I’ve seen a lot of different approaches to measuring the return on marketing investment. Everything from basing it on “gut feeling” (yes, I’ve literally had executives tell me that they’re rather do that as opposed to relying on hard metrics even though the metrics were readily obtainable with a bit of effort and investment) to extremely rigorous financial modeling that breaks out return on investment down to the financial P&L level. Most enterprise-caliber brands understand the importance of identifying and crystallizing ROI metrics for their various marketing programs and channels, but the truly progressive ones are still pushing the envelope even further and working on ways to fold even more information – and value – into those calculations.
Before I get into some ideas on how to emulate these industry leaders, let me take a moment to review some of the more common approaches to measuring digital marketing ROI:
- One of the most basic ways to measure ROI is in terms of brand impressions. This can consist of anything from a display ad impression to an impression that a press release gets when it’s picked up by a journalistic publication. This method of ROI is often used by companies that do not sell any product or service directly to the consumer. A good example would be a consumer packaged goods company like Coca-Cola.
- Another basic way to measure ROI is in terms of unique visitors and pageviews to a website or application. This is commonly used by media publications like newspapers, magazines, and television networks who essentially sell those unique visits and pageviews to advertisers.
- Another method of calculating ROI is commonly referred to as cost-per-lead or CPL. This is commonly used by companies that use digital marketing channels to secure sales leads that they then try to convert to customers via in-person or via the phone. Insurance companies and car dealerships are good examples of the types of companies that use this type of ROI metric.
- From there, you get into actual sales and revenue calculations, which are often referred to as ROAS or efficiency. This methodology is typically used by e-commerce companies that sell product directly via the internet and it’s essentially the revenue or profit generated by an online sale divided by the cost of the marketing spend that was used to generate that sale.
- Some companies also try to place a dollar value on “soft” conversions like email subscribers, Facebook followers, etc. but these approaches to ROI often take a back seat to harder forms of ROI calculation, especially for companies that generate leads or direct sales online.
And that about covers the universe of ROI metrics and calculation, right?
There are actually several other key metrics that should factor into virtually every company’s ROI calculation but that few companies actually take the time to fold into the mix. Here are two of those factors that I find particularly insightful:
1) New Customers – The value of a new customer is often overlooked and this is a big mistake, especially for older well-established brands that have a large customer file but struggle to acquire new customers or are trying to break into new verticals or categories. Moreover, understanding the rate at which different marketing channels attract new customers is crucial since if all other things are equal the channel that drives a higher percentage of new customers (as opposed to re-acquiring existing or lapsed customers) should get the larger share of marketing spend allocation.
2) Customer Lifetime Value (also known as CLV or LTV) – This is yet another metric that is often overlooked by marketers big and small. It refers to the average amount of revenue a newly acquired customer will generate over their customer lifetime (Note: typically “lifetime” refers 12 months of purchasing activity and not an actual lifetime). Calculating this value and then adding it to your ROI calculation allows you to be more aggressive in terms of competing for conversions since it’s essentially inflating the amount of revenue you’re generating per conversion.
Interestingly, the reason that many enterprise companies don’t use advanced ROI factors like new customer data or CLV/LTV is not because they’re not aware of their existence. Instead, it’s because it takes a lot of work (and money) to coordinate data and workflow between the marketing, finance, CRM, and RNA departments in order to plug the data in accurately. This is also often the reason why companies refuse to utilize real financial data like net revenue, gross margin, or even P&L to optimize digital channels like paid search.
I can tell you from personal experience that plugging in the data, procuring the technology and getting different stakeholders to play nice is not an easy feat. But for the brave marketing leaders that are willing to traverse this gauntlet the long-term payoff in terms of competitive differentiation and business intelligence can be massive.