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Understanding the Marketing ROI

3 TYPES OF MARKETING INVESTMENT

At the highest level, you can divvy up marketing investments into three main categories: 

  • Brand marketing: The awareness and perception building that comes with classic brand advertising. 
  • Acquisition marketing: All about bringing in new customers. Lead generation, demand generation and performance all describe how to bring in new customers through marketing. 
  • Customer marketing: Once you’ve landed that customer, it’s about keeping in touch, growing the relationship, and encouraging them to renew. If the customer churns and are no longer a customer, this type of marketing can help win them back. 

Because the largest percentage of marketing expenditure often goes into acquisition marketing, we’re going to focus this guide on that investment category. We’ll share how LinkedIn drives qualified leads, collaborates with sales, and attributes revenue impact. You’ll find out how to crunch numbers and develop metrics in order to calculate your ROI—and demonstrate that you and your team are helping your company reach new heights.

DEFINING ROI

Let’s start by understanding how to define ROI: 

(Ad-Sourced Revenue - Ad Spend) / Ad = Spend ROI

RETURN : what you earned
INVESTMENT : what you spent
ROI : Return on Investment

Here’s the classic definition from finance: Divide your return—or what you earned—by what you invested to drive that outcome in order to calculate your return on investment. 

Return on ad spend is often what marketers mean when they say ROI. 

When calculating your advertising investment, you’re usually tallying up the spend on paid media and maybe adding in costs for elements like the creative. Figure out how much it will cost you to produce the campaign. Then add in how much it will cost you to run your campaign through paid media channels. Tallying these together is the spend side of return on ad spend. 

ROI Expert Tip: Calculating ‘Fully Loaded’ ROI usually means adding paid media spend plus the creative cost and other investment categories, like salaries for sales and marketing. Some CFOs prefer this version of ROI, because it provides a more holistic view of the costs marketing incurs versus the revenue their activities drive.

How to calculate the ROI

When you’re facing a tough climb, it helps to break it into manageable steps. 

Here’s how to break down this ROI calculation. It starts with ad-sourced revenue: the revenue that’s coming into your company from advertising. You then subtract the ad spend from the ad-sourced revenue. Then divide that by the spend to figure out your ROI. 

For example, if you spend $2,436 and generate $7,720 in ad-sourced revenue, here’s how you’d calculate the ROI: 

($7,720 – $2,436) / $2,436 = 217% (or 2.17x) ROI

Ad spend measuring is quite simple: you tally up all your invoices and contracts from various paid media that you’re running. Measuring ad-sourced revenue is harder because you need to figure out marketing attribution. 

In larger companies, marketing’s contribution is not always crystal clear. The buying process can be quite lengthy and involves multiple buyers and touchpoints. We’re going to spend a bit of time in the following sections explaining how can you better measure ad-sourced revenue and what kinds of tools marketers are using to do so.

List of Metrics to solve the ROI (with definition)

  • CPC / COST PER CLICK Ad spend / clicks. The actual price you pay for each click. 
  • CTR / CLICK-THROUGH RATE Clicks / Impressions. The amount of clicks in your campaign divided by the number of impressions or sends. 
  • CPL / COST PER LEAD Ad spend / leads. The amount of money you spend to acquire a lead. 
  • MQL / MARKETING QUALIFIED LEAD A lead that meets the benchmark agreed upon by marketing and sales for being considered a strong prospect. Usually qualified through analytics and/or a lead scoring system. 
  • LEAD SCORE The methodology marketing uses to identify 
  • MQLs. 
  • SQL / SALES QUALIFIED LEAD A lead that sales has vetted and qualified as a prospective customer. 
  • CVR / CONVERSION RATE Conversions / Clicks. The percentage of users that take a desired action. 
  • CPA / COST PER ACTION OR ACQUISITION Ad Spend / Conversions. How much it costs on average for one person to fill out a form or become a lead. 
  • ROI / RETURN ON INVESTMENT (Revenue – Ad Spend) / Ad Spend 
  • MARKETING AUTOMATION SYSTEM Technology used to automate marketing actions to improve engagement and efficiency. 
  • CRM / CUSTOMER RELATIONSHIP MANAGEMENT Technology used to manage and analyze interactions and data throughout the customer lifecycle. 
  • ATTRIBUTION Accurately attributing an outcome to a specific tactic. The five models for marketing attribution are: first touch, last touch, multi-touch, rules based and algorithmic.

