By Ron Ens

Getting Started with Marketing ROI

Managing the return on your marketing investment makes sense. Right? Who doesn’t want to prove that their marketing programs are generating profits? Sounds relatively straight forward, but how do you get started? Return on marketing investment or “Marketing ROI” is becoming a topic discussed more frequently by senior management. In a recent survey, 65% of marketing professionals report an increased demand from their management team to demonstrate the return on the firm’s marketing investment. How do you go about it? Where do you start? What standards if any can you refer to?

Traditional metrics like measuring levels of awareness, tracking response rates, calculating the sales conversion ratio and net sales are often on track, but incomplete. Why? Because they don’t take into account the total costs associated with acquiring that business. The result? A marketing program that may look like a winner, but it is really a loser and vice versa. Without the complete financials, you might be led to pick the wrong program to take to market. How do you get started, especially on a limited budget? I was faced with that question as the VP of Marketing and Sales for a global company. You do what I did; you begin with what is most likely in your immediate control — your direct marketing programs.

To implement a ROI process that assesses the effectiveness of your direct marketing programs, it is important to understand the Customer Buying Funnel concept.  Essentially, at the top of the funnel are the large numbers of unaware prospects.  As your prospects move through the buying process, the funnel narrows until all that remains are customers generating profitable sales.  As unaware prospects are touched by your marketing programs, they begin to leak out of the funnel at varying stages in the buying process.   For our firm’s particular application, the direct marketing efforts targeted unaware prospects and were designed to drive them to our web site for response.  Once at the web site, the respondent would fill out a brief questionnaire to claim their premium.  The information gathered from the questionnaire would be assigned to an inside sales representative responsible for contacting the prospect to fulfill the premium and to further qualify them for a direct sales contact.  Those qualified leads were assigned to direct sales and tracked through to conversion.

Our buying funnel for this specific program looked like this:

Program A
#
% Progress
% Leakage
     Unaware Prospects
20,000
     Responded to Web Site
600
3%
97%
     Completed Web Questionnaire
350
58%
42%
     Qualified for Direct Sales Follow-up
100
29%
71%
     Meeting Scheduled
45
45%
55%
     Sales Completed
14
31%
69%

As you would expect, the majority of the leakage from the funnel occurred at the initial stage, moving from the “unaware prospects stage” to the “responded to the web site” stage.  However, to improve our results, our marketing team decided to modify the program in an attempt to reduce the leakage between the “responded to web site” stage and the “completed web questionnaire” stage.  Our approach involved increasing the premium we provided for completing the web questionnaire in the hopes that we would generate more leads for our inside sales representatives to qualify for a direct sales follow-up.  The marketing rationale for this approach is pretty obvious — increase the response rate and with all other things holding the same, increase the number of converted sales.   This new program, after the changes were made, yielded the following results.

Program B
#
#
% Leakage
     Unaware Prospects
20,000
     Responded to Web Site
585
3%
97%
     Completed Web Questionnaire
415
71%
29%
     Qualified for Direct Sales Follow-up
128
31%
69%
     Meeting Scheduled
68
54%
46%
     Sales Completed
21
31%
69%

At first glance it appeared that Program B was more successful than Program A.  By offering a better premium we reduced the leakage at the “completed web questionnaire stage” and consequently closed more business.  Additionally, further analysis revealed that the net profit was higher with Program B making it a success story.  Right?  Well, not really.  Here’s how the programs looked after completing the ROI analysis.

Program A
Program B
Direct Mail Costs
# of Pieces Mailed
20,000
20,000
Fully Loaded Cost for Mailing
$1.45
$1.45
Subtotal
$29,000.00
$29,000.00
Web Response Costs
# Completing web questionnaire
350
415
Cost for programming
$5,000
$5,000
Incentive Cost
$15.00
$22.00
Cost Per Lead
$29.29
$34.05
Subtotal
$10,250.00
$14,130.00
Customer Service Costs
Web Leads
350
415
Cost to Qualify Lead
$14.50
$16.50
Subtotal
$5,075.00
$6,847.50
Sales Meeting Costs
# of Scheduled Meetings
45
68
Cost Per Meeting
$145.00
$145.00
Subtotal
$6,525.00
$9,860.00
Summary
Net Sales
14
21
Cost Per Sale
$3,632.14
$2,849.40
Avg. Profit Per Sale
$6,150
$4,625
Marketing Program Cost
$50,850
$59,838
Net Profit
$35,250
$37,288
ROI
69.32%
62.31%

What happened?  How did Program A generate a higher ROI than Program B?  The traditional marketing metrics indicate that Program B was the better approach.  At first glance, the improvement in web leads from 350 for Program A to 415 for Program B was quite positive, especially when you factor in the increase in direct sales meetings from 46 to 68.  The answer lies with costs that are not generally incorporated into the analysis.   First of all, to boost the web questionnaire completion rate, the marketing team increased the incentive cost.  While only a $7.00 per lead difference, it actually drove higher costs in the inside and direct sales stages.  The analysis shows that the real driver to a lower ROI for Program B rests with the less profitable business it generated lowering the average profit per sale from $6,150 to $4,625 primarily due to the purchase of less profitable items.  Despite higher response rates and higher net profit, the ROI was actually lower in Program B due to hidden costs and the conversion of less profitable customers.

Moving to an understanding of the ROI of the marketing program involved uncovering the true costs for each stage of the process.  Things such as the direct costs of the marketing program, staff, creative, printing, and web programming, along with costs such as price discounts and rebates, the inside sales function, trial incentives and sales commissions all had to be quantified and included in the analysis.  The basic equation for Marketing ROI, (Net Profit / Marketing Investment) may sound simple enough, but this example illustrates the importance of capturing the correct financial metrics.

What did we learn?  First of all, a slight change in the program’s approach moved the response down market to attract lower value buyers.   While this was not apparent at first glance, a thorough ROI analysis revealed that this change was actually driving less profitable business despite the improvement in our response rate.  This finding allowed our marketing team to further modify the program, to continue to attract the slightly lower value customer segments, while doing it more profitably.  The marketing team made modifications to the product mix to reduce the pricing gap between the more profitable product option and the one being selected by the new customer segment.

The real benefit we observed from implementing the ROI model into our direct marketing programs was the ability to quantify the cost/benefit of our respective programs.   By understanding the true costs of the marketing program for each funnel stage, our marketing team was able to turn their creative efforts into modifying the program to minimize the leakage.  Our effectiveness was ultimately achieved by testing several differing approaches to reduce costs, improve the conversion rate and generate a higher Marketing ROI.

Marketing ROI does not have to be an “all or nothing” proposition.  As this example shows, starting with a marketing program that allows for the collection of the financial and marketing data can help kick start the process internally.  As a result of this one example, an important cultural shift took place in our organization.  The marketing team started thinking of success in terms other than just response rates and conversion rates.  Instead, they began think of marketing programs in terms of their return on investment.   After all, delivering profitability is the job of everyone in the organization including marketing.  Marketing ROI is the marketer’s tool for increasing profitability.

Ron Ens was previously Vice President of Marketing & Sales for Toppan America and has held senior marketing roles for several Fortune 1000 firms in the Financial Services and Technology industries. He can be reached at ronensjr@aol.com.