True ROI

This is part of a series of posts that look at the overall health and key business drivers behind marketing/sales teams.

 

 

A TRUE ROI CALCULATION

Many marketing teams are dependent on return on investment (ROI) as their primary metric for success. This calculation used to measure how effective a team or campaign is performing against the investment.  However, the simplistic calculation can give us a misleading indication of true success. To really understand your campaign’s performance we should dive deeper into all the factors involved.

The base calculation of ROI is defined as (Profit – Cost) divided by Cost.

This is a good overview of the simple way of figuring out ROI.  However, marketing departments have many variables, and we can tweak our formula to be even more specific.

Cost is usually associated with the cash spent, but it can also include an assortment of parameters. SaaS products specifically used, out sourced creatives, image rights you purchased, or or other campaign considerations. And if you are doing it right, you should be consulting with legal from time to time to ensure compliance. This cost, if not in house, should be noted on the expense column.

Time is one of the biggest factors when determining true ROI. Is this based on 30 days, 3 months, or 3 years? To help understand a fair time table think through several factors: sales cycle and add that to end of campaign, perhaps MQL vs. SQL or a ratio there of, and could report in a pattern that fits product cycle.

Profit can be determined simply or more detailed. Profit should be determined based on cash calculations for the company. Whether it is up front, payment plans, LTV focused, etc. should be reflected in the ROI calculation within the timeframe and cost structures above.

The amount of variables can be quite large, and in some cases pedantic. However, if you take the time to set up an excel sheet thoroughly with all potential variable cost, it should auto pop your calculations quickly. A working template that each team member can utilize or customize will make your reports a true reflection on the numbers.

Bonus:

Now to take this to the next level, take the template to determine opportunity cost. Do the math before your campaign. Insert the expectations into your new calculations and compare one campaign to the other.

Realism is another element to add to the reporting. By calculating the true cost, true profit, and opportunity cost, you can add in stress tests to see how things would look in best case/worst case scenarios. The stress tests encourage good questions about what it would take to achieve the best or what can happen to create the worst case scenarios. Both bring out dependabilities to influence marketing success.

A good practice is to go over this with your team so everyone agrees and on the same page.  Then take the time to educate your superiors so they have buy in and input as well.  Going forward, everyone will have the same vocabulary and formulas as they report on marketing.

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