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March 11, 2011

Honing Marketing ROI Calculations

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Simply calculating ROI without considering all associated revenues (near term and long term) and all associated expenses (like marketing overhead and sales) can be irrelevant, or worse, misleading. The ROI itself is a simple calculation whereby the fully-loaded and properly allocated cost of marketing is subtracted from the lifetime value of conversions or sales created by the marketing activity and divided by the cost.

Components of the marketing costs might include:

  • Cost to produce the marketing activity
  • Allocation of marketing overhead
  • Media buying costs
  • Sales expense (possibly)
  • Marketing system attribution fees
  • Components of the lifetime value of the conversion might include
  • Gross margin of the sale itself
  • Discounted value of the gross margin of any regular residual support/maintenance fees (using a discounted cash-flow model of some sort)
  • Value of the customer for other reasons (marketing cachet, referrals, market share, etc)

The decision to include sales costs is a complex one. If different marketing strategies produce leads of varying quality, then the sales expense associated with the different strategies and channels become relevant to the overall ROI. For example, let’s say that the print ad channel seems to generate as many sales for the same marketing cost per sale as the search marketing channel. For some reason, however, the print ad sales require 4 times as much effort to close due to customers requiring more hand-holding. In this case, the sales expense would be critical to determine the proper ROI and attributing sales expense would be not only appropriate but also paramount to making the right marketing decision.

In evaluating marketing ROI, the marketer could also consider Sales and Lead volumes. Some combinations of media types and attribution mechanisms may provide superior returns, but low lead and sales volumes. In other words, the media may be cheap, but the lead quality may be low or the lead volume is low. The most cost-effective media type may not preclude the effectiveness of other media types whose ROI may be inferior, but whose lead/sales volumes may be greater. Of course, any direct response media that generates a negative ROI would almost always be a candidate for termination.

Calculating ROI is a difficult task, and we have only touched on a few of the challenges here. What are some of the other major difficulties? How have you grappled with this complex issue in order to get a clear picture of of your ROI?

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by Kevin Groome

Founder, CampaignDrive

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