As a CFO more often than not, I’m asked the question: what is the value or what did we get for the 1000’s of dollars spent on digital marketing. I usually pass that question to the CMO or the person responsible for managing advertising dollars in the company. Usually, the answer is “I don’t know yet”, or “it depends”, or “we didn’t see a return”, or some other similar answer.
I’ve been a CFO for a digital marketing company, a customer of another similar firm and a CFO consultant for companies that use digital marketing services. In all of these experiences, I have to admit that digital marketing firms very seldom provide ROI information on their proposals. In a recent situation, I received a proposal for almost $500k a year in digital marketing services and there wasn’t a single word about what to expect as far as hard benefits? This is just not acceptable and CEOs must demand accountability from their marketing firms or their CMOs if this function is managed internally. The reality is that the information and the tools to have a fairly good idea or to estimate the ROI for a given marketing digital strategy are widely available.
When company budgets are being cut, the first thing that tends to go out the door are under-performing assets, people or strategies. As such, when the digital marketing efforts have no specific ROI, they become de-facto under-performing. I do believe in that old saying “what you don’t measure, you don’t manage”. It is in the best interest of the CMO or the digital marketing firm to measure in a very crisp way the ROI for each strategy. Otherwise, the marketing spend tends to go into a “black box” and subsequently at risk of being reduced or completely eliminated.
Imagine putting money into an activity that you don’t know how to measure, what the benefits are or what would happen if you stopped those activities? The only thing you know exactly is the amount of money that you are paying. That is the marketing “black box”. Small and medium size organizations don’t typically have a Chief Marketing Officer (CMO) or in many cases the time to analyze if these marketing activities are generating incremental revenue. While generating impressions, leads, “likes”, engagement, conversations, etc, are all nice and as they are all part of the marketing funnel, they only thing that really matters is the number of incremental new customers that can be directly attributed to a specific marketing activity.
First, set the right expectations up-front. At the beginning of any campaign, the marketer must be able to estimate or at least provide a range of ROIs, here is how:
Gross Revenue is the number of new customers that this particular campaign generated * LTV (Lifetime Value). The campaign cost includes all costs such as, the amount paid to Google or Facebook, any management fees (in the case that these activities are outsourced), and the cost of content creation associated with this specific campaign. It goes without saying that the marketer must be able to calculate the LTV beforehand.
As an example, a Gym is implementing a new website for $10,000 in order to attract new members. The current website receives 10,000 new visitors per year and this results in 100 new members with an LTV of $1000. The marketing team estimates a 15% increase in new visitors based on similar results with other implementation. Assuming that after the new website is implemented the conversion is the same (100/10000), the ROI could be:
Gross Revenue: 1,500 new visitors * 1% * 1000 = $15,000
ROI = 50%
Once the initial expectation is set, the key drivers can be managed during the year to evaluate how close we are to the 50% ROI and more importantly what KPI (i.e. # of new visitors, conversion or LTV) is in line or out of line. It is crucial to establish a baseline because the ROI of a new website is primarily based on the incremental number of visitors.
Second, provide a monthly detailed ROI. This detail calculation will certainly provide transparency and accountability and ultimately help avoid the marketing spend going into the “black box”. For example, a company implemented an ad in Google Ads with the following results:
Impressions: 40,000
Click-through rate: 2%
Conversion rate: 1%
LTV: $500
Total Campaign cost: $10,000
When several marketing campaigns are running simultaneously, it is imperative to have a mechanism to track the source of each new customer. For example, a company implemented a new website and shortly thereafter implemented a Facebook Ad campaign. If 10 new customers were generated from these two activities, the company must be able to determine or at least estimate how many of these 10 customers came because of the new website or from the Facebook Ad. It is imperative to use specific conversion rates once the campaign is active in order to measure actual results and not theorical results. Depending on the complexity of the multiple campaigns it may be difficult to attribute each customer to each campaign, in this case developing and using an attribution formula may be appropriate.
If the ROI cannot be calculated then at a minimum the break-even number of incremental customers must be calculated. For example, if a new CRM is being implemented to manage leads, and the cost is $2000 and the LTV for each customer is $500, then the company needs at least 4 new customers to break-even. Again, the company must be able to track the source of each new customer in order to have reliable calculations.
The expected returns need to be risk-adjusted. On one hand, the amount spent is very certain, just like paying the rent. But on the other hand, the incremental gross revenue is far from guaranteed. The more uncertainty or pushback that I get from the marketeer, the higher the risk-adjustment. For example, in the above example of a new website the expected ROI is 50%. If the incremental number of new visitors of 15% seems optimistic or if the competition is also going through a new website redesign, you may want to demand that the project generates a higher return such as 75% before committing resources.
Setting the right expectations from the beginning and managing these expectations through detailed ROI calculations is imperative. The use of KPIs for each campaign is a way to understand why specific goals are not being reached. Having specific metrics will almost ensure accountability and perhaps avoid marketing budgets being completely eliminated when the CEO/CFO doesn’t see any benefit associated with these activities. Evaluate the overall risk of the campaign and adjust the required return as needed. After evaluating several campaigns and seeing what worked and what didn’t work, the company can set a “Required Rate of Return” before marketing dollars are committed.