Marketing ROI. It’s all the rage!
You’ve heard over and over that Marketing ROI is the ultimate single number to communicate marketing success, and you should be working with an agency that clearly delivers this number to you. As they say, “you’ve got to spend money to make money”, and you want to make sure the money you’re spending is, in fact, making money.
As a general concept, ROI is critically important to your business and to your relationship with your marketing partners. But as a single number, it could be misleading, tampered with, or just downright worthless.
Here are 4 reasons why a single ROI number is not the holy grail you’ve been looking for:
- Perfect attribution of sales is not possible, no matter what anyone tells you. At best, we can rely on “attribution models” to estimate.
- Marketing companies can provide value, beyond measurable sales, that is simply not quantifiable.
- LTV (Lifetime Value) of a customer should be included in ROI, but estimation is fuzzy and LTV success is heavily impacted by outside factors.
- The pursuit of a perfect ROI calculation will exhaust the very resources that are supposed to deliver ROI.
With the four statements above, it should be safe to say that an ROI calculation is a rough guess on a good day. Still not convinced? I’ll outline examples of each scenario below using a hypothetical customer, Bob the Plumber. First things first, let’s define ROI.
How to calculate Marketing ROI
ROI, or return on investment, is a percentage that compares the profit of a company against it’s investments. The basic formula for ROI looks like this:
ROI = ( Net Profit / Cost of Investment ) x 100
Simple, right? If you spend $500 on a marketing campaign, and you generate $2000 from it, we can very simply calculate your ROI.
(1500/500)x100 = 300% ROI
With this basic math, the Marketing ROI in the example above looks great! You spent $500 and turned it into $2000.
Now we’ll take a look at how this basic concept gets turned upside down with Bob the Plumber’s 4 ROI-ruining scenarios.
Marketing ROI Issue #1: Attribution
Bob has a website for his plumbing business, and he set it up with a contact form to capture leads. He’s off to a great start and has traffic coming in to his website from search engines, directories, ads, printed mailers, social media networks, personal networking, and more. It’s hard for him to keep track of who’s coming from where, but he’s hired a marketing company who helps him monitor traffic sources and visitor behavior. Bob is feeling good about his relationship with his marketing company who helps him with content generation, email communications, and paid advertising.
It’s an ordinary afternoon, and Bob meets John Smith at his son’s little league game and gives John his business card. John visits the website and signs up for Bob’s email newsletter. As a result, Bob’s marketing company sends John the occasional email with some great content about plumbing.
Months later, John has a rough morning. He wakes up to a flooded basement from a burst pipe and needs a plumber, now! He goes directly to Bob’s website and fills out the “request for service” form. Bob gets back to his request as fast as lightning and they work together to resolve the plumbing issue. Sale for Bob. Fixed pipe for John.
So, who gets attributed for the sale?
- Bob made the initial connection at little league.
- The marketing company kept Bob’s company at the top of John’s mind.
- But John visited the site directly, not through an ad or an email.
- Was John even influenced by those emails, or was he always planning on using Bob’s services after that first connection at little league?
- Maybe John was influenced by those emails and doesn’t even know it!
No matter how sophisticated your tools get, attribution isn’t crystal clear. True attribution gets blurred between people, devices, emotion, intent, channels, networks, etc. We can rely on attribution models like “last click” or “first interaction” to set some guidelines, but at the end of the day, none of these models reflect reality.
Without a way to perfectly measure attribution, your ROI number is not accurate.
Marketing ROI Issue #2: Time Saved and Other Hard-To-Measure Items
Back to Bob. He’s hired this marketing company and they are working hard on his content and advertising. Bob is bringing in new business and doing his best to attribute marketing sales to the marketing company and personal networking sales to himself.
Based on his own numbers, Bob notices an uptick in sales via his personal networking efforts and he has recognized that the company is running more smoothly. Bob is noticing one of the greatest values of working with a marketing company, they’ve freed up his time to do what he does best. Bob is great at making personal connections and managing his team, but he was so swamped with the digital marketing and advertising projects that he couldn’t get anything done!