Understanding the Attribution models

In order to optimize your marketing, you need to be able to accurately attribute an outcome to a given tactic. Let’s review the three basic attribution models and why algorithmic attribution is the future. 

  1. First-touch attribution: This gives 100% credit to the first action the person took before making a purchase. Because it gives all the credit to the first touchpoint, it will naturally overemphasize upper funnel tactics. 
  2. Last-touch attribution: The most common model gives 100% credit for a conversion to the last marketing tactic the prospect interacted with. This model naturally overemphasizes lower funnel tactics, such as email or paid search. This is problematic, because last-click attribution fails to recognize the contribution of branding efforts that got the prospect in through the upper funnel in the first place. 
  3. Multi-touch attribution: Multi-touch (or multi-channel) attribution more accurately measures the impact that your entire marketing strategy drives, but is of course the most complex. There are two basic kinds of multi-channel attribution: 
    1. Rules-based attribution: In this model, you assign a certain value to particular tactics based on predetermined rules, such as frequency, recency, and perceived value of the interaction. For instance, you might give a higher score to a more recent interaction or for watching a demo than for downloading an eBook. We’re not huge fans of this model, because the rules are not necessarily driven by data. 
    2. Algorithmic attribution: This is the more complex, yet more accurate model. While similar to rules-based attribution, algorithmic relies on machine learning to apply value to interactions and improve the weighting over time. This method analyzes data from online and offline tactics by pulling in sources like cookie and CRM data, historical sales data, and other technologies.

The Curve of Marketing Math success

The biggest rewards come to those who create solutions to obstacles along their travels. 

As a marketer, your goal is to travel up the curve of marketing math success. By doing so, you’ll realize a more mature marketing measurement approach that goes far beyond the click and ultimately leads you to understand your ad-sourced revenue in order to calculate your ROI. Simply put, you want to be able to look at an ad and see exactly how many conversions it has generated. Ultimately you want your ad to turn into a lead and then into a customer.

Many marketers begin at the left-hand side of the curve, focusing on CPC and CTR, but these can be misleading since they don’t tell the whole story. The best marketers have traveled up to the second half of the curve; they’re conversion based. In other words, they know which actions and ads lead to a conversion. 

Putting the Math to work by Moving from Clicks to Conversions

You’re on the right trail, but how do you optimize for the quickest way to the top? 

First, take a look at all of your campaigns. Using either a last-touch or multi-touch attribution lens, see which is driving the most conversions. Can you isolate the one factor that sets this campaign apart? Maybe it’s the unique format or the spot-on copy or compelling creative. 

Second, try moving more money into your top performing campaign to see if it continues to produce high returns. 

Third, you might set up an a/b test in your next campaign that further isolates the variable you think is driving ROI. That way, you’ll know for sure why one campaign does better than the other. Repeat this process over and over to optimize your marketing strategy over time.

Now here are the steps you take to move from clicks to conversion: 

  1. Build an ad conversion funnel. This is an optimized landing page with a form where you can capture a lead. 
  2. Start measuring initial performance. After the first few weeks running your ad, review CPC and CTR. You may not get many conversions at first. Depending on your ad spend and sales process, it may take months. Once you see results come in, you can start measuring performance. If you start optimizing before you gather data or see conversions, you’re just guessing. Make sure you let the numbers run and then assess. 
  3. Once you’ve got conversions, run the ROI numbers to see how well you’re moving up the curve. Look at your campaign. Perhaps you’re running one campaign with four different creatives or targets. Look at which is driving the best conversions and click-through rates. 
  4. Optimize the results. Do more of what works and less of what doesn’t. Put more budget toward ads that are doing well or create similar ads. After you optimize by running more of what works well and then iterate (i.e., further optimize), you’ll get closer to a CPA number and understand how much it costs you to drive one conversion.
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