Return on Marketing Spend — an Overview
Marketing ROI explained with key metrics to help you measure it
In 2019 alone, the combined global spending on marketing channels such as ads, email marketing, media campaigns, and other marketing channels was estimated at 2.1 trillion dollars. The UK alone is considered as the fourth largest advertising market in the world with estimated advertising spend of 22.35 billion pounds, as of 2017.
With millions being spent on marketing campaigns every year, companies have started to consider marketing as a major element of its strategy, in order to retain brand value and stay ahead of competitors. Marketers argue that marketing is now a driving force behind sales funnels and deal pipelines, but without measurable units and strict measures, there is simply no way to justify this claim. Therefore over the years, various performance measures have been developed that help in analyzing whether marketing efforts actually generate any tangible value. One of the more important performance measures created is called, return on marketing spend.
Clear House Accountants have worked with their digital agency clients, marketing agency partners and internal accountants to prepare this valuable guide, which can be used to address the technical and data-intensive elements of marketing, which due to its lack in creativity and lustre might be ignored by agencies and business owners.
Related: If you haven’t launched your business yet, then learn how you can set your business in the UK by reading our startup guide here.
Marketing ROI
As the name suggests, marketing ROI or MROI is a method used to estimate the return generated on the investment made on a specific marketing campaign. This figure helps in determining the efficiency of a marketing campaign. It also assists in comparing different campaigns in order to decide between the most suitable channel to generate business value.
Benefits of using marketing ROI
ROI empowers you with data that could help you steer your marketing efforts in the right direction. Below is a list of the benefits that you could derive from an accurate return on marketing spend calculation:
Comparison of marketing spend efficiency with that of competitors
Bigger marketing budgets are not always the underlying factor for a company’s success, the efficiency with which these budgets are used is the real factor required to stay ahead of the competition. Identifying how efficiently your competitor is using their marketing budget can be crucial to staying ahead of competitors and formulating an effective marketing strategy. A company’s MROI is confidential information and may not be available publicly. However, as an alternative, you can work with your accounting firm to use publicly available financial statements to estimate their MROI to use as a comparative.
Helps justify a budget with an expected return
Entrepreneurs and business owners are always curious to find out how good their investments are at generating returns; an ROI metric can help business owners plan on how much their marketing budget needs to be for the return they expect using an MROI metric. Marketing ROI is an indicator of the firm’s profitability that can eventually help to determine the success of a specific campaign, project or strategy.
Helps plan the allocation of marketing funds
Marketers have to plan for marketing campaigns based on factors such as leads, clicks, comments generated, engagement achieved, etc. But ultimately what matters is the return generated by a campaign, in terms of quantifiable financial figures. An MROI, therefore, forces a business to think about the ultimate objective of a marketing campaign in financial terms, to better allocate funds based on the financial gain it brings. A task that generates no financial return would have a lower priority compared to one that generates a high financial gain.
MROI allows marketers to measure the success of their efforts in a quantifiable manner. This helps them plan strategically and decide whether it is worth spending money on a particular campaign based on its expected yield and then use the MROI figures to measure success. Based on yield and actual MROI figures, businesses can decide which campaigns to allocate funds to over the other.
If you are looking to spark creativity in your business as a business owner or a marketing manager, you should read our guide about zero-based budgeting.
Increases accountability
Marketing is not just about increasing business awareness or increasing brand awareness; it is also about generating increased revenue, growing customers and improving sales. Performing marketing activities without any measurable objectives only creates additional effort without any financial gains. Therefore, a plan in the right direction is necessary to produce the right mix of results.
Measurable results give the team goals and the higher management a way to assess their performance. ROI is one way to measure the performance of a marketing team and to hold them accountable for the money spent. Marketing ROI also forces marketers to plan carefully before investing in a specific marketing programme as they would be aware of how it might affect the ROI.
Related: Do you wish to transform your startup into a success story? Learn more about the key ingredients for business success by reading our guide here.
