Whether it’s the end of a quarter or fiscal year, it’s a good idea to review the Return on Marketing Investment on a regular basis.
It’s interesting that while Marketing does not own the making, selling or fixing of anything, many companies invest up to 10% of revenue (dollars and people) in Marketing? In short, Marketing is responsible for developing and executing go-to-market plans that build the brand, help develop products and assist the sales organization in generating revenue.
With that backdrop, what was the Return on Marketing Investment in your organization last quarter or year? Here’s one approach to objectively and quantifiably address that specific question.
Return on Marketing Investment – The Direct Correlation to Revenue
First and foremost, it’s all about revenue so it’s imperative to answer a few basic questions: 1) What did the organization spend on Marketing; 2) What did the organization receive from Marketing; 3) and, is Marketing a managed, repeatable process that can be counted on for next year?
What Did Marketing Spend
It’s imperative to start the discussion with the Annual Plan that drove the Marketing Plan that dictated the Marketing budget. There were obviously priorities and assumptions made in the annual planning process that guided the development of the Annual and Marketing plans and corresponding Marketing budget. Also, there may have been course corrections throughout the year that may need to be examined in order to recalibrate.
It’s best to compile a detailed budget spreadsheet that includes total spend by month, quarter and fiscal year (include percent changes for Q/Q and Y/Y and percent of total) with breakouts for:
- People (full time equivalents, contractors and consultants)
- Programs (campaigns, agencies, automation, infrastructure)
Resist the temptation to stop here because there is no information that correlates back to brand or products, and little information that correlates back to sales. Specifically, add the categories below as columns and enter actuals or estimates for percentages to provide insight on the past funding levels for each category:
- Channels of Distribution
- Branding (customer satisfaction, awareness, net promoter score)
For each of the above categories, it’s best to keep a table with assumptions around the allocations of people and programs to each category as this facilitates making changes. If it is not clear how to calculate a percentage, look to dollars spent, time spent, marketing qualified leads, etc. to develop an estimate. In terms of people, ask each team member to create a pie chart that allocates their time for the last month, quarter or year across the major activities they perform. The categories in the budget spreadsheet should be categories in the pie chart. It may not be 100% accurate to extrapolate these percentages but it is 100 times better than nothing and provides a flavor for where time and dollars are spent to optimize the return on marketing investment.
Marketing Spend – Actionable Metrics to Track, Measure & Manage
- Performance against budget: quarterly and yearly
- Contract terms: list price presented vs. price negotiated
- Decreasing costs for repetitive functionality from prior year
- Decreasing costs for recruiting
- Projects, people and programs that were reduced or eliminated from the budget
- Alignment of funding and key corporate initiatives
What Did Marketing Contribute
The net question is how much revenue ties back to Marketing. Marketing’s contribution to revenue is fueled by demand creation and management – global programs, field marketing, sales or market development, depending on an organization’s nomenclature. The point is that these groups within Marketing should have an established relationship with Sales where roles, responsibilities, definitions, processes, systems, metrics and an SLA are in place in order to establish an effective long-term and successful relationship between the two functions. In addition, the expected Marketing contribution to the sales pipeline should be documented. Next, it is key to confidently answer the question: “If a dollar is invested in Marketing, how many dollars in revenue will be generated and by when?” In other words, what is the Return on Marketing Investment.
Of course, there are always a few issues to work out when presenting numbers to the CEO, CFO, VP Sales and others on the management team. One issue that’s sometimes glossed over (but really critical to frame the discussion around) is whether to evaluate the impact of the prior years’ Marketing spend on the current sales pipeline. This is not a semantics issue and it is imperative to understand the nuances to accurately quantify the Return on Marketing Investment.
On the other hand, if the focus is on the impact on current year revenue (really the term should be bookings) then the timeframe to analyze the Marketing campaign will have to precede the current year. A good rule of thumb is to review the demand creation and management programs up to a year prior to bookings, for the same reasons mentioned earlier. Some of this will have to do with the methodology Marketing employs to correlate programs to revenue (first touch vs. last touch or contact vs. company).
Also, it is a best practice to follow the sales forecast methodology when calculating the sales pipeline value at each stage in the sales process—is it weighted or actual dollars?
Marketing Contribution – Actionable Metrics to Track, Measure & Manage
- What closed: won, lost and dead
- The value (number and dollar value) at each stage of the sales process
- The sales pipeline multiple at the start of the quarter and year
- The number of days in each sales stage
- Conversion percentages between each sales stage
- The flow rate by month
- The velocity within the sales pipeline
- The number of hot, warm or cold leads
- The cost per lead and closed/won deal
- ROI for each program and category of programs
What in Marketing Constitutes a Managed and Repeatable Process
In short, the CEO and CFO will become huge fans of Marketing spend when there is an if/then statement illustrating the impact on revenue for each dollar spent in Marketing. Granted, Marketing is part art and part science, and it is not possible to eliminate everything that can’t be quantified to present a positive ROI. And, it is important to note that it is the sum of many Marketing touches that result in a sale, i.e. there is no one magical silver bullet. However, because each function in a company requires funding and there is a finite set of budget dollars, it is imperative that Marketing present a strong business case for funding. And that requires quantifiable justification.
Ideally, for each Marketing investment made in the current year, a business case with projections should be required and each monitored and managed throughout the year. Rolling these up to meaningful categories and a total will be germane to a predictability discussion about the return on marketing investment.
The waterfall and the process to reverse engineer lead targets from sales targets will also be another area to cover in detail. Doing so will reveal assumptions, actuals and any corrective actions that may be necessary to improve accuracy. Specifically, note the specific integration points of the Marketing plan to the annual plan.
Reviewing the assumptions and execution around the demand creation and management plan will be important to highlight tight process and operational excellence. Automation should be of particular importance as it usually drives down costs and improves productivity, so spend time reviewing system and process improvements. The inclusion of industry benchmarks is always pertinent as a competitive streak should be present within the organization.
There are definitely Marketing accomplishments that contribute significant value to the organization but may be difficult to quantify and do not factor into the Return on Marketing Investment calculation. For example:
- A key competitor may have been weakened with a new product announcement, competitive intelligence or a competitive swap program
- Industry Recognition (Magic Quadrant, or Forrester Wave placement, most admired company or technology award, etc.)
- Unaided awareness is increasing
- Social Media presence
- Customer satisfaction scores are improving
- Net promoter scores are increasing
- Thought leadership acknowledgements in PR, social media, speaking opportunities, etc.
- The retention of employees that reduces recruiting costs, training and downtime
- The implementation of automation
All of these are significant contributions to the company but are hard to trace back to Marketing. And, since most decisions have an emotional component, it’s best to make this argument after the hard number argument or sandwich it in between the quantitative argument for maximum impact.
Closing Thoughts on Return on Marketing Investment
At the end of the day, a finite set of resources exists within any company and the CEO makes the final call on who gets what. The metrics that matter most to the CEO (and his/her trusted advisor—the CFO) will be expense management, revenue generation, profitability, productivity and customer satisfaction. As a result, Return on Marketing Investment is the messaging that Marketing must use with executive management to deliver a compelling story that will resonate.
Going into the new fiscal year it is a best practice to conduct a marketing assessment to establish a snapshot of current state, desired state and the associated plan to improve the organization.