by Feb 2, 2015How To, Reporting

What does ROI mean in B2B marketing?

What does ROI mean for B2B marketers? This can be as simple or complex as you wish to make it, but ultimately, it’s a measure of the impact of marketing. Although the calculation is relatively straightforward there are some added complexities when it comes to B2B.

In a nutshell, ROI is a way to compare different sources of leads and sales through the return (profit) it provides. If you are unsure how to calculate this or you are curious about some of the key considerations that B2B marketer should look at when attempting to calculate it, then read on.

Return on investment definition for B2B marketers

It is the profit (net) generated by marketing (excluding marketing expenses), divided by the marketing ‘invested’ (marketing costs) or risked.

There are of course, some key variables and considerations in B2B that will adjust how you use this ROI calculation. The question is not what does ROI mean? But what does it mean within your business or for the individual product.

ROI = (Net Profit from Marketing – Cost of Marketing) / Cost of Marketing

ROI considerations and variables

In an ideal world it would be very easy to measure the revenue, profit and the costs of a campaign, but B2B sales are notoriously long, have multiple touch points and are not all that easy to track and measure. Some of these key considerations might be:

Time frame

What is the period over which the ROI shall be measured or predicted? 12 months is a good place to start, but if your sales cycle is a matter of weeks or several years, this time period would not be appropriate.

One-off campaign or business as usual activity

Is the marketing a one off campaign or part of continual ongoing marketing? If you carry out a tradeshow it’s easy to measure the finite amount of business generated from the leads and contacts gathered, but with activity that’s regular such as content creation, or where there have been multiple touchpoints through email marketing, it’s more difficult.

The lag of sales

In typical B2B businesses the sales in month 1 are not related to the spend in month 1 – there is a lag between when the marketing budget was spent and the sales made. So where do you place the attribution? You might want to offset the typical sales cycle length to get a crude measure of the return generated from the marketing. Or you will need very sophisticated measures in place and a great deal of time to measure all opportunities and the sales generated, and be able to track these back to the point at which they were generated.

Lifetime value and churn

If you have a licensed product or sell multiple products to a client, a simple ROI calculation will not take into consideration the lifetime value of the customer. Looking outward and examining whether those customers churn or repeat purchase and the added value of any additional purchases should be factored into the equation. So, although a marketing campaign may give a relatively good short term ROI, in the long term, the activity could be highly damaging to the business.

High cost of sales

In some technology businesses, the cost of acquiring a new customer is exceptionally high and if measured over a 12 month period, the ROI would be dismal. It’s only after 2 or 3 years that the high cost is clawed back, so the duration and the lifetime value should be factored in.

The complexity of the calculation

The more complex and exact you make the calculation, the greater the time taken each month/period to measure it. If starting out with ROI calculations, try to keep it simple and consistent to start, then get more exact and complex if required.

Forecast potential gains

Being able to predict the ROI of a campaign will highlight your value to the board and the business, but getting this widely out could damage your credibility. It’s best to stay on the side of caution and spend time measuring so that you can learn from and improve your predictions.

A working example: ROI example for B2B software company

A marketing campaign for an ERP system generates 100 new opportunities leading to 20 new sales with a total value of £500k in year 1. The profit margin on the sales was 25% of the revenue. Demand generation costs for the campaigns were £50k and included all media, content and staff costs.

ROI = (Turnover x Net Profit Margin) – (Marketing Costs)
——————————————————
(Marketing Costs)

Therefore:

ROI = (£500,000 x 0.25) – (£50,000)
————————————–
(£50,000)

Therefore, ROI = 1:1

So what does ROI mean in this example? Well for every £1 spent on the marketing campaign it generated £1 of profit. On face value one might consider this a poor result, but this case does not consider the lifetime value of the client or even indirect sales that might be attributed in the first year.

There are also the prospects in the pipeline that were generated as part of the campaign that haven’t converted yet – and we don’t know how successful the conversion on those will be (although we could take the average conversion rate and apply this).

The point of ROI is to compare and understand the performance of one activity against another. But with B2B, we’ve got multiple types of activity involved as part of the conversion process, high cost of sales, issues of churn and lifetime value and long time periods. It’s complex.

Where to start? Set out your key assumptions, choose your ROI model (start simple at first), predict your performance and measure carefully and consistently. Don’t get too hung up on being able to assign every pound made, the ROI calculation is there to give you a measure of marketing performance and help you make better more informed decisions in future. So what does ROI mean to you in your marketing and how are you measuring it?

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