Measuring marketing ROI
The importance of choosing the right marketing channel for your business
Before you start spending on marketing, it is advisable to identify the ideal marketing channels for your niche. It is recommended to test different marketing channels like social media, email campaigns or ads to see which one fits your business needs the best. This will help you filter the best ones and to discover other lucrative channels along the way.
There are a multitude of marketing channels which you can use to achieve maximum visibility and brand awareness; selecting between them can be tedious work requiring multiple A/B testing scenarios and hit and trial methods. Below are the different marketing channels that you can use to market your brand.
One of the most sought after marketing channels nowadays are social media platforms. They have introduced a whole new level of versatility in the world of marketing. These channels have huge user bases and are constantly adding new ways to put your products in front of your potential customers.
Brands can now promote their business and improve brand visibility through social media posts, hosting webinars, writing blogs, and so much more. The best part about digital marketing is that you might not be required to pay anything — unless you are doing paid campaigns.
Measuring marketing ROI — not as easy as it looks
With endless benefits linked to the value that an ROI provides — unfortunately, there is a catch to the entire equation. Measuring marketing ROI is not as easy as it looks, and it is very challenging for businesses to accurately estimate it. If it would have been a simple equation which could provide you results with a simple tap of your calculator, things would have been much different. You can not use the same variables over and over again to calculate your firm’s marketing efficiency, but instead, you have to take multiple variables under consideration.
Your ROI equation may vary in different cases; however, you will have to set a definite time limit when measuring the returns. It is important to define a specific time period for which the marketing spend, and its return needs to be calculated. You may set a time period of 3 three weeks to two years. It’s advisable to measure your marketing ROI for a smaller period and a larger one, to have a better variety and for improved accuracy.
Making it work for you
After defining a time period, you have to determine the factors or indexes that constitute ROI. These factors can be either, your revenue, your gross revenue or even your customer lifetime value.
Statistics and figures reflect your company’s performance and also provide future insight into how you should be working to make it even better. With that said, it’s advisable to consider a metric that will be very helpful in evaluating your short-term and long-term marketing strategies. You can even consider some ratios when investigating factors that impact the marketing ROI. For instance, you can compare the number of people who have registered for your live webinar with the actual attendees. You can even compare the number of attendees to the number of conversions later on. The more detailed your analysis is — the better results you will be able to derive.
Estimating marketing ROI can get confusing. We advise you to speak to a data analyst, a performance specialist such as a business advisor, marketing analyst or an accountant. Someone who specialises in working with marketing clients, who can help set specific goals for your campaign and can also help estimate numbers that are most relevant to your marketing plan.
How can you determine ROI?
Simply put — an ROI equation at one end inputs the money that are the expenses on the campaign, and your revenues are on the output. You will need to compare your revenue to your overall marketing expenditure. This is a simple method to determine ROI but to achieve greater accuracy; you might have to dig deeper.
One equation for calculating the ROI is shown below:
Marketing ROI
(Additional financial value gained from the marketing investment — Cost of the marketing Investment) / Cost of the marketing Investment
To explain this in a better way — let’s consider the example. Suppose you invest £500 in a particular campaign. Out of which you were able to generate £1000 as revenue (incremental financial value). The equation would now look like this.
=(1000–500)/500 x 100 = 100%
This may seem like an ideal scenario; the reality can be quite different.
Attribution Models
To determine various data analytics which is used to make ROI estimations. it is advisable to set up an attribution model to get a track on how customers found your product.
What do you need to know about Single-Attribution models?
Single attribution models determine a marketing channel’s ROI based on the information, whether it was the first or last touchpoint of your customer’s journey or not.
There are many companies that follow the single attribution model. However, according to expert opinion, the single attribution model fails to provide accurate results. Possibly because they ignore many other touchpoints that the customers might make with your business.