Now Bob is securing new customers and improving his business processes because he isn’t stuck working on content marketing and ad management. His marketing company is generating more business with the digital efforts in less time, AND they’ve enabled him to focus on the big picture. Win win.
So what did Bob really get when he hired help?
- Several hours a week to focus on goals that align with his skill set.
- A more efficient way to deliver digital marketing strategies.
- Increased sales from both of the above items.
- Reduced stress. Stress Kills!
- More time to spend with his family.
Bob’s getting a whole lot more than just the marketing sales from his investment, and his business will flourish with this marketing relationship.
Without being able to assign an exact dollar amount to things like reduced stress and the value of extra time, your ROI number is not accurate.
Marketing ROI Issue #3: LTV Estimating
Bob is bringing in new customers with his digital marketing, and some of these are clear cut marketing wins. One customer clicked an ad, filled out the form, and bought the service. Cut and dry marketing attribution.
This customer was happy with the service, and bought again a month later, and again three months after that. All of these sales can be tied to ROI, as they are a return on Bob’s initial marketing investment. Now Bob needs a way to keep track of all of his customers, and get sales data back to his marketing company who can accurately track the money they are generating over long periods of time for Bob’s business. Bob’s marketing company needs to be involved in all the financial transactions of Bob’s company. They need to know about sales, hard expenses for each plumbing job, returns, and more.
Because LTV is so important to ROI, Bob’s marketing company should really control his sales process, response time, truck cleanliness, uniform, and while they are at it, do his accounting too! If they need to rely on LTV to show Bob the ROI he’s expecting, they’ll need to completely control his company. Let’s face it, that isn’t realistic.
When you look at the lifetime value of a customer, factors outside of the control of Bob’s marketing company have a serious affect on performance. His marketing company can provide services to contribute to a higher LTV, but they aren’t solely responsible for it. Bob and his team contribute to that too!
Without relinquishing total control of a company, LTV doesn’t accurately reflect marketing efforts alone and your ROI number is not accurate.
Marketing ROI Issue #4: The Cost of Reporting
Bob wanted some more sophisticated ways of tracking phone calls on his website. His marketing company set up a tracking system where the phone number changes on the website depending on the source of the customer. Each call can be roughly attributed to their most recent source. Bob’s marketing company tells Bob that phone calls are increasing from his website, specifically the ones from email marketing.
Bob wanted to know more about the nature of these calls, so Bob’s marketing company starts recording all of the calls. Every day, they listen to the entirety of the calls and categorize them: general inquiries, leads, sales, spam, etc. This effort is taking up a lot of Bob’s very limited monthly marketing budget.
While Bob’s marketing company was busy working on phone call reports, they neglected their original strategy. They stopped generating great content, and forgot to keep top-of-mind with emails. Maybe Bob would be better off having his marketing company prioritize marketing action over reporting.
Reporting is a very important part of a marketing relationship, and sometimes advanced reporting is worthwhile. But, the reporting efforts need to be appropriately sized to the total marketing efforts. If reporting is a higher priority than marketing action, your ROI number will reflect that neglect.
Redefining Marketing ROI and Introducing VROI
A marketing company should strive to find a set of meaningful metrics to gauge the results of their services. Likewise, a marketing customer should “feel” value from their marketing company well beyond the numbers in a report. In a mutually beneficial marketing relationship, ROI would include the additional added Value connected to all marketing efforts, or the Value Returned On Investment (VROI). VROI would be defined as:
VROI = ( Overall Value / Cost of Investment ) x 100
Where “overall value” includes much more than net profit. Overall value includes time saved, heart attacks avoided, benefits of successful delegation, sales increased, leads generated, trust, network building, and a whole lot more that will vary between each unique business.
ROI’s traditional definition creates the aimless pursuit of a fuzzy number that pits the customer and agency against one another. VROI encourages a working relationship where value reaches far beyond a number, and where customer and agency are on the same team.