’s break it down.
The Funnel and Cost Per Aquisition
Here’s the sales funnel. You’ve probably head a lot about it:
At the top of the funnel, you invest to get people’s attention and make them aware of your brand. At the bottom, committed loyal customers come out.
Cost per lead is at the top. A lead only shows initial interest; they haven’t committed to spending their money with you.
In the middle is a complex buying cycle that’s not as linear as this graphic makes it look. The majority of leads leak out of your funnel because it turns out to be a mismatch, or they lose trust in you, feeling a disconnect between what you offer and what they believe. Many people simply get distracted; life gets in the way and they never take action.
But some flow to the bottom and become loyal customers. The cost you expend to win them is your cost per acquisition.
A couple of important considerations here.
One is that moving people through the middle of the funnel is time-intensive. It can require more of your budget than getting the initial lead. Your marketing campaign plan must deal with a drawn-out cycle where your advertising gives way branding tactics.
Second is that cost-per-acquisition is not your final marketing ROI metric. But this is where most businesses make mistakes when calculating ROI. Let’s expand on that.
Customer Lifetime Value & Referral Gold
How much is a new customer – acquired through the funnel – worth to a business?
Let’s take an example of an eCommerce clothing boutique.
A lead goes through the funnel and ends up buying a new dress. Revenue from the dress is $30, with a net profit of $3.
The cost of acquisition for this sale is $15. At this point, it looks like a negative ROI of 80%.
But this is the wrong metric. What you really want to look at here is something like return on ad spend (ROAS), which compares the amount spent in an ad campaign to the values you set for the conversion. This metric is specific to this ad campaign only.
But the business doesn’t intend for this one purchase to be the end of the relationship. They expect this customer to really like her dress and feel an affinity for the brand. In the next 5 years, she’ll buy $2000 worth of clothes for a net profit of $600.
Now that $15 cost of acquisition is far more favorable. This is a more accurate ROI number.
It gets better. She likes to show off her clothes to friends. Out of 15 people she talks to about clothes, 7 make purchases from you and 3 become regular customers.
And it can get even better. This process repeats itself 30 times and the brand gets on the radar of a social media influencer with 2 million Instagram followers. The business makes a connection with her and sends her some clothes. She starts to mention them in her Instagram posts and 2% of her followers buy at the store.
So what’s the ROI on the original customer we spoke of? Hard to put an exact number on it, but it certainly goes beyond just what that individual person bought on their first visit to the store.
Lifetime Customer Value
This example illustrates an important point when it comes to advertising, marketing, and determining ROI.
In terms of cost and associated return, the easy thing to measure is the funnel that drives initial acquisition.
Digital tracking allows you to determine your lead acquisition costs with accuracy. You can also track the journey through the funnel and get accurate numbers for your cost per acquisition.
At this point, you know what return you got in terms of an initial transaction with the customer.
Then, using CRM (customer relationship management) and POS (point of sale) software, you track the repeat purchases of clients to calculate the lifetime value of a customer.
This is the metric you use to determine your marketing ROI.
But as we pointed out, hopefully your customers become advocates for your brand, driving referral business that, in reality, drives the ROI number of initial funnel investment up.
You can track this to a degree, but it will be an estimation.
Other ways your brand gets amplified (like influencer marketing or PR exposure) may increase your return by serendipity. Difficult to track but still goals worth pursuing.
Prime the Pump
The ways you can’t track ROI – with precision – actually add up to something vital.
Today, it’s difficult to be profitable if the only way you get sales is to continually fill your funnel with new customers. Facebook and Google will make money here, but you won’t.
The high cost of advertising to new target audiences means your initial cost per acquisition will probably be a net loss. If that’s all that ever comes of your campaigns, you’ll struggle to make it.
In his book, This Is Marketing, Seth Godin makes the pertinent point:
The truth is that most brands that matter, and most organizations that thrive, are primed by advertising but built by good marketing. They grow because users evangelize to their friends. They grow because they are living entities, offering ever more value to the communities they serve. They grow because they find tribes that coalesce around the cultural change they’re able to produce.(p. 210)
He has suggestions on how to “fix your funnel” (p. 204):
- Make sure that the right people are attracted to it.
- Make sure that the promise that brought them in aligns with where you hope they will go.
- Remove steps so that fewer decisions are required (shorten the cycle in the middle of your funnel).
- Support those you’re engaging with, reinforcing their dreams and ameliorating their fears as you go.
- Use tension to create forward motion.
- Most of all, hand those who have successfully engaged in the funnel a megaphone, a tool they can use to tell others. People like us do things like this.
That last point is at the heart of it. You don’t just want a customer. You want a loyal, repeat customer who tells others about your brand.
To maximize your return, more marketing investment needs to happen after initial customer acquisition.
This is not to say that a business model built on one-time sales won’t work – if that’s in fact how it’s built.
But if you’re measuring ROI based only on initial customer acquisition – when you must develop lifetime customer value and brand equity – your effort is falling short.
For most successful businesses, return on investment is built on returning customers who tell others about you for no other reason than you continue to delight them.
The impact of that delight probably won’t be something you can precisely measure, but it will drive the result you want: profits and long-term success.