So last week we talked about building your 2016 marketing budget and assuming you did that, this week you’ve heard from your finance and accounting partners that they’re cutting it by 10%. In order to avoid these cuts you likely will be asked to defend your budget, and that comes in the form of (insert scary music sounds here) proving the Marketing ROI.
Actually, the finance partners probably aren’t asking for your ROI because, well, they’re probably just managing to the expense lines, and THIS is where you put your expertise to work! Because you, as an astute marketing manager, can illustrate why spending this hard-earned corporate money will result in a very specific amount of revenue.
Nine out of ten (90%) global marketers are not trained to calculate return on investment (ROI), and 80% struggle with being able to properly demonstrate to their management the business effectiveness of their spending, campaigns and activities, according to new research. Fournaise Group Marketing, 2014
Before you can value your marketing you have to value your customers. A few key measurements are:
- Cost of Acquisition: Cost of acquisition is calculated by the amount you spend to acquire a customer over a given time, and dividing it by the number of customers you acquire in that given time. Don’t forget to take into account EVERYTHING it takes to find and acquire a customer like vendor costs, sales, support, and marketing staff compensation.
- Customer Lifetime Value (CLV): The CLV is a prediction of the net profit each customer can deliver over the course of the relationship. So while the cost of acquisition looks at what resources your organization uses to land a new customer. Simply stated, CLV examines the potential value that customers bring to your organization.
- Customer Retention Rates (CRR): Customer retention may be a performance measurement that most marketing managers simply don’t see. This blind spot is one of the fundamental problems with a sales-driven marketing team. Customer retention is left to Customer Service or other more operationally-focused teams leaving Marketing out of the process entirely.* To calculate retention take the original number of customers, subtract your lost customers and divide by the original number of customers for the that given timeframe. For example, if you start the month with 45 customers, and lose 5, the formula would be: (45-5)/45=89% Retention.**
*Meanwhile your competitors are hitting up your customers right and left — so DON’T ever stop marketing to your existing customers.
** Obviously you should exclude new customers in this calculation
Once you have some value of your customers, you can begin to know how much you can logically spend to acquire them and still make a profit. The higher your revenue per transaction the more you can spend to acquire (but you probably have a longer buying cycle which will drive your marketing costs up in relation.)
The best predictor of future success (or failure) is past success (or failure). So now’s when you pull out your historical campaign measurements. You should be able to assess how many customers you gained from your direct mail, you should know how many customer service issues you resolved using social media, and exactly how many qualified customers found you using paid or other search. These metrics become crucial when creating your marketing “balance sheet.” Don’t fool yourself into thinking that, without any other changes, your newsletter open rate is going to jump from 2% to 15% this year simply to justify an added $25,000 to your email marketing budget.
When you compare your previous campaigns (and their successes) you should be able to then create a forecast that says spending X number of dollars on direct mail yields me Y number of customers. X number of dollars spent making my website more engaging yielded me and additional Y number of customers. And so on down your budget line items.
If you don’t have previous examples to follow, for new products or new marketing channels, you generally can gather secondary research information that will help you, but it will be somewhat of an estimate because your unique offering, sales conditions and product can play a big role in the metrics.
You can’t expect your organization to value anything that you, yourself cannot quantify. This also becomes a lesson in making sure that your measurements are in place throughout the year so that when it comes time to budget you have clear numbers to rely on and your 2017 budget (and ROI proof) will be a breeze.