How to measure marketing ROI

Posted by Mark Gibson on Sep 6, 2016 5:24:34 PM

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The days of marketers being able to say “trust me” are over. The C-Suite is demanding to know payback on marketing investment. Marketers need to calculate the financial benefit of their major programs, as well as how much the organization should be spending to achieve its objectives. This blog post will explain how to do that.

First question: How much to spend on marketing?

First, let’s answer the “how much?” question. Every organization has an optimal amount of marketing spend. The following diagram from Tenet Partners, a firm that measures brand power, helps you and your executive team visualize it. Until you invest a certain dollar amount, most of the money (in red) is wasted. When you reach the breakthrough point, you are advertising enough so that people see and remember your brand. At that point, your incremental revenue more than pays for the dollars spent on marketing (the blue space), until you reach the point of negative returns.    

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Source: CoreBrand; Tenet Partners.

So how much is right for your brand?

First, identify the target customer groups to whom you are trying to appeal. Consumers and small businesses are the easiest to calculate. Look at the market share you currently have in each of your media markets, and determine with your management team what share you want to have within five years.

Next, work with your media partner to determine your "share of voice," or how much you are spending compared to all your competitors in each media market. Generally, if you want to maintain current share, your "share of voice" needs to equal that percentage. If you want to grow share, your share of voice needs to be at least as high as the market share you aspire to, and preferably 3 to 5 percent higher. That is equivalent to the "breakthrough point" on the chart.

What to spend your money on

Now that you know how much you should be spending, it’s time to make sure that you are spending it the right way. That means understanding what actions and media work the best, and quantifying the financial return of your programs.

We’ve all heard the quip “I know that 50% of my advertising works; I just don’t know which half.” That used to be good enough, but it isn’t anymore. Some programs, like direct mail, email, and digital advertising, are relatively easy to measure. If you and your team don’t have the analytics or time to do it, your mail or media partners should be able to look at your new customer list and identify how many were generated by their program.

What you need to provide is the economics of what each product or new customer is worth. Working with your finance department to calculate this is a good idea. That way the results you come up with will have their blessing.

How about media like TV and radio that are harder to measure? You can do that a couple of ways. First, you can look at product sales during campaigns, subtract out the digital and direct mail, and give traditional media credit for the rest. Or, you can deploy some newer techniques like media mix modeling or attribution which use complex math to actually correlate your sales to each marketing medium.

Remember, every time you meet with the executive team, talk about results and return on investment, not just concepts and creative! That will help position marketing as an investment rather than an expense. 

Want to learn more about ways to maximize your marketing budget next year? Register for our "Seven Imperatives for 2017" webinar on Oct. 20.

 Register here