Despite becoming increasingly digital and data-driven, marketers still struggle more than their counterparts in other corporate functions to communicate the business impact of their work. In a consistent way. Marketing performance metrics should be regularly tracked to measure success and gauge whether goals are being met.
Marketing ROI (MROI) is the ultimate measure of marketing effectiveness. Done right, it enables marketers to consistently measure and compare the performance of diverse campaigns executed across multiple channels.
In other articles, we’ve discussed the importance of picking metrics that matter, and seeking to boil down marketing value to financial metrics. In this article, we’re going to look closer at the impact of timing on ROI.
As a reminder, the MROI formula is: MROI = (Return - Investment)/Investment
Our recommendation is to measure return in terms of contribution margin. If you can’t, use gross margin, or - slightly worse - revenue. Here’s why:
- Imagine two companies each spend $20,000 on a campaign that generates $100,000 of revenue. If we measure ROI at the revenue level, the ROI’s look identical: (100-20)/20 = 4.0
- If one company has a contribution margin of 60% on its product ($60,000 margin on the $100K return) and one has a contribution margin of 30% ($30,000 margin on the $100K return) it becomes clear that one company’s ROI is four times better: (60-20)/20 = 2.0 vs (30-20)/20 = 0.5.
This means the complete campaign investment, which is easy to measure once the campaign is finished. While you’re executing the campaign, however, it’s useful to know which expenses to include, and how they will affect your results. Options are outlined in the following sections.
Which measures of investment make most sense for you depends on the campaign type, your team culture, and the questions you’re trying to answer.
Know your target ROI
We strongly recommend calculating your target ROI. It’s a good practice to have a sense of your total campaign budget and the value of your total outcomes before the campaign begins. That way you can determine if you are set up for success. When you consider your budget and the value of the campaign outcomes, if they don’t yield a compelling ROI, you should go back to the drawing board and take a different approach. What’s the point of doing a campaign that, if it succeeds, delivers a poor ROI?
How timeframes affect MROI measurements
MROI as a monthly (or quarterly) snapshot
Sometimes it is useful to calculate ROI for a specific time frame that is shorter than the entire campaign. This may make sense in the context of an evergreen digital campaign, where you want track performance month by month. The table below illustrates ROI independently each month. Leads have a mean contribution margin of $90 in this example,
This measure doesn’t communicate how the total campaign is doing, but it allows for easy month-by-month comparisons over relative performance, which is valuable for many.
MROI with cumulative metrics and expenses to date
Other times, you may want to track the cumulative ROI of a campaign. If investments precede outcomes by a long time frame, then you should plan on having a poor ROI to begin with, but as the metrics start to pour in after the spending has stopped, the ROI trajectory will improve quickly. An example of this type of pattern is an event.
Our evergreen digital campaign looks like this in a cumulative view:
A cumulative ROI for a product launch may look wildly different. In this example, there’s a small number of pre-orders in March, the launch date at the end of April. There’s no spending in May, and the vast majority of the results occur in May, vaulting the ROI upwards.
The ROI for the campaign looks terrible in April if the marketer hasn’t fully considered the timing of investments relative to outcomes. But in reality the ROI may be exactly on track. This is why it’s a good idea to know your metric achievements milestones in advance of the campaign so that you don’t panic when the ROI looks awful, like this:
The chart shows a sudden jump as the first metrics arrive in November. The 11 prior months of investment with no metrics would be concerning if the marketer hadn’t plotted out milestones (the gray dashed line) to show that few metrics were expected prior to at least October. Investment without metric achievement is part of the plan for the investment stages of this campaign. As long as this is well understood and can be communicated, the campaign can proceed relatively stress free. If you’re tracking real-time ROI without these milestones in place, it may look - incorrectly - as if the campaign is failing.
MROI with cumulative metrics and all committed and close campaign expenses
In all instances, it is worth knowing what your current, total campaign ROI is. That is, if you stopped the campaign today, with the metrics that you have, and 100% of your closed expenses and committed future expenses, what would the ROI be? Some campaigns don’t have significant expenses locked in over future time periods, but others do. Imagine if you’ve made a significant media buy for a TV advertising campaign and then don’t launch. You still owe the money for the media buy and that has to be included in the campaign ROI calculation.
This isn’t always the most intuitive point, but the notion of committed future expenses is critical to MROI calculations. If you stop a campaign early, and it has future expenses that you still have to pay, those must be included in the MROI calculation.
Building on the example above, here once again is the MROI calculated just including expenses incurred through the end of May:
Now let’s imagine that as of February, there was an additional $20K of expenses contractually committed across June and July. The real MROI table through May should be updated thus:
This is the most accurate representation of where things stand if the campaign were to stop in May. If you’ve plotted out your metric milestones, and you know your target ROI, you will know whether this 0.5x ROI is where you expect to be.
Even with something as apparently simple as the MROI equation, there are numerous factors to consider. Here’s a checklist to determine which make the most sense for you (using more than one is okay):
- Always be clear what your measuring your return in: revenue, gross margin and contribution margin are all valid, but each will change the definition of what a good ROI is
- Plot out your expected metric achievement in milestones. This help you understand and communicate whether a campaign is behind schedule, or whether the metrics are just coming in in the future.
- If you want to track monthly (or quarterly, or weekly) performance independently, then MROI snapshot measurements may be useful. Long-term, repetitive campaigns - particularly those with constant investment levels - lend themselves to this kind of measurement. But remember, this measure will not tell you the total campaign ROI.
- MROI measured with cumulative return but only to-date expenses may give you a good sense of how the campaign is going, and whether you are on track. Be mindful that the ROI may drop if you end the campaign early, as you will have to factor in committed expenses in the future (e.g. you may have a non-refundable contract related to the campaign that has not been invoiced yet - if you cancel the campaign, that contract still needs to be paid)
- For the truest MROI measure, keep a track of cumulative metrics and achievement and all committed expenses, including future commitments. This won’t always give you the most encouraging snapshot view of ROI, but it is realistic, and if your milestones are planned in correctly, you will know you are on the correct course to achieve the right outcome in the end.
Dan Faulkner is co-author of The Next CMO: a guide to operational marketing excellence, and the CTO of Plannuh, where he is responsible for the technical strategy and delivery of the world’s first AI-powered marketing management platform. Dan has 25 years of high-tech experience, spanning research and development, product management, strategy, and general management. He has deep international experience, having led businesses in Europe, Asia, North America, and South America, delivering complex AI solutions at scale to numerous industries. Dan holds a Bachelor’s degree in Linguistics, and Masters degrees in Speech & Language Processing, and Marketing. He has completed studies in Strategy Implementation at Wharton.