How Marketing ROI Calculations Can Get You in Trouble

marketing ROI calculationsOver the past decade, there’s been a big push for marketers to improve their use of financial metrics, especially marketing ROI calculations. This enables them to better communicate with the rest of their executive team. Instead of speaking in terms of brand awareness, conversion rates and leads generated, marketers have been focused on speaking in terms of net sales and return on investment.

“We spent X dollars on the campaign which resulted in Y sales, and Z net profit, producing an ROI of …”

Executives love this type of conversation, because it’s in the common language they speak – the language of numbers. Naturally, an astute marketer who is championing the work of her department should do everything in her power to quantify the return of all of her marketing investments.

It can only help her standing in the company right?

Not always.

In some cases, it can lead to the unemployment line.

Herding Cats

To measure marketing ROI, you need to know the following:

  • Marketing budget for the campaign or initiative
  • Additional costs, such as salaries, etc. if you include them
  • Total sales resulting from the campaign
  • Estimated profit from those sales

The formula is Profit – Investment all divided by Investment.

The biggest challenge with calculating ROI is tracking total sales resulting from the campaign. For a simple B2C direct mail campaign with a unique coupon code, it’s easy to track.

But few campaigns today are that simple.

The Shift of Power from the Seller to the Buyer, and How It Affects ROI Measurement

Today we’re in the age of the customer. The explosion of digital media channels has made it far more difficult to track the true marketing activity that caused a sale.

Since buyers no longer trust company-sponsored “sales pitches,” and instead leverage the crowd and their own research to determine if they want to engage or purchase, marketers must focus on interacting with our market, creating a consistent brand experience, and making it easy for our fans to purchase. Our role has shifted from persuaders to enablers. We’re facilitating and communicating, focusing on the numerous activities that influence the market’s perception of us, as they decide whether to engage and purchase.

All of this activity has made it difficult to track the media that caused the conversion. Most companies have to invest in content creation and online interactions as they’re shaping the brand experience.

Take this example:

  • Brand X invests in a funny YouTube video that goes viral.
  • Sam’s Facebook friend shares the video with her. Sam likes the brand’s Facebook page.
  • A week later, Sam sees a special offer on Brand X’s page. She doesn’t accept it, but searches on the main website and decides to sign up for email updates.
  • A month later, Brand X emails Sam an offer for the product she was looking for, so she converts.

Which campaign receives the ROI? If you calculate the ROI based solely on the email campaign, it’s over-inflated. If you calculate the ROI based on the YouTube video or Facebook promotions, it’s not counted. One will make you look like a star, and two will make you very nervous when sharing with your boss.

And if you’re showing too many campaigns with a negative ROI, you might find yourself looking for another job.

A Holistic Approach for Using ROI Calculations

To avoid these complications, determine how your department will use ROI. The approach we take is to organize marketing spend into three buckets with the following ROI tracking rules:

  • Brand building – We treat it as a long-term investment and don’t try to measure ROI.
  • Larger scale campaigns – We take the high-level view and include the costs of multiple types of media, and don’t track at the granular level.
  • Targeted campaigns – When we can easily track conversions, we measure ROI at the granular level.

By defining how to use ROI, you’ll avoid the pitfalls of the over-inflated and under-inflated results, while still speaking in the business terms that your executive team prefers, and using financial measures to gauge your success.

It’s a win for both you and your executive team.

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