Marketing

6 Tips for Accurately Calculating ROI on Marketing Spend

By October 2, 2018 No Comments
6 Tips for Accurately Calculating ROI

Accurately calculating ROI on your marketing spend will not only show the value of your work, but it will also help you improve leads and sales year over year. Calculating marketing ROI (MROI) may seem like a straightforward formula at first, but it is not so simple. A number of issues can quickly throw your numbers off and make your calculations ineffective. Use these tips to accurately calculate ROI on your marketing spend this year.

6 Tips for Accurately Calculating ROI on Marketing Spend

Calculating ROI on your marketing spend starts with a seemingly simple formula. However, each of these variables may become inaccurate in a number of ways.

(Sales Growth $$ – Marketing Spend) / Marketing Spend = MROI

This equation may vary depending on your marketing goals as well. Most business activities are ultimately linked to sales. Activities that don’t drive sales generally aren’t seen as driving value. However, your marketing goals may be more abstract and based on long-term growth, such as improving brand awareness or the business’s reputation. If so, sales won’t be a logical basis for your MROI. In this case, we’ll focus on sales, but another metric may be more accurate for you.

1. Factor in the Right Costs

Some marketing costs, such as ad spend or content creation, will be obvious additions to the expense part of your equation. Others, like staff people who fill multiple roles, can easily be added when they shouldn’t be. It’s tempting to put all marketing department costs onto the expenses line, but this may not be accurate.

As you add up your marketing spend, consider your anchor metric, sales, in this case. Any activities that are not aimed at increasing sales should probably not be included. These activities should be calculated separately using a different metric, such as lifetime customer value for activities aimed at customer retention (more on this later). Which costs you choose will depend on your marketing strategy, whether you work with an agency or an in-house team, and your goals. Consider the following costs and make a determination:

  • Staff: If some staff work in other areas, such as public relations or reputation management, you might include only a fraction of their salary based on the time they spend on specific activities.
  • Ad spend: In general, you’ll include these costs when calculating ROI on marketing spend, but this might not be the case for ads aimed at brand awareness.
  • Software: Some software, such as photo editing or website editing programs, is probably used in other areas of your business. Make sure you’re not adding costs twice in two different departments.
  • Social media: Are you primarily using social media as a marketing tool, or customer retention tool to manage complaints or questions? Different staff may take on different jobs within social media.
  • Sponsorships: Sponsoring an event can be a powerful advertising tool, but the primary goal might be brand awareness or reputation improvement.
  • Overhead and equipment: Computers, smartphones, tablets, company vehicles, travel, furniture, and a variety of other expenses may go here, but only if they are used by the team associated with improving sales through marketing.
  • Content creation: If you have teams dedicated to photos, graphics, videos, and copy, they probably create content for other areas as well. A video editing team will probably work on a recruitment video, for example.

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2. Add Up The Right Sales

If your sales are not accurately tracked, you cannot accurately calculate ROI on marketing spend. This may seem obvious, but there are several ways that the wrong sales tracking can throw off your MROI. This is especially true for long sales cycles. In this case, you will have to be especially conscious of your timeline, as well as the sales team’s performance.

To accurately calculate ROI on marketing spend, you’ll need an accurate sales starting point for the year (or whatever timeline your choose) as well as an ending point. Customer tracking through a CRM system is especially helpful here, as you can see when and how each person become a customer, when the sale was completed, and whether or not they purchased again. This will help you avoid the following problems which can throw off your sales numbers:

  • Wrong year: A sale made this year from a customer converted last year should, most likely, be part of your starting sales calculations, not growth.
  • Direct sales: Happy customers may reach out directly to the sales team again, bypassing marketing. These sales may be valuable for marketing activities focused on customer retention, but not new sales.
  • Department focus: If the sales team receives many leads, but closes few, this may be an issue the sales team must address in their own ROI calculations. However, this may also mean the marketing department is focusing on the wrong customers. Draw conclusions carefully.

3. Use Granular Data

Calculating ROI on marketing spend from different activities will help make your MROI more accurate, and it will help you draw more useful conclusions. If your MROI is suspiciously high or low, it can be helpful to look at the ROI of specific areas separately, such as inbound or outbound marketing, social media management or ad spending, organic leads or paid leads.

If one area also shows an inordinately high or low ROI, take a closer look at the costs, staff, and sales, and make sure these are all relevant. With only relevant data included, you can see if you should invest more in a high-performing area, or eliminate a low-performing one.

4. Choose Between Sales or Lifetime Customer Value

Loyal, repeat customers tend to be the most lucrative. For long sales cycles with a majority of repeat customers, focusing only on new customers and new sales will undervalue your marketing ROI. To accurately calculate the ROI on marketing spend in this case, it may make more sense to use lifetime customer value instead of actual sales. After all, it may cost a lot to convert these customers, but very little to maintain a lucrative relationship with them.

Using lifetime customer value as your benchmark metric will also allow you to include a broader range of marketing activities. Activities related to customer retention and loyalty, for example, will also be included.

Since you can’t know how much each new customer will ultimately spend, you will have to use an estimation for lifetime customer value. The more accurate this number, the more accurate your overall MROI will be. If you have previous data, you can calculate the average lifetime customer value. However, keep in mind that your lifetime customer value may change if your customer retention activities change.

5. Examine Sales and Marketing Separately

Whether you use lifetime customer value or sales, your sales team’s activities will have an effect on your marketing ROI. To draw actionable conclusions, it’s helpful to examine some elements of these departments separately.

Keep in mind that these departments should be cooperative, not competitive. Comparing the departments should be about drawing accurate data and solving problems, not about laying blame or finding fault. You might take a closer look at the following metrics, but be careful about how you express them to each team.

  • MROI vs SROI: Each department deals with the same number of starting and ending sales numbers, but how much they spend may be much different. If one is significantly lower, the department may be responsible for too much of the sales funnel.
  • Close rate vs Conversion rate: If marketing converts a high percent of qualified leads but sales does not close them, the ROI of both departments will suffer. Make sure your marketing department is scoring leads appropriately, and that sales has enough staff to attend to all leads.
  • By Region: Combine any targeted regional marketing activities with the regional sales team and compare them. This may reveal obstacles in certain areas. One regional group may be new, smaller than others, or the product may simply not be as relevant in that region.

6. Use the Right Tools

Getting accurate marketing expense data, tracking customers and sales, examining individual departments and finally turning these calculations into conclusions takes time and energy. Spending too much time on these calculations will ultimately erode your MROI before you can even get an accurate number. To make this process manageable, use the following tools:

  • CRM system: The right CRM software will show you where leads come from, when they become sales, how much they spend, and so on. This gives you invaluable insight across your sales and marketing activities.
  • Web Analytics and Tracking: Use web analytics and tracking codes through Google Ads, Google Analytics, Facebook ads and other sources to get accurate data about your marketing spend and the leads you gather.
  • Reporting Software: Put all of your data together in one place, automatically, to make easy-to-read reports you can draw conclusions from.
  • Organized Scorecard: With all of your KPIs on one intuitive, well-organized sheet, you will be able to find and compare key metrics at any time.

Factoring in all of these elements is a challenge, but accurate data is worth it. By accurately calculating ROI on your marketing spend, you will not only prove your value and justify your strategy, but you will also draw actionable conclusions that will help you improve leads and sales year over year.

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