Marketing—and its impact on the bottom line—has never been more scrutinized. Companies spend a lot of money on marketing, generally around 9-10% of revenues in recent years, according to Gartner and Deloitte. It’s natural for companies to want to know what they get for all that marketing spend.
Many CFOs are increasingly demanding concrete evidence of marketing’s financial return. However, the quest to quantify marketing ROI is fraught with challenges, complexities, and sometimes, questionable worth.
Calculating the ROI of Marketing
The formula for calculating the ROI of marketing is the same as any other ROI calculation:
This formula seems straightforward but belies the complexity underneath. The key is not just achieving a positive ROI, but ensuring it surpasses other potential financial uses, such as relatively risk-free investments like U.S. Treasury bonds.
Challenges to Measuring Marketing ROI
Here are just a few of the challenges to getting an accurate measure of marketing ROI.
Accurately Assigning Costs
Determining the true cost of marketing initiatives is intricate. Marketing expenses span across various channels, often with overlapping costs that are difficult to segregate. For example, how do you allocate the cost of a social media campaign that uses content originally created for a TV ad? Do you include the cost of the social media managers in the cost calculation? When they work on hundreds of social media campaigns in a quarter, how do you accurately assign their costs to a particular campaign?
Establishing a Baseline
Calculating the incremental value delivered by marketing is challenging. A critical factor here is establishing a baseline — what would your revenue look like with zero marketing spend? This zero marketing spend analysis is vital yet complex, as it involves understanding market dynamics without marketing influence.
Think of the value of a brand like Apple or Microsoft. If these companies stop spending money on marketing, they’ll keep generating revenues. But eventually, the value of their brand will deteriorate, and it will take a lot of spending to restore the brand.
Marketing Effects Take Place Over an Extended Period of Time
Marketing effects often take place over long periods, complicating the attribution of results to specific campaigns. Brand-building campaigns, for instance, yield results over years, not quarters. Many marketing campaigns are like melting ice. If the temperature is 10 degrees below the freezing point, you have to expend energy to raise the temperature. But only putting in enough energy to raise the temperature by 9 degrees won’t show any results. Spending just a little bit more sometimes has big results.
Attribution is Hard
The digital marketing landscape offers various attribution models, from the simplistic ‘last click’ to more complex ‘multi-touch’ models. Each has its advantages and drawbacks, and choosing the right model can significantly impact perceived ROI. Particularly in consumer businesses, Google tends to be favored because the ‘last click’ many consumers make before purchasing is looking for the best price. But if consumers had not done research in multiple places, and seen marketing campaigns for your product, they may not have decided to purchase.
The Cost of Not Taking Risks
Focusing solely on marketing ROI can lead to conservative marketing strategies. For instance, while proven techniques might guarantee modest returns, they might also miss out on high-reward opportunities that are less quantifiable in advance. If marketing teams feel like they must always deliver positive marketing ROI with every campaign, they may not take the chances that lead to marketing breakthroughs.
Everything is Connected
Marketing doesn’t exist in a vacuum. External factors, like product quality or brand reputation, heavily influence its effectiveness. The Volkswagen emissions scandal is a stark reminder of how external factors can render marketing efforts ineffective, regardless of investment. In B2B businesses, the quality of the sales force may impact the apparent return on marketing’s ROI.
Gaming the System
When rewards are tied to specific metrics, there’s a temptation to manipulate these metrics. This ‘gaming’ of the system can lead to misleading ROI figures and poor decision-making. For example, what if marketers exaggerate the capabilities of a product, leading to increased sales, but also increased returns and customer dissatisfaction?
What Should Marketers Do?
What should marketers do if measuring marketing ROI is challenging and may not be worth the cost?
Measure the ROI of What Can Be Measured
Focus on areas where measurement is feasible and reliable. For instance, direct-response digital campaigns often provide clearer ROI metrics than broader brand-awareness initiatives.
Directional Trends Analysis
Look at key indicators like customer lifetime value (CLV) and brand equity. Is your CLV trending upwards? That could be a sign of effective marketing, even if direct ROI is hard to quantify.
Balanced Portfolio Approach
Diversify your marketing strategies, balancing safe, ROI-positive and innovative, high-potential initiatives. This approach is akin to a financial portfolio, balancing risk and reward.
Integrated Measurement Frameworks
Adopt a holistic view of marketing measurement. Combine financial metrics with non-financial ones like customer satisfaction and brand perception to get a more comprehensive view of marketing’s impact.
Conclusion
For today’s marketer, the measurement of marketing ROI is not just a financial exercise but a strategic endeavor. It requires a nuanced understanding of marketing’s multifaceted impact, a willingness to embrace complexity, and a commitment to balance quantitative rigor with qualitative insights. By adopting a more holistic, diversified approach to marketing measurement, marketers can better navigate the intricacies of this challenge and demonstrate the true value of their marketing investments.
