In the first two blogs in the series we discussed the importance of carefully selecting metrics that are tied to first-order ROI, and the importance of avoiding DWDI (did we do it?) metrics. We also enumerated the relatively small number of first-order ROI metrics that cover most marketing campaigns.
This blog is about adopting a consistent approach to MROI measurement, both for campaigns, and for an entire marketing plan. Once you have achieved that, you can create a reliable benchmark for your marketing organization’s performance, both to assess relative performance changes over time, and to compare your performance against similar organizations, which we will cover in our final, fourth blog.
Three principles of the Plannuh MROI model
Earlier in my career, I worked for an acquisitive company - we acquired over 100 companies during my tenure there. Barely a day passed without some kind of due diligence meeting somewhere in the company. In one of those diligence meetings, the CEO of a company we were assessing complained that we were undervaluing some of his company’s technology. He said that we were too focused on the P&L and were overlooking the “strategic value” of these assets. One of my colleagues challenged the CEO to describe a strategic value that didn’t ultimately show up on the P&L - either as a revenue or margin benefit. The CEO wasn’t able to. What he meant was that that financial benefit was uncertain and a long way in the future. With some modeling, all the “strategic” programs his company was carrying out could be traced into the future to tell us when the benefit should start to arrive. A sensitivity analysis could be carried out on what the potential range of outcomes might be. Then, based on time and risk, we could discount the value of those benefits and attempt to quantify the value today. We couldn’t do it with total precision, and we didn’t agree on some of the variables, but we weren’t flying blind.
Marketing plans and campaigns offer up a similar opportunity to the one highlighted above. They yield financial outcomes, and they may deliver value far in the future. These are two of the fundamental principles that you will need to support in order to be able to measure the true ROI of your marketing plan and its campaigns. If you don’t apply these concepts, it is difficult to measure the true ROI of marketing activities.
All marketing campaigns have an ultimate, quantifiable, financial target
Many marketers carry out their campaigns and then try to figure out retrospectively what the ROI was. This is the wrong way round. It is more effective to identify your target financial outcome (your return), and use that to inform how much you will spend on marketing to reach your target (your investment). You can only do that if you have identified the target financial outcome.
It’s obvious that a lead generation campaign has a financial outcome: identify and create leads that become prospects, then opportunities, then customers. Other types of marketing campaigns might present a less obvious path to a financial outcome. For example, a rebranding campaign might seem like something that isn’t directly tied to revenue. But, if we think in terms of where our campaign is affecting the funnel, and then follow the funnel to its end, there is always a financial outcome. From this angle, it’s clear that a rebranding campaign has a financial objective, it’s just further up the funnel - further away in time - from the financial outcome of increased sales. For a commercial company (vs a non-profit) the question is what marketing campaign would not have a financial motivation?
When thinking about ROI for your campaigns, it is important to zoom out far enough so that you can trace a line between the marketing activities of today to the financial outcomes of that activity through the funnel. Then you can get a sense for what the future looks like for your company if you do those activities or not. This brings us to the second fundamental point: time.
MROI is not tied to the fiscal year
Your budget begins on the first day of the fiscal year but your plan doesn’t. Imagine your fiscal year matches the calendar year. On January 1st, your pipeline is not empty. There are people in the world aware of your brand. Leads, prospects and opportunities exist at various stages in the funnel. Deals are being actively negotiated by sales. Marketing campaigns are underway from the previous fiscal year.
This means that some proportion of your marketing results for the fiscal year are already in the bag. From the perspective of this year’s budget, they feel free, but they were obviously funded from last year’s budget. It would be unrealistic to make a plan that did not fully take into account these carried over benefits from extant campaigns.
It would obviously be disastrous for your business if you only executed campaigns to create value in the current fiscal year (it would also be extremely difficult to do).
It’s important that your marketing organization, and your company’s executive team, embrace the notion that different campaigns have different value horizons and treat campaign investments as just that - investments with a return in the future. The marketing team’s job is to ensure there is a well-calibrated number of well-qualified opportunities for sales to close at all times, which entails working a marketing funnel that will usually operate out of step with the fiscal year.
