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The Marketing ROI Equation: How it All Adds Up

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March 14th 2006

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by David Graf  |

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If there were Oscars for the most overused business and marketing related terms, the nominating committee would have a tough time narrowing them down to the finalists. Businesspeople, media, consultants and others use these terms so ubiquitously that they have come to mean many things and nothing at all. The nominees would be comprised of at least the following terms; Outsourcing, Customer Relationship Management, One to One Marketing, Pay for Performance, and Marketing ROI.

And the winner is Marketing ROI.

This term in particular has pervaded virtually every corner of the marketing world from articles to meetings to seminars to corporate executives trying to figure out what marketing ROI really means, and lastly to service providers extolling their versions of marketing ROI. The reason this term has become such a buzzword is because companies large and small can no longer spend and invest marketing money without being able to show a measurable and acceptable rate of return on the capital deployed.

A big part of the reason that there is so much confusion about marketing ROI is because to really understand it and put it to use, several disciplines need to converge and work together that historically haven’t. Specifically, marketing people need to interact with finance and technology people. It’s the finance piece of this that is relatively new. In the “old days” marketing would be given a budget and they would find a way to spend it using their very best intentions. Marketing was a necessary cost of doing business; it wasn’t looked at like other capital expenditures and investments. After all, who could measure all that “creative” stuff? As globalization and other competitive pressures have transformed the competitive landscape, companies have had to become more Darwinian — that is, they’ve needed to find new ways to survive and thrive. One of those ways is to optimize the utilization of their scarce resources, one of which being capital. No longer was it acceptable for “marketing” to receive a budget without any accountability to its return.

Sooner or later, the marketing and finance groups got together and said, “Isn’t there a way we can actually measure what impact our marketing dollars are having on the growth of our business, so we can figure out how to best deploy these resources?” This began to occur in the early to mid 80’s when pc’s and database technology created tools enabling rapid and accurate measurement of these efforts. Over the years, lots of different disciplines including academia, internal large companies, small unsophisticated providers, and very sophisticated providers have developed a multitude of approaches towards definitions of marketing ROI.

At its core, marketing ROI is being able to measure the exact return for each marketing dollar deployed. As a definition, that sounds fairly simple. Where the complexity comes in and where most people oversimplify the exercise is in determining what to include in the calculation. For example, an everyday direct mail company will say that they can drive marketing ROI by making mail pieces for less and helping to increase response rates? A database company will say that their list scrubbing and modeling techniques will drive more efficient marketing and thereby improve marketing ROI. Loyalty companies will claim that their retention programs drive ROI. CRM companies claim their software and systems maximize customer lifetime value, thereby delivering marketing ROI. Interestingly, all of these claims are true and none of them are true.

Each unto themselves impacts part of the marketing ROI equation but none comprises the total equation. In a simplified view to make the point, in order to really quantify marketing ROI, one needs to follow a much more robust formula and set of equations that consist of the different elements depending on whether the goods being sold are products or services. That being said, the following are the guidelines to think about when trying to derive an actual marketing ROI calculation: