The InsideOut blog is a collection of our strategy, marketing and online thinking.

Over the last month, I’ve been putting together a marketing ROI programme. Being an ex accountant, numbers are second nature to me, but that’s not the case for everyone. As such I’ve wanted to provide a simplified process for marketers to follow to make sure their effort and hard work will be rewarded.

Marketing metrics is a simple concept, at the heart of it you need to generate a return that justifies your expenditure. Once you understand the ROI fundamentals you will start to take a more rigorous approach to your campaigns. Over time you should start to develop a more disciplined approach; one where questioning, testing and learning become standard core competencies.

You don’t need to introduce everything at once. Spend time getting used to the ideas and introducing them campaign-by-campaign. When annual budgeting time rolls around, look to apply the principles to the bottom line. Look at the different areas of your marketing team and see how the ideas work there, each area will be different. But make sure you use the same definitions in each area so you can all talk the same language.

As business gets tougher Marketing Managers need to speak the language of CEOs, almost all CEOs are focused on revenue growth. Define value in terms that your CEO would value. Agree the key objectives that are supported by the management team and deliver real tangible benefits to the organisation. These should be the key cash flow or growth drivers for the organisation. Clearly define how marketing adds value to support those key objectives and identify all the marketing activities that affect the key cash flow drivers. Look to identify a metric for each of the key marketing activities and then show how your metric affects the cash flow drivers. That is, link what you're actually doing back to the key drivers of cash in your organisation.

ROI Calculation One of the key questions I am often asked is, how should you measure the return of a campaign? To do this you need to run the numbers through a basic ROI calculator, the formula is;

ROI = Return/Investment = (Gross Margin – Investment)/Investment

The Gross Margin is the present value of incremental profits less cost of sale expenses. This represents the contribution made to the company’s profits prior to deducting the marketing investment. The Marketing Investment includes all the expenses that are put at risk, to market the product or service. This includes campaign development and media, as well as staff time allocated to managing the project. It does not include additional discounts or gifts – this is a cost of sale.

Key things to understand

• ROI should be a positive number and expressed as a percentage. A positive percentage is a financial gain, a negative percentage a financial loss and 0 is breakeven. A hurdle rate greater than your cost of capital should be set. Ask your finance team to help.
• Return should be based on the Gross Margin Contribution – not Revenue.
• It should include a reasonable estimate of Incremental Customer Value (ICV) – this is the subsequent sales the customer will make as a result of the initial purchase. Note though this is not Customer Lifetime Value – Lifetime value requires further reinvestment from future marketing investments – so using CLV will overstate the return.
• Don’t include any costs of sales in the investment – discounts, vouchers, incentives are a COS not investment. That is you incur the cost with the sale not with the generation of the marketing program. Typically variable costs are COS and fixed costs are an investment.

Other Considerations Long term versus short term activity.
One thing you obviously need to do is build long-term brand equity. You’re going to do this through brand building, awareness advertising, or building associations through sponsorship for example, while these activities will result in sales they are not designed to drive immediate sales. As a result it is not realistic to measure results against these tough ROI measures. Brand communications should be considered an overhead expense and managed using long-term brand equity valuations. Considering this, obviously a judgement needs to be made in terms of what proportion of your marketing budget you can afford to allocate to brand building.

Bankable success versus innovation.
Like a lot of things in business you are always looking to improve your success, while at the same time you do recycle those methods that are tried and true. From a marketing point of view while there is always a desire to be innovative you need to balance that with the risk of a complete campaign failure. To manage this it’s important to set a portion of your budget aside for innovation and experimentation so you can learn and improve your results. However the trick is to not set this too high that it might adversely affect your annual results should it fail.

Campaign Measurements
Different styles of communication have different levels of measurability. Brand advertising is of course more difficult. With traditional above the line media it's possible to measure some of the impact, but not perfect. Direct Marketing is easy to measure and Online Marketing offers the ultimate in measurability. Looking specifically at traditional media; TV, Press, Radio, Billboards. While this is difficult to measure you can build mechanisms into your advertising to do this. Ideas you can explore are;

• Different 0800 numbers
• Different URLs
• Specific Coupons/Offers
• Txt for info
• Website/retail questioning – how did you hear about this offer?

If you want to know more about how to introduce a more accountable marketing approach, download the full whitepaper on Marketing ROI or feel free to contact us with any questions you might have.