As a preparation to a customer round-table event organized in Luxembourg in June 2012, and with the collaboration of my colleague at IBM, Koen De Cock, we tried to define what an ROI on marketing projects can be, how to approach it and why to measure ROI. Here are the main elements :

 

1. ROI Definition

To simplify, ROI can be calculated as the ration between Gain and investment. Or between what you get as additional revenue or additional margin compared to the cost of a campaign or marketing initiative.

Thus, ROI is a ration between 2 amounts in Euro (or USD, …). The cost of the campaign is usually easy to calculate or estimate. The challenge is often how to evaluate the gain of the campaign and express this gain in monetary value.

 

2. Why would an organization calculate an ROI on marketing actions?

Yes, to justify budgets. But also as a management tool, to select the best projects, to prioritize, to optimize your marketing budget, to be sure you get the most of each Euro you invest.

 

3. KPI vs. ROI

Yes, KPI measurement is important to drive and take decisions. But to estimate an ROI, you need figures in Euro while most KPI are reported in other metrics (amount of clicks or downloads, shop visits, brand awareness, …). The challenge is often to translate KPI values in Euro.

 

4. So, how to calculate an ROI ?

  • Based on direct money figures (sales increase, margin improvement, …) from your ERP or production system;
  • Translate KPI to Euro : based on past experience and measures, it is possible to translate a shop visit in basket value, web-site clicks in revenue,…
  • Based on behavioral models like “Customer Lifetime Value” to estimate the future value of a relationship created or strengthen thanks to the campaign. This valuation method is the most complex and less reliable as it is based on a double series of assumption (the impact of the campaign and the estimated value of the relationship).
 

5. Some tips :

- measure the return and ROI of your campaign by segments to analyze the efficiency with more details and gain the insight to focus on the most profitable combination of marketing investment / segment. This can lead to a higher differentiation of the communication between segments.

- design your campaign or marketing initiative with the importance of measure points in mind. Analytics tools are available to gain insight from data, but they need data. Link your campaign to your social media presence, your web-site,…

- Try to connect marketing initiatives with your CRM system, ERP, billing systems, customer DB : The more you can link communication and marketing initiatives with real customer and purchases, the more you will be able to fine-tune your campaigns, differentiate your message by custmer segments and increase your marketing ROI.

 

During the customer round-table we organized in Luxembourg on June 14th with some customers, we also highlighted the importance of pragmatism and good sense : indeed, calculating an ROI can become quite complex, time consuming and costly, marketers must adapt to the level of details expected by their management or budget owner. Although, measuring ROI can also be an internal tool for the marketing manager to improve its efficiency by understanding what works best.

 

This article was written with the input and collaboration of my colleague Koen De Cock.