In our book, The Next CMO, I wrote about the New Marketing ROI (MROI). In this blog, I update the approach by drawing out two concepts that help put the New MROI into practice. I also make the distinction between Revenue ROI (RROI) and true ROI.
The approach to the New MROI is based on three key principles:
- All marketing campaigns have an ultimate, quantifiable, financial target. If your marketing campaign is not intended, ultimately, to affect the P&L of your company in a positive way, why would you do it? If that’s true, then the challenge is to base your ROI analysis on that point in time.
- MROI is not tied to the fiscal year. Avoid the trap of trying to deliver outcomes in the same fiscal year as your investments. A campaign in the second half of the fiscal year that delivers great financial outcomes in the next fiscal year is a good investment.
- Every phase of the funnel is worth the same as the financial target. This is a critical point that hinges on thinking about averages rather than specific funnel events. One of the fallacies of marketing attribution models is the false precision they assume in tying a specific deal to a specific funnel event. Operational Marketing excellence is focused on strategic outcomes (did the investment in this campaign deliver its financial objectives?) rather than the fruitless minutiae of last-touch attribution models and the like (to which specific marketing tactic am I going to ascribe the value of this particular deal?).
To put this into practice, I recommend doing the following:
- Zoom out
Zooming out means thinking about the end of the funnel in your marketing campaigns and then scoping your campaign based on that. This will allow you to aggregate coordinated activities into campaigns that will culminate in a financial outcome. For example, if you have an ABM campaign whose goal is to upsell installed base customers, you might deliver an integrated marketing campaign that combines digital awareness, thought-leadership through blogs and article placement, culminating in a customer seminar to outline the benefits of a new product capability, all of which yields a set of sales-qualified leads (SQL) that culminate in new deals.
Zooming out so that you can see over the horizon of your immediate tactics to the destination of the financial outcome will enable you to scope, plan and coordinate your marketing engine more optimally, bringing together disparate tactics into a coherent campaign. If you don’t zoom out, you will find yourself measuring “did-we-do-it” metrics like, “Number of event registrations.” Such metrics feel good, but they only allude to a positive business benefit. If you zoom out, you will see that those registrations turn into MQL, which turn into opportunities, which turn into SQL, which turn into bookings, which turn into revenue. Now you can start to think analytically about how much registrations are really needed to generate the target revenue amount at the end of the funnel.
- Focus on averages
During election seasons, we are often advised not to over-react to individual polls, and instead to look at averages of polls to get a realistic sense of what's happening. In the same vein, it is critical to think about the average value of marketing events in the funnel rather than individual marketing events. Who could possibly tell the value of a specific event registrant? You don’t know if they’re going to convert into a real deal or not. It would be wasteful to pursue it on a case-by-case basis.
Imagine we run a campaign that yields 10 deals (represented as stars below), worth $10,000 on average
Those deals were won from 30 opportunities, 20 of which did not turn into deals (the circles in the diagram below). What are those 30 opportunities worth? Since 20 of them didn’t close, and 10 of them did, the 30 opportunities are still worth $100,000
At the opportunity stage, we don’t know which of these deals will yet convert to become a real deal, so we don’t know the value of any individual opportunity. We know though, that on average, each opportunity is worth $3,333.33 (i.e. $100K / 30 opportunities).
If we work our way up the funnel to the MQL stage, we might have 100 leads. Those 100 leads are still worth $100,000 because the ten deals are buried in there somewhere, and 90 of them are not going to convert to a deal. And 70 won’t convert to opportunities (represented by the plus signs below). While we don’t know what any particular lead is worth, we know that on average, a lead is worth $1,000 ($100K / 100 lead)
If we can estimate our conversion rates through the funnel, we can estimate the financial value of any funnel stage. But we can only do this effectively if we have zoomed out far enough to see the financial outcome at the end of the funnel, and then worked our way back.
True ROI vs Revenue ROI
It is intuitive to focus on revenue as one of the elements of the ROI calculation. If I spend $10,000 to make $40,000 in revenue, then according to the ROI calculation, that yields:
($40,000 - $10,000)/$10,000 = 3.0 x RROI
That feels pretty good. And clearly, it’s the revenue ROI calculation. However, before we accept that, we should take a look at the margin of that revenue. Let’s imagine that revenue is high margin, say, $90% contribution margin:
($36,000 - $10,000)/$10,000 = 2.6 x ROI
Still a decent investment, perhaps. But if we were targeting a true ROI of 3.0 x, then we would have needed to generate a 3.0 x ROI from revenue with a contribution margin of 90%, and we would need to have a top-line revenue target of $44,444 rather than $40,000
To underscore the point, imagine the margin was very low, like commodity professional services revenue. That might have a contribution margin of 30%. Now our true ROI looks pretty bleak:
($12,000 - $10,000)/$10,000 = 0.2 x ROI
An ROI of 0.2x is not a good marketing investment, and it is only when we look into true ROI that we get a genuine sense of what we need to attain with our financial outcomes. With a 30% contribution margin and a true ROI target of 3.0x, we would need to believe that we could generate $133,333 of top-line revenue from our $10,000 marketing investment.
Using Plannuh's marketing ROI software, users can work with numerous financial outcomes, depending on what works best for their business.
We can capture cost-per-outcome (CPO). Here’s what it looks like in Plannuh. This example shows a campaign where significant marketing expenses were consumed prior to the first outcomes being achieved. When the first outcome was achieved (on 8/8) the average CPO is very high. The dashed line shows us the target CPO based on the marketing budget of the campaign and the target number of outcomes. Over time, as more outcomes are achieved, and campaign investment flattens out, the CPO drops toward the target, eventually surpassing the target CPO in October.
Revenue ROI (RROI)
Below is an example of RROI achievement in Plannuh. The user is tracking leads. Using our methodology described above, they have assigned an average revenue value per lead. They’ve also set specific date-based milestones for lead-attainment. The line chart in the bottom right shows lead attainment against the milestone targets. The chart in the upper right shows the corresponding RROI achievement relative to the target (the dashed horizontal line).
To understand the true ROI, we need to think about profit. Plannuh is neutral about whether you choose to use contribution margin, gross margin, or even operating profit. The key is that you apply the conversion consistently across related campaigns.
Below is an example of how Plannuh enables users to define the conversion rate from Pipeline → Bookings → Revenue → Profit. Once this is done, Plannuh will calculate the true ROI of a campaign even if it has Pipeline defined as the target metrics, by converting the pipeline actuals through the conversion funnel to arrive at a profit-based outcome. This may be particularly useful if your campaign is going to deliver results in the next fiscal year, but you want to see if you are on track today and understand whether the campaign is performing where it needs to be.
Operational excellence in marketing requires a new, financially oriented approach to true MROI. By applying the new MROI model outlined here, and bringing it into practice by zooming out and using average values, marketers can more accurately and confidently measure and communicate the business impact of their marketing campaigns.
Dan Faulkner is the CTO of Plannuh, a marketing planning software. Dan has an undergraduate degree in linguistics, and post-graduate degrees in speech and language processing and marketing. He got his marketing degree after running research for text-to-speech synthesis research at SpeechWorks (now Nuance) and must have been looking for something easy to do. You can follow him on Twitter and LinkedIn.