The sole purpose of marketing is to get more people to buy more of your product or service, more often, for more money. That is the only reason to spend a single, dollar, loonie, yen, euro. If your marketing is not delivering paying customers to the cash register with their wallets in their hands ready to buy your product or service, don't do it. So why do so many marketing executives and departments look at meaningless vanity metrics to measure performance?
In recent years, data-based marketing has swept through the business world. In its wake, measureable performance and accountability have become the keys to marketing success. However far too many companies look at "vanity metrics": the number of twitter followers, or people who fill out a white paper download, instead of looking at what really matters, which is direct revenue contribution and return on investment.
Think of Marketing as an Investment, Not an Expense
To truly gain a seat at the executive table you need to speak their language. Stop talking about meaningless metrics that have nothing to do with the bottom line. Number of website visitors or size of house database does not resonate with the other members of the c-suite. Instead, you need to discuss things like the number sales accepted leads, and how you have shortened the sales cycle or increased sales person efficiency. These are measurements that CIOs, CFOs and other executives care about. I am sure there are not too many executives that can tell you how many website visitors they had last month, but I am sure they can tell you their close rate and how long it takes to close a deal. Until you get on the same page, marketing will always been seen as an expense and continue to get their budget set by a percentage of revenue.
A better way to justify your marketing budget is to think of it as an investment that incurs costs today but delivers benefits for many years to come. In most organizations, any significant investment needs a bottoms-up business case that demonstrates it will deliver a minimum rate of return. If the business case is made, the CFO generally approves it. Marketing spend should not be any different.
Demand generation spending is the easiest investment to tie to ROI. Some programs generate leads; others nurture leads as they move through the revenue funnel. When the leads become ready, they are transferred to sales and become opportunities, some of which eventually close and translate into revenue. With the right marketing measurement tools, the entire process becomes measurable; the interactions between different marketing programs become understandable, and the future return on today's spending becomes quantifiable.
Return on Marketing Investment
Return on Marketing Investment (ROMI) is a relatively new metric, but unlike other vanity metrics, it is the one that will get marketing a seat at the board table. It is not like other "return-on-investment" metrics because marketing is not the same kind of investment. Instead of moneys that are "tied" up in plants and inventories, marketing funds are typically "risked". Marketing spending is typically expressed in the current period. But for all types of marketing investment, the returns are usually not immediate and often come months or years down the road. The principle of matching expenses with the revenue generated by means of those expenses implies that marketing investments should be capitalized as an asset and not treated like simple expense items. In other words, the dollars spent on marketing should be amortized over the entire period in which those dollars deliver benefit to the organization.
Thinking of the marketing budget as a long-term investment can be especially important for smaller, fast growing companies. By amortizing investments in brand building, awareness, and pipeline that will pay back over many quarters, the percentage of marketing expense that is recognized in any given quarter will more closely match the current levels of revenue.
How to Calculate Your ROMI
A necessary step in calculating ROMI is the estimation of the incremental sales attributed to marketing. These incremental sales can be "total" sales attributable to marketing or "marginal". The following example should help clarify the difference.
Where the difference between X1 and X2 represents the cost of an incremental marketing budget item that is to be evaluated, such as an advertising campaign or a trade show.
- Revenue Return to Incremental Marketing = (Y2 - Y1) / (X2 - X1)
The additional revenue generated by an incremental marketing investment, such as specific campaign or sponsorship, divided by the cost of that marketing investment. - Revenue Attribution to Marketing = Y2 -Y0
The increase in sales attribution to the entire marketing budget (equal to sales minus baseline sales). - Revenue Return to Total Marketing = (Y2 - Y0)/(X2)
The Revenue attribution to marketing divided by the marketing budget. - Return on Marketing Investment (ROMI) = [(Y2 - Y0) * Contribution Margin (%) - X2] / X2
The additional net contribution from all marketing activities divided by the cost of those activities.
By treating your B2B marketing budget like an investment in the future, you can help build the perception that marketing is an asset that drives revenue, not a liability that simply incurs costs. There will always be a need for a strong focus on your customers and relationship management, but by knowing your Return on Marketing Investment (ROMI) instead of just focusing on vanity metrics you will be able to drive revenue and gain a seat at the board table.
