- Measuring ROI is complex and requires investment and new processes
- ROI will support marketing in delivering proof of performance
- Aim for Customer lifetime value (CLTV) as your go to KPI to report to the CFO
- Remove the skew of short-term quarterly reporting by aiming for long-term growth reporting featuring brand effectiveness and customer lifetime value
For marketing teams who want to demonstrate their impact on the business, return on investment (ROI) has long been the most powerful performance indicator, and it’s clear why. It demonstrates definitively to the CFO that marketing can generate customers today and build brands for tomorrow.
But with the ambition of understanding ROI, and the KPIs that support it, comes the complexity of navigating the different channel data showing the performance of both short-term and long-term strategies for effectiveness. In fact, there is no single KPI that indicates marketing ROI – instead, marketers must put in place a robust model of performance measurement that can scale to meet the needs of the organisation.
While it may not be easy, it is absolutely worth it. Reporting on ROI will fuse marketing activity with organisational growth, positioning the marketing team as a growth driver rather than a cost centre. And changing that perception, so that ROI connects marketing and growth, will ensure the marketing team has a strategic seat at the table when it comes to deciding the direction and performance of the organisation.
Investing in ROI measurement and KPI tracking may seem like an expense over the short term, but in the long-term the investment will be paid back in multiples, providing marketers with accurate effectiveness data on profitability, channel performance, brand performance and customer lifetime value (CLTV)
Aim for customer lifetime value
When we explored CLTV in our report on A Guide to Marketing Effectiveness, we discovered that while it is at the heart of ROI, the majority of CMOs either do not measure CLTV or do it on an ad hoc basis, diminishing the potency of this important KPI.
Why is it so useful? Well, understanding it will arm you for informed conversations around the organisation, because it can be used to show marketing’s impact on long-term growth. And it will help solve key questions on the performance of the business and market strategy as well as product and service positioning. For example, it should answer:
- How much marketing budget is required to acquire a new customer
- Which audience segment is most profitable
- Which audience segment is a loss
- Which products / services have the biggest margin and profit
- Whether the cost of the relationship is worthwhile vs the lifetime value
How you set your CLTV measurement will be different depending on sales cycles, category conventions and routes to market, which all have an impact on how CLTV should be measured for optimum accuracy. A simple starting place, though, is the following formula:
CLTV = Avg order value x frequency rate of purchase x avg customer lifetime
Other metrics that offer valuable insight into marketing’s ROI include:
- Market share: your percentage of sales compared against the category you operate in
- Growth rate: revenue over different timelines compared against marketing activity
- Profit margin: gross profit, net profit and operating profit
- Customer Retention and Churn rate: the number or percentage of customers that stay on to buy repeatedly from you
ROI is a complex calculation
The complexity involved in measuring marketing performance means that it is vital to have consistent and accurate data that, when modelled, provides a reliable picture of performance, minimising the margin of error.
Don’t be fooled by too-easy digital metrics: these are helpful and can inform ROI and KPI but for a true picture, marketers must look more deeply into KPIs such as share of voice, brand effectiveness, cost per acquisition and CLTV.
Consider connecting marketing ROI data with Sales data to create a baseline and funnel from marketing to acquisition to conversion and retention. This will provide an accurate view of end-to-end performance. After all, it can be a challenge to attribute profit generation to specific activities, and with digital advertising acting as a last-click model attribution through the funnel becomes more important to support ROI reporting.
Don’t let quarterly returns destroy your ROI data
The demand for quarterly performance data can strongly impact the marketing team’s measurement and KPI reporting. A heavy focus on sales and marketing to hit targets each quarter can skew marketing ROI reporting to focus on the narrow and easily reported data KPI rather than the long-term growth drivers. So, when creating your marketing ROI reports, challenge the status quo and aim for customer lifetime value.
Recap: marketing effectiveness needs ROI
Demonstrating the performance and effectiveness of marketing activity and connecting it to growth involves accurate reporting that seeks to uncover both short-term and long-term KPI metrics. Such data will give marketers stronger credibility across the organisation’s success. In other words, ROI presents you with an important opportunity to improve marketing’s leverage within your organisation.