For instance, according to the first-touch attribution, if the buyer’s first interaction with your business is through a blog, then that blog post will be given 100% credit for making the conversion successful. This might seem unfair as it makes the other marketing efforts seem useless.
Video: Attribution Models: The Complete Guide for Beginners
Understanding Attribution Modeling and choosing the right one for your marketing campaign.
Pros and cons of First Touch Attribution model
Pros:
- It is very easy to understand.
- It requires a very minimum of effort to implement.
Con:
- It does not take into account valuable nurture programs and other later-stage touchpoints.
Pros and Cons of Last Touch Attribution model
Pro:
- It helps provide an overview of late-stage campaigns that motivated the purchase for long sales cycles.
Con:
- It might not give an accurate depiction of what actually influenced the buyer to make the purchase decision.
What do you need to know about multi-touch attribution?
Multi-touch attribution is one of the best methods to measure marketing ROI. This model allows marketers to assign weightage or percentage to every touchpoint your customers’ hits during the entire purchase cycle. Depending on your strategy, you may assign equal weightage to every touchpoint, or you can also assign more weightage to the first and last touchpoints and equal weights to every touch that comes in between.
The reason we give preference to multi-touch attribution over single-attribution is that it is able to provide a more comprehensive insight into your marketing plan and it gives flexibility as well. Once you are more familiar with the process, you will be able to distinguish between touchpoints that were more popular among the buyers and helped them become conversions.
If you are a startup owner and struggling to plan and budget for the marketing and financial aspects of your business. You should hire or speak to competitive startup accountants or work with an expert marketing agency.
How to work out the ROI formula based on attribution models?
Once you have familiarized yourself with the above two sections. It would be reasonable to move towards the mathematical calculation of the marketing ROI formula. The formula that has the capacity to address your business needs and can help craft an ideal marketing strategy for your firm.
To begin, you need to first set up the attribution model as listed above. You may do this by the assistance of an analytical tool such as Google Analytics.
As an example, let’s suppose that you want to calculate ROI for your live webinar. You wish to attract as many viewers as possible. In order to track your viewers, you adopt the multi-touch attribution approach. Suppose you assign 20% weightage to the last and first touchpoints, and equal weightage to touch-points that come in between. Once the webinar is over, you will track each of the marketing channels and the number of viewers it was able to generate.
The results might not always be what you expect. This is where you will realize the importance of your attribution model. In the case defined above — you might find out that your email campaign was the most successful in driving up the viewership of your live webinar. As a result, you might decide to improve sign-ups for your email invitations and carry on with testing different email formats to find the optimal formula. Similarly, you might discover that your online ad campaign barely appears as a touchpoint. With this information, you can further work on improving your marketing strategy, thus saving resources and extra effort.
Digital marketing and how to measure its ROI?
As mentioned above, in order to measure your digital marketing ROI, you will need to set unique goals and objectives. You can use Google Analytics to get access to data. This data might be useful in sorting out the best digital marketing metrics for your company.
There is a long list of digital marketing metrics that can help you track the ROI on your marketing campaign. We have mentioned the names of some metrics that most businesses use to measure their marketing ROI.
- Conversion Rate (CR)
Most of us are aware of the term conversion rate as it is a common marketing terminology. If the mantra of your marketing campaign is to improve your conversion rate. Then this might be the best metric to tell whether you are achieving your goal or not. Not only this, but it also gives an insight into the performance of your marketing campaign. This can help you work on better allocation of resources to achieve higher results and increase the return on investment in future.
You might want to consider other factors when choosing the type of conversion rate. One such type is ”conversion rates by channel”, which helps determine the source of traffic.
But finding out where your traffic is coming from isn’t enough. You also have to filter out the best marketing channels. You can do this by identifying the channels that are helping you generate the most leads.
2. Customer Lifetime Value (CLV)
Customer lifetime value is another popular measure to get a comprehensive understanding of your marketing ROI. CLV gives an average estimate of how much an individual customer will spend over their lifetime as a consumer. You might have to associate customer acquisition costs before working on this metric.
When you get an idea of the long-term profits a single customer can help you generate; it helps you analyze the ROI from an entirely different perspective.
Related: If you are operating as a SaaS business, then you might want to learn about the metrics that may be very useful for your business. Learn more about them by reading our SaaS metrics guide.
3. Cost per Lead (CPL)
If the ultimate goal of your marketing venture is to gather as many leads for your sales team, then it’s very important to keep track of the amount of money you are putting in to acquire an individual lead. Cost per Lead helps determine the ROI of a particular marketing campaign.
For instance, if you are spending on an ad campaign, then this formula will help:
CPL (Cost Per Lead) = Total spending on Ad campaign/ Total Attributed Leads
4. Average Order Value (AOV)
AOV helps track the average amount of pounds that are spent whenever a customer orders your product. You can estimate the Average Order Value by dividing your total revenue by the number of orders placed.
As an entrepreneur, you might struggle to increase the number of orders placed over time. But you should start paying attention to the Average Order Value of each order placed as well. A marginal increase in the percentage of the average value of an order can help you pocket thousands of pounds of new revenue. If you are already working on AOV and want to improve it, then you can do this by speaking to your internal management accountant or an accounting firm that you work with.
5. Cost Per Acquisition (CPA)
One of the most popular and widely used digital marketing metrics is the Cost per Acquisition (CPA). Your CPA gives you an estimate of the average cost that is incurred while acquiring a new customer. You can calculate the CPA by dividing your total marketing expenditure by the number of sales generated.
For instance, Cost Per Acquisition for new customers through an ad campaign can be formulated as:
CPA = Total spending on Ad/ Total Attributed conversion
Estimating CPA allows you to get a better understanding of your marketing ROI. Spending more to acquire a customer than receiving from that customer implies that you have a negative return on investment. This information lets you rethink your current marketing campaigns. It will also help you discover new ways to mitigate the cost you incur to acquire a new customer.
The list mentioned above includes some very insightful metrics to calculate the ROI of your digital marketing campaign. However, it is important to keep in mind that the metrics you select can vary according to your marketing strategy. For instance, the metrics for your content marketing campaign will vary significantly with those of the social media campaign.
The metrics that you choose also depend on your company’s short and long term goals and objectives. Below are the recommended metrics for different marketing channels.
What mistakes to avoid when calculating the marketing ROI?
The marketing ROI will not be able to fully evaluate the long-term benefits of certain marketing campaigns. The ROI value might also be misleading at times as the financial team might only be able to see the cash flowing out of the company without any contribution in terms of profits. As a result, the finance and marketing executives might start to doubt the capability of the marketing strategy to actually function in the long-run. Even though your company’s marketing might not be able to generate quick profits. You might be building a strong foundation — something that an ROI can’t decipher.
For instance, if we take customer lifetime value into account, we can estimate the worth of an individual customer in comparison with others to provide a holistic picture into how well marketing creates an impact on the company’s relationship with that customer. We have also witnessed companies working on proxy measures, like brand liking or brand awareness. These proxy measurements help provide a demonstration of how each pound spent on marketing is helping the customer land into the sales funnel.
It’s simple, every pound you invest for your firm’s marketing today, will contribute to the development of your brand as an asset tomorrow. To sum it up, your marketing expenditures might be heavily affecting your profit and loss statement this year, but it is also developing your brand equity and improving your relationship with the customers for the coming years. It is all about developing a futuristic approach for your business.
Related: Informed decision making in business depends on how well you assess and manage your business risks. Learn more about risk management by reading our guide here.
Clear House Accountants are highly recognized Accountants in London. Our marketing accountants specialise working with digital marketing agencies, website developers and creative businesses to help them not only manage their compliance work but also the management and performance reporting elements of their business. We also help our digital marketing clients to create effective performance reporting measures for their client’s marketing campaigns.
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