Every phase of the funnel is worth the same as the financial target
If I have a revenue target of $1M for a campaign, and I need to close 10 deals to achieve that revenue target, it’s obvious that those 10 deals are worth $100,000 each, on average. Let’s step back one phase in the marketing funnel, and stipulate that I need to have 20 qualified opportunities in order to get to 10 deals. What are those 20 qualified opportunities worth? $1M. This is not an additional $1M, it’s the same $1M, because hidden in those 20 qualified deals are the 10 deals that will ultimately close. Another way of saying this is that it’s the same 10 deals at every stage of the pipeline, always worth $1M. The job of the marketing campaigns through the funnels is to find them, and filter out the rest.
So let’s keep going back, and say that I need 100 prospects to create 20 qualified opportunities. 100 prospects, collectively, are worth the same $1M. If I need 1,000 leads to get to 100 prospects, then 1,000 leads is worth $1M. You can’t achieve the revenue target without the preceding funnel targets being hit. 1,000 leads contain 100% of the value of the sources of the financial target, plus a lot of leads that need to be filtered out through the marketing funnel, and put into some nurturing campaign or lost. Every phase of the funnel - if its targets are achieved - is worth exactly the same as the final revenue outcome. This is a useful thing to bear in mind when you’re asked what the value of top-of-the-funnel marketing activities is. If you understand your funnel and conversion metrics, you should be able to quantify it.
Viewed this way, we can assert that, for this example, a deal is worth $100,00 ($1M/10); a qualified opportunity is worth $50,000 ($1M/20), a prospect is worth $10,000 ($1M/100), and a lead is worth $1,000 ($1M/1000). This is a crucial point to measure ROI consistently, and to be able to properly value marketing outcomes in the earlier stages of the marketing funnel.
Prerequisites for the MROI model
Here are some questions you need to answer before you can calculate ROI consistently.
- Will you measure return in terms of revenue or margin? Either may make sense depending on your business at a given point in time, but each will yield considerably different ROI’s from the other.
- What is your financial unit of measurement? Ultimately, it should be money, usually expressed as revenue. This may be one-time customer revenue, lifetime value, a percentage of LTV, and so on. Using one-time revenue for a one-time purchase obviously makes sense. For recurring revenue deals, some share of LTV makes sense.
- Example: My average deal size is $10K p.a. My average customer retention rate is 5 years. LTV is therefore $50K. If I use $10K in my ROI valuation, I will end up with an artificially low ROI. If I use $50K, it will be unrealistically high. 50% of LTV may be a reasonable measure to use in ROI calculation once I’ve considered the cost of customer support and renewals after the customer is acquired.
- What is your target ROI multiple? If you are seeking a 5x ROI and you have a clearly-defined financial outcome, then you can easily back into the implied marketing budget for a campaign, and an entire plan. Doing it this way gives you the chance to apply the sniff-test to the feasibility of a campaign. Does it seem achievable to reach target outcome with the implied investment at target ROI? That might save you from embarking on campaigns that had a low likelihood of achieving their outcome from day one.
- Note: You should not complicate the ROI model with time-value of money calculations such as net present value (NPV). There is enough uncertainty in the execution of the campaign over time. Time-value of money calculations in this context lend a false precision that is not worth the complexity.
The most important thing is that when you determine what you will use as inputs to the model, you stick with it for a long enough period to compare results over time, and across campaigns.
At this point in our series, we’ve established how to identify first-order ROI metrics based on financial outcomes, how to apply those throughout the marketing pipeline, and which prerequisites to know before you embark on an ROI-based campaign.
In the final part of our blog series on ROI, we will walk through an example, with real numbers, and finish with a discussion about benchmarking ROI over time to bed-in an ROI-based approach to your marketing plans.
Dan Faulkner is the CTO of Plannuh. Dan has 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.