One of the hardest things for any marketer or marketing agency to do is to prove their worth, or the return on investment (ROI) of their marketing campaigns. Sure, there are some generic metrics that some clients may be happy with, but what about those clients that have to justify their spend with you each month and need to understand exactly what their ROI is and whether it’s trending up or down? You need a better system of proving marketing ROI in order to better understand your campaigns, keep your current clients happy, get your current clients to re-sign with you, and even to sign new clients in the future. So where do you start?
Well, the first step is to understand what ROI is. Sure we’ve all heard the ROI buzz word as it gets thrown around by every business and marketer in the world, but do you actually understand how to calculate it? Do you understand what a “good” return on investment is? Well, if you don’t (even if you’re too embarrassed to raise your hand), we’ve got your crash course ready. Here we go!
Return on investment (ROI) is a measure of the profit earned from each investment or campaign. You should be calculating the ROI on each campaign whether it’s inbound or outbound marketing and reporting on it. Some marketing tactics can be much more difficult to calculate than others based on their outbound nature. Campaigns like billboards, television commercials, radio ads, and direct mail are typically much harder to track than digital tactics like email campaigns, content offers, and search engine optimization, but your clients are going to want to know and understand their marketing ROI no matter what kind of campaign you’re running.
To calculate your marketing ROI the formula is:
(Gross Profit – Marketing Investment)
Return on investment is typically expressed as a percentage (which is why you would then multiply it by 100 at the end of the expression). [MarketingMo]
Like we mentioned before, some tactics and campaigns can be much easier to track than others. If you’re a “traditional” marketing agency and you are running a “traditional” marketing campaign for your clients including some of those outbound tactics that we outlined above, there may be some guess work involved in your return number in the equation. Most marketing campaigns like this try several tactics in order to get a better understanding of their effect such as using a special phone number dedicated to that campaign, unique landing pages, and even “code words” that are used at the time of purchase for a discount. These can be fairly effective in helping you to understand the return on the campaign.
For campaigns that are easier to track, typically digital campaigns, we just need to collect the data, analyze it, and report on it. But, how do we do that exactly? Let’s check out our 7 step plan to produce marketing ROI for your clients!
Determine your KPIs
Though this is not necessarily part of the marketing agency’s job in marketing for their clients, it’s important that the agency clearly understands which KPIs (key performance indicators) are most important to the success of their clients. KPIs are a set of quantifiable measures that a company uses to gauge its performance over time [Investopedia]
These metrics, whether you’re developing them with your client or they already exist, will go a long way in understanding what is important to the business and what you will need to work on producing in order to keep them happy, profitable, and a client as long as possible. Though KPIs aren’t necessarily included in the ROI calculation, they will be considered by your client as if they were. If a KPI for your client is organic traffic to their website, it may not be used directly to calculate gross profit, but actually takes it another step past that ROI calculation to see where that gross profit actually came from and answers questions such as:
- How much traffic must you produce in order to grow our profit by 10%?
- What would happen if we invested in increasing our organic traffic by 1,000 visitors per month?
- How many organic visitors must we attract in order to convert one lead? And, how many leads must we produce in order to close one sale?
This is all very important information that you should be able to report on to your clients.
Determine your client’s marketing costs
Now it’s time to really dive into the marketing return on investment equation.
First, we must understand what the client is paying in costs for every piece of the campaign. This will number will likely include many of these items:
- Media costs
- Creative costs
- Printing costs
- Software or technical costs
- Management time (such as account management charges from your agency)
- Cost of sales
- Labor costs
- And many others depending on your client’s unique business, setup, and your relationship with them.
When you’ve determined the overall costs for each tactic in your marketing campaigns you can then extrapolate that for each campaign as a whole. Remember – successful agencies will report on overall ROI of their campaigns as well as ROI of each tactic. This will help you and your client to understand where potential areas of growth are, tactics that may not be performing like you’d expect (good or bad) are, and tactics that may be outperforming your expectations that you may want to focus more on.
Determine if you’ll use customer lifetime value & calculate CLV
One of the hardest things to get business owners, especially small business owners, to understand is customer lifetime value.
Customer Lifetime Value (CLV) is defined as a prediction of all the value a business will derive from their entire relationship with a customer. [Custora University]
Many business owners will look at a single sale as the value of that customer so it’s likely going to be your responsibility to help them to understand that the value of that one sale is likely not all of the value that that individual customer provides. As with any marketing campaign, you are likely attempting to create a long-term customer, not just a single sale.
Once you’ve got buy in from your client on the importance of looking at CLV, not just the value of one purchase, it’s time to calculate the lifetime value of a customer from each campaign. For a predictive CLV, we use this calculation:
[(Avg. Monthly Transactions X Avg. Order Value) Avg. Gross Margin] x Avg. Lifespan in Months
This will likely be a process you’ll need to work with your client in order to produce and you’ll need to measure your results for each client as you gain them, but using your client’s CLV will help you identify where your most valuable customers are coming from and show the value of your agency past that single purchase.
Establish ROI threshold
The process of establishing a floor and goal for the ROI of each campaign will help you work towards better and better ROI and keep your clients happy. By doing this, you’ll do several things that are helpful for your internal process including:
- Set reasonable expectations
- Gain more control over the marketing budget
- Gain more control over the campaign with autonomy to cut and increase spends as necessary to reach your ROI goals
Every marketing agency has had struggles with clients around each of these points, but taking the time to establish your ROI thresholds will help you temper client expectations (because we all know they expect the world) and it will also open the door to conversations about higher budgets for high performing campaigns. Win – Win!
Create ROI dashboard
Next, we recommend creating a return on investment dashboard for each client (or campaign) depending on how intricate the tracking will be.
One thing that separates good agencies from great agencies is giving clients the ability to monitor their performance in real time. It’s great to be an agency that provides monthly analytics. It’s better to be an agency that allows their clients to continuously monitor results, it is after all, their money at work.
Need a good solution to help you build out your ROI dashboards and share them in real time with your clients? Give Cyfe a try! You can get started for FREE!
Measure ROI of each tactic AND campaign
Like we’ve mentioned several times already, it’s important to measure not only campaign success and ROI, but the success and ROI of each tactic individually. Doing so will help you identify tactics that may be costing your client a lot of their budget, but is not resulting in leads, customers, and revenue like expected as well as tactics that may be outperforming your expectations and deserve more of the budget.
Optimize based on your findings
Measuring the ROI of each tactic and each campaign leads right into optimization. Taking the data that you’ve produced through these exercises will help you be more flexible with your campaigns and align your client’s budget with tactics that perform well and result in generated customers and revenue.
No client wants to work for an “order taker” type of agency. You’re supposed to be the expert and thus should be making ongoing recommendations based on your analytics. Measuring ROI for your clients and their individual tactics and campaigns will give you all the information that you need in order to make recommendations to reallocate budget to better performing tactics or campaigns and even request higher budgets (meaning more money in your pocket) for campaigns that are performing like rock stars. Who doesn’t want more money?
Now, this whole process kind of falls apart if your clients don’t understand the KPIs that are most important to their success in marketing and business. Help them develop their unique KPIs with our FREE eBook, The Beginner’s Guide to Choosing the Right Marketing KPIs for Your Business. Download it now!