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
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?
Determine your client’s marketing costs
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.
Determine if you’ll use customer lifetime value & calculate CLV
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
- 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
Create ROI dashboard
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
Optimize based on your findings
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!