One of the most helpful things I’ve learned in B-school that has really affected my thought process in planning-there isn’t much that comes out of marketing unless you can tie costs to revenue. While I’m downright certain you don’t need an M.B.A. to be able to figure this out, it does help to understand ROI when you’re having to converse with finance or strategy folks, and certainly any C-level executives about the validity of marketing program efforts.
I will tell you that these conversations are a fantastic way to get your budget initiatives approved, and more importantly keep your job. But even more- it lets you understand the impact that marketing has on the corporate revenue, gives your marketing folks something to be proud of, or direction if your current efforts are going south. Sometimes people forget to look at that before they slice up the department in a budget cut effort-only to turn around a year or two later and wonder what happened to the corporate visibility, and why isn’t sales performing like they should. Does this mean every marketing effort is worth the $? Of course not. But you do need to try things and then adequately measure impact to be certain.
In order to multiply impact for your business, I want to introduce you to a different marketing ROI framework that’s much simpler than the classic equation taught in finance textbooks. Traditional finance ROI is defined as net profit from an investment- investment cost/investment cost. This calculation isn’t easy to do in marketing because a fully loaded net profit from a marketing campaign is tough to gauge.
So do what the big guys do. Most Fortune 500 marketing VPs look at the revenue to cost ratio: incremental revenue driven by a marketing campaign divided by the cost. It’s a deceptively easy metric, but if you use it properly, I guarantee you’ll be able to make the bold marketing decisions you need to grow your business.
For example, let’s say you send a text message campaign to your loyalty program members (I love loyalty programs-time after time they prove beneficial to both parties, giving you repeated customers with much less effort. If you haven’t tried one, and you’re selling widgets, I urge you to think about it-I’ll discuss those at a later date.). It costs $6 to send the text to several hundred of your customers. 4% of the recipients of the text come to the store and spent a total of $110. The revenue to cost ratio of this campaign=18x. Was this a good result? Rule of thumb=5x is a decent return, so in this case the promotion was great! It’s easy to look at every promotion and effort like this and you don’t need to be a math wiz.
Once you understand the revenue to cost ratio, it’s easy to start ranking marketing decisions. Should I pay to advertise on Facebook? Do I got to this event? Should I do a daily discount? All of these decisions can be put through this simple analysis to see if it’s a good decision. You can estimate revenue to cost ratio up front, or you can try a campaign once and see if it passes your ROI hurdle.