Return on marketing investment has become a hot topic as marketers seek to prove the value of their activities and programs and strive to bolster their credibility in the C-suite. Today, marketers are using ROI for everything from justifying marketing budgets to measuring the performance of individual campaigns.
ROI has also become an important topic for marketing service providers. MSP's are routinely using case studies that include ROI calculations when pitching projects to prospective customers. In many cases, they will also provide post-campaign reports to clients that contain a calculation of the ROI produced by the campaign. Therefore, marketing ROI has become an important factor both for winning business from prospects and for winning additional work from existing customers.
In these circumstances, it's critical for MSP's to use accurate calculations of marketing ROI. One very quick way to lose credibility with a prospect or client is to present a flawed ROI calculation. Even if your immediate contact doesn't catch the error, it's likely that, sooner or later, someone in the customer organization will.
Given its increased use and popularity, you would think that the process for calculating marketing ROI is now well understood. Unfortunately, I still see far too many examples of marketing ROI that has been calculated incorrectly - in many cases by people who should know better.
One of the most common errors is the use of increased revenues (sales) rather than increased profits when calculating marketing ROI. You can see a detailed illustration of this problem here, but the essence of the issue is easy to describe.
The basic formula for calculating marketing ROI is:
ROI = (Gain from Marketing Investment - Cost of Marketing Investment) / Cost of Marketing Investment
For ROI purposes, Gain from Marketing Investment is the incremental gross profit (gross sales/revenues less cost of goods sold) produced by a marketing campaign or program. Using incremental sales or revenues in the ROI calculation distorts ROI because most marketing campaigns are designed to increase sales volume. And increases in sales volume are not free - there are always costs associated with producing and delivering the additional products or services. Therefore, incremental gross profit is the real meaure of the "gain" produced by most marketing investments.
Using sales/revenues rather than gross profits will usually produce ROI numbers that look fantastic. But the problem is, these ROI numbers are flat out wrong. Way wrong.
Using accurate ROI calculations isn't the only key to being a successful MSP, but it is an important factor in winning new business and building lasting client relationships.