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: Mr. Graf has over 15 years of leadership expertise, direct marketing, telecommunications, sales and business management experience. Most recently and prior to becoming Chief Executive Officer and President of TRANZACT, Mr. Graf was President of Mosaic Performance Solutions North America, a wholly owned subsidiary of Mosaic Group Inc., and formerly Paradigm Direct from 1999 to mid 2003.

The Marketing ROI Equation: How it All Adds Up

Written on: March 14th 2006
Author: by David Graf |
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1.Holistically account for all the costs across the entire supply chain of customer acquisition and customer management. We will call these gross marketing costs. They start with the costs to develop strategy and include all the costs embedded in the marketing and support processes until such point that the customer no longerbuys the product or service from the brand. The elements include strategy, data,media, promotion, premiums, technology, order provisioning, loyalty programs, crm programs, and any and all in market marketing execution.

2.Determine the true lifetime revenue of a customer by multiplying the length of time that customer stays with the brand or continues to buy by the brand’s product by the customer’s cost to buy or use the product or service.

3.As a subset of the true lifetime revenue, determine the lifetime gross margin produced over that lifetime by calculating gross lifetime revenue less direct cost of goods sold.

4.Subtract the gross marketing costs from the lifetime gross margin. We will callthe resulting number the customer lifetime gross profit.

5.Divide the customer lifetime gross profit by the gross marketing costs. This percentage results in the actual return on the total marketing dollars invested.

By way of an example, let’s examine how a typical wireless company might look at this exercise.

1.Let’s assume the sum total of the gross marketing costs is $500.00. This includes all the elements above — everything it took to acquire that customer andeverything it takes to manage the customer until he churns off the service.

2.Let’s assume the customer stays on the service for 30 months at $50.00 of average monthly revenue, producing a lifetime revenue calculation of $1,500.00.

3.Let’s assume that, in this case, COGS is 50% of the monthly revenue, totaling $750.00 over the customer’s lifetime, resulting in $750 of lifetime gross margin.

4.If we then subtract gross marketing costs from lifetime gross margin ($750 - $500 = $250.00), the result produces the customer lifetime gross profit.

5.If we divide the customer lifetime gross profit by the gross marketing costs, the result is the actual return on marketing dollars invested. In this case$250.00/$500.00 or 50%.

Of course this example simplifies what really goes into the calculation, but the point is that marketing ROI is a calculation that can be accurately computed and can be impacted, if one understands the input elements and leverage points associated with those elements. As time passes, more and more companies will develop their own formulas for calculating marketing ROI, and over time, these same companies will realize that to obtain a true understanding of marketing ROI, the calculation includes many more elements than they originally thought. As this process becomes more mathematically and process driven, the term marketing ROI will go from a buzz word and hype, to a critically important part of a company’s financial planning and capital allocation process. That’s when marketing ROI should really win an award.