Marketing your product or service in today’s economy is crazy hard. First, the economy is irritable and unpredictable thanks to current events. Second, there’s SO MUCH NOISE out there. Social media marketing, content marketing, relationship marketing – our potential customers are overwhelmed with it. It’s harder than ever to get your message through the fog.
An important tool to plan and manage your marketing activities is usable metrics.
Most business owners, especially small to midmarket business owners, simply can’t afford to dump a huge number of dollars into “building brand awareness.” There are dozens, if not hundreds, of articles and checklists, but how do you know that you’re getting value for the money and effort? You know that your marketing budget should return a satisfactory ROI, but what IS a satisfactory ROI and how do you calculate it?
Our advice is to start by defining what growth metrics matter to you. Not every company or type of business has the same goals. What have you identified as the best path for growth?
- Increased revenue per customer or increased average order value– If you have a large customer base, it may be that growing by increasing sales to those customers is a good strategy. What you need is for your existing customers to visit you more often and purchase more per visit.
- Increased customer diversity – You need to expand your reach. Maybe you have pretty good market penetration with a specific segment, but you want to reach new demographic groups and expand your customer base.
- Improved customer retention or increased lifetime value of a customer – A large percentage of your customers are one-and-done shoppers or sporadic shoppers. You want to turn these folks into regular customers who create a more predictable revenue stream, reducing the need to spend as many marketing dollars on customer acquisition.
- Higher sales margin – Maybe you’re selling the heck out of your low margin products, but to increase profitability, you need customers to purchase higher-margin products too. You need a plan to successfully upsell so that you get more value from each customer visit.
Understanding where you are today and what the competitive landscape looks like will help you determine which approach to growth makes the most sense for you. The next step is to establish the short- and long-term metrics for your goals. For example, if your average customer is buying $75 annually from you, you might aim to increase their spend to $100 this year and $130 by the end of next year.
It’s also likely you are about more than one of these goals. It’s ok to have multiple goals, but try to quantify which ones will have the biggest impact on your business, so you can prioritize among the different goals.
Okay, so now you’ve decided what growth strategy you need to focus on, where you’re starting from, and where you’d like to go. Now you’re ready to determine how much money to invest in the marketing you need to get from here to there. Or maybe you already had a set marketing budget, but now you have better guidelines for how to focus that spend to get the results you need.
In almost every organization, the marketing team is asked to justify the marketing budget by reporting the Return on Investment on marketing spend. To do this, a simple formula is employed.
ROI = (Incremental financial value – Cost of marketing investment) / Cost of marketing investment
Easy, right?
Well….part of it is easy. You can track how much you have spent on your marketing efforts. The tricky part is really understanding the incremental financial value you obtain from that marketing spend. Even if you have a solid baseline and well-defined goals, there are a lot of things that can affect the numbers. How do you know if the increase is due to your marketing efforts? There’s no perfect solution. Consider the following impacts to your marketing ROI when determining the effectiveness of your program:
Seasonality
If your business has seasonal highs and lows, you need to take that into consideration when calculating your ROI. If you always have a 20% increase in sales in August for back-to-school, then it won’t make any sense to compare August numbers to June numbers. You’ve got to align to the same time period last year to see what’s changed.
Concurrent Activities
You’re running a new marketing campaign, but you’ve also added 20 new products to your mix and hired a new warehouse manager who is getting orders out the door 2 days faster. Your sales go up! Can you determine how much of the increase is attributable to your marketing efforts? It might not be possible to unpick that knot. If you can, put a box around marketing efforts you want to measure so that you can isolate them. For example, if you have stores in 10 metro areas, run that new radio ad in 1-2 of them and then do a comparison.
Delayed Results
Not all marketing spend is going to have an immediate impact on revenue. Sure, if you run an online ad and people click on it and buy stuff, that is an immediate and measurable impact. If you publish an interesting article, someone reads it, shares it with three friends, and two months later one of them comes to you to purchase, that’s a lot harder to quantify. Your excellent marketing content impacted that customer’s decision journey and brought you revenue, but the results were not immediate. You might need to use a trailing average to really understand the impact of your marketing efforts.
You’ve set goals, defined metrics, and figured out how to track your ROI. How do you know if your return is satisfactory or if you should recalibrate your efforts? Is a $5 return for your marketing dollar a great ROI? Or do you need $10? Is this as arbitrary as it sounds? The more important questions are:
- Are you on track to meet your growth goals?
- Are your growth goals still valid, or do changes in the market mean you need to reset?
- Does your marketing spend helping you create sustainable growth by building a positive brand image and increasing the lifetime value of customers, or are you seeing feast-and-famine cycles?
- Are you creating more short-term demand than you can satisfactorily meet, creating long term customer satisfaction problems?
Just because one specific campaign has a good ROI doesn’t mean that it is the right approach for you. An infamous example is running a “new customer” discount which increases the creation of new accounts by 15% – great ROI, right? But at the same time, you’re losing existing customers because you didn’t offer them a reason to stay, and they’re taking advantage of the competition’s new customer discount! You’re not increasing your customer base, you’re just churning. Marketing ROI is just one piece of the marketing decision-making puzzle. The most important measure is how well your combined marketing activities move you towards your growth goals.
For another in-depth guide on how to measure marketing ROI, check out our other blog post here.
