ROI is an excellent measure of how the money invested is performing and a great way to assess what to do next with your future investment. But whilst we all get hung up on how to measure ROI, it’s worth considering what it means for your organisation. After all, ‘return’ isn’t necessarily always profit.
The traditional definition of ROI
A couple of weeks ago we looked at various methods to calculate ROI. The most popular one being focussed on profit:
ROI = (Net Profit from Marketing – Cost of Marketing) / Cost of Marketing
The profit (net) created by marketing (excluding all marketing expenses), divided by the marketing ‘invested’ (marketing costs) or risked.
ROI is important because in its most basic form as it’s a way to compare the performance of different sources of activity. It helps a business decide what’s really working and what’s not. But sometimes, it’s not all about profit.
The calculation above is only half the story. What if your organisation is not looking to generate profit?
Other ways to measure return
Many high growth businesses (especially technology businesses) are necessarily looking to create profits for their shareholders, they’re looking to create growth and value in the business.
There are various ways to create value, not all of which are profit. There’s the measure of turnover, long term retained income or value in the type of customers (enterprise contracts rather than business from SMBs). What your executives and business needs to really know is which of the marketing activity is delivering best against your business goals and the type of long term return you need.
If a company’s objective is not to generate profit, but instead generate a large proportion of cash that can be invested to fuel higher growth, then a revenue ROI calculation is more relevant.
Here’s an example where revenue, and specifically revenue from a particular set of customers, is important. The revenue ROI definition:
Revenue ROI = (Revenue from Marketing – Cost of Marketing) / Cost of Marketing
A working example: revenue ROI example for B2B software company
An application development company has invested £150k in marketing at tradeshows in a year. By tracking the performance of the leads it has generated £1.2m of new business.
This would seem to be a great result and may stack up favourably against other activity, but what if only £300k is revenue from its key target audience (that will drive up the potential value in the long term).
Not quite so good. To know if this is the kind of result you need, it’s important to analyse this against other marketing activity, then to assess how much additional value those customers are worth now. For this business, trade shows may not generate the value it’s really looking for.
With B2B, there is the added complexity of long sales cycles and the high cost of those sales, not to mention multiple attribution that should be considered and incorporated into the analysis.
So what next? Well, first determine the ROI definition that’s most relevant to your business and define what you will need to measure or assess. At the start of any activity, try to forecast your ROI for your new campaign (ideally based upon past performance) and put in the right processes to measure activity correctly. You don’t need to spend hours measuring every pound invested, but try to get top line figures so you can assess quickly your performance and start to determine how you can play your part in driving real value in to your business (and not just vanity metrics).