With the fourth quarter of 2019 well underway, many marketing leaders will have already started planning for 2020. In most cases, the planning process will include an analysis of how well marketing performed in 2019. and many marketing leaders will use return on investment (ROI) as the primary tool for conducting this assessment.
Over the past two-plus decades, ROI has become the "gold standard" for measuring marketing performance and for communicating the performance and value of marketing to senior company leaders. So you would think that, by now, marketing leaders would thoroughly understand what marketing ROI is, and how to calculate it correctly. Unfortunately, however, that is not always the case, as a recent survey conducted by LinkedIn Marketing Solutions makes clear.
The LinkedIn Research
The Long and Short of ROI report is based on a survey of 4,000 B2B and B2C marketing professionals from 19 countries. Survey respondents worked in a wide range of industry sectors, including technology, financial services, professional services, and manufacturing. The survey was conducted in June 2019.
Most of the results presented in the survey report refer to "digital marketers." Unfortunately, the report does not define who "digital marketers" are, nor does it indicate whether all of the survey respondents were "digital marketers." With that caveat in mind, here are the "headline" findings from the LinkedIn study:
- 70% of digital marketers claim they are currently measuring ROI.
- 77% of digital marketers measure ROI during the first month of a campaign, even though 55% of those marketers reported having a sales cycle that is at least three months long.
- When most digital marketers say they are measuring ROI, they are actually measuring a variety of key performance indicators (KPIs), but not true ROI.
- 63% of digital marketers don't have a high level of confidence in the "ROI" metrics they are currently using.
The LinkedIn survey report argues that marketers should (a) clearly distinguish between KPI-based metrics and ROI, and (b) measure ROI over the length of the sales cycle in order to obtain accurate results.
When You Say ROI . . .Mean ROI
The findings of the LinkedIn survey highlight two of the still all-too-prevalent ways that many marketers are misusing ROI. First, many marketers use "ROI" as a catch-all term to describe a wide variety of benefits produced by marketing activities. But return on investment is a specific financial metric that has a well-established meaning among management and financial professionals.
This means that none of the following constitutes ROI:
- Increased brand awareness
- Increased market share
- Increased customer lifetime value
- Increased average deal size
- Improved conversion rates
- Improved response rates
- Improved NPS/customer satisfaction scores
For many companies, tracking some or all of these performance measures will be valuable, but they do not constitute marketing ROI. Calling any of these benefits "ROI" reflects a misunderstanding of what ROI is, and if a marketing leader presents one of these kinds of ROI calculations to a CEO or CFO, his or her credibility will be weakened.
Calculate ROI Correctly
The second way that many marketers misuse ROI is to calculate it incorrectly. The basic formula for marketing ROI (MROI) is:
MROI = (Gain from Marketing Investment - Cost of Marketing Investment) / Cost of Marketing Investment
So the basic MROI formula contains only three components:
- The financial gain from the marketing investment
- The cost of the marketing investment
- Time - Although the formula doesn't expressly contain a "time" value, MROI is always measured for a defined period of time.
While the basic MROI formula appears to be quite simple, that simplicity is deceptive. In reality, calculating MROI accurately can become a complex task because every component of the formula presents questions that require thoughtful answers and sound judgment calls.
I've addressed many of these issues in several previous posts, so I won't repeat that material here. However, I've provided links to my ROI-related posts below. If you're involved in calculating MROI, I encourage you to take a look at these posts and carefully consider the issues they discuss.
Image courtesy of Rick B via Flickr CC.