How to Calculate Marketing ROI

Most marketing leaders live on the defensive. Every year, they have to justify — and re-justify — their budgets. And when things get tight, they know Marketing’s budget will be the first one that takes cuts.

But, like, why? We all know, intuitively, that Marketing is critical to Sales. Just ask a salesperson who’s ever had to sell an unknown brand, or was sent out into the field without any qualified leads.

That said, drawing a straight line between Marketing and Sales has always been difficult. And the people in the C-suite like assurances. If they can’t know what they’re getting back from their marketing investment, they’re likely to perceive it as expendable.

Let’s put an end to that.

While attribution remains an elusive bitch, there is a way for you to draw a reasonable speculation on your marketing ROI — by following these six steps:

Step 1: Determine the total amount of marketing spend dedicated to lead-gen campaigns.

This can be difficult, since marketing activities and communications can have many functions (e.g., awareness, audience engagement, etc.). But determine, as closely as you can, how much of your total marketing spend — both services and media — is fueling communications whose primary function is to drive opt-ins. (In particular, look at AdWords, retargeting, lead-gen emails, “boosted” social media, etc.).

Step 2: Calculate the total number of leads converted by those campaigns over the last 12 months.

This should be easy to do if you have your Google Analytics set up correctly. If you don’t, yikes! Call us. The key is to get a full-year picture of what Marketing is generating in terms of leads.

Step 3: Ask your Sales team for their average conversion rate over the last 12 months.

This includes leads that came in through digital marketing efforts, as well as those generated at industry events, through a call center, via purchased lists, etc. You may get some push back because leads are variable, and nobody wants to be penalized for failing to close the non-Glengarry leads. But you’re looking for an average full-team number. When they look at good leads, bad leads and everything in between, what percentage do they close? 10-percent? 7-percent? 3-percent? (And if a certain type of lead is closing at a particularly low rate, wouldn’t Sales want to know that?)

Step 4: Determine your average Lifetime Customer Value.

This, too, can be difficult because every customer is different. You may have one client with a value of $100K and another that’s generating $5M. Discuss this with your team and remove any outliers that may throw the numbers off. Once you’ve settled on what should be included, start by using these formulas (via Hubspot) to make your calculations. And to be safe, err on the conservative side.

Step 5: Calculate the value of your Marketing leads.

Start with your total number of earned leads (see Step 2), multiple that by the Sales team’s close rate, and multiply that by the average Lifetime Customer Value (LCV). The number you get is the total value of the leads generated by Marketing:

Step 6: Run that number through this formula:

The resulting metric is your estimated Marketing ROI.

For example, let’s say you …

  • Generated 142 leads for your org last year
  • Your Sales Team closes at 7% on average
  • The Lifetime Value of your average customer is $300K
  • And, your marketing budget was $1M

That means Marketing generated $2,982,000 in Lead Value last year — and that the organization got an almost 3x return on every marketing dollar spent. (You can also show this as a 2.98-to-1 ROI.)

Granted, the numbers generated from this methodology are conditional. And, they don’t tell your whole marketing story. They reflect only the value of new business that came from the leads generated. (They do not, for example, account for how marketing activity boosts the value of your brand. But let’s face it: Most CEOs don’t care about that. It’s the CEOs of larger brands — those with measurable equity — who tend to see that larger picture.)

So, as long as the numbers provided by your Sales team are accurate, you can offer your Marketing ROI projection to the C-suite with statistical confidence. Because, if anything, you’re undervaluing the value of your team’s marketing efforts.

And the next time your CEO, COO or CFO start to question how much budget will be dedicated to marketing next year, remind them that marketing isn’t a cost. It’s an investment. The fewer seeds you throw down today, the less growth you’ll have tomorrow.

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