If You’re Asking What’s The ROI On Marketing? You’re Asking The Wrong Question

I’m regularly asked by potential fCMO clients, CEOs, and agency owners about ROI on marketing spend. Honestly, I think it’s a question people think they are supposed to ask. But after 30 years of running marketing programs for companies of all shapes and sizes, I have a very specific opinion about this question.

I’m also asked the timing question fairly frequently, too. Basically, you’re asking the WRONG questions. Instead of what is the projected ROI, or the time it’s going to take to get leads? You should be asking these two questions.

How much do we need to invest to get to the leads and sales opportunities we need to hit our sales goals?

AND

What investment can we make to shorten the time it’s going to take to get to those numbers?

The first two questions are almost impossible to answer, and anyone who does is likely guessing. Why? Well, both questions are not dependent only on marketing. ROI requires deals get closed, and that’s ALL sales.

The timing around leads is extremely dependent on the performance of the marketing tactics, and while we’re able to project that, we’re not able to control all the variables impacting the performance of the tactics.

My two questions are about business outcomes.

ROI isn’t really a business outcome; it’s a random calculation that assigns value to a set of expenses.

The timing around leads starting to flow is only the first step and no real indicator of marketing success. It’s just a point in time; even if leads start coming in in three months, you’ll need to continue that for years afterward.

Instead, let’s dig into my questions.

How much do we need to invest to get to the leads and sales opportunities we need to hit our sales goals?

This question assumes we know how many leads and sales opportunities we need to hit our sales goals, which means math was used to calculate those numbers based on your existing sales process and conversion rate. I wrote an amazing blog article about these calculations. Click here to read it.

Once you have these numbers, you can start building marketing campaigns and tactics that will produce the numbers you need. This also gives you a marketing budget. We need to spend $20,000 a month to get 200 leads a month.

If you can afford that and the lead numbers are good, your marketing strategy and tactics are good to go. But if, like most businesses, you can’t afford $20,000 a month, you have to readjust your expectations accordingly. Either find the money or reset your goals.

This is a real conversation most businesses never have. But it’s critical to invest at the right levels to drive the needed business outcomes. This is much more action-oriented than an arbitrary ROI calculation.

What investment can we make to shorten the time it’s going to take to get to those numbers?

Now that you have your numbers, marketing budget, marketing strategy, and marketing tactical plan, you should be asking about ways to accelerate the time it takes to get to your goals.

This, of course, costs money.

If it’s going to take 3 months to get you to your 200 leads a month goal and it’s going to cost you $20,000 a month, it might be feasible to get you to your 200 leads a month in just 2 months if you’re willing to spend $30,000 a month for the first two months. An extra $10,000 to get you to your desired state in 1/3 of the time.

Again, this is a business decision that can be made. Yes, we want that and can pay for it or not, we can’t afford that, so we’ll wait.

Finally, one more thought on ROI. Let me use this standard ROI calculation model to prove my point.

Total Marketing Spend: $25,000

Funnel Performance Assumptions

• Leads generated: 250
• Cost per lead (CPL): $100
• Lead → First Meeting: 20% → 50 first meetings
• First Meetings → Proposals: 50% → 25 proposals
• Proposals to Closed Sales: 50% is 13 new customers
• Average deal value: $7,500

Revenue Generated

• 13 customers × $7,500
• Total new revenue: $97,500

ROI Calculation

($97,500 - $25,000)/$25,000 = 290%

Cost Efficiency Metrics

• Cost per lead: $100
• Cost per first meeting: $500
• Cost per customer acquired (CAC): $1,923
• Marketing spend as % of revenue: 25.6%

Net Contribution View (More Honest)

If gross margin is 50%:

• Gross profit: $48,700
• Less marketing spend: $25,000

Net profit contribution: $23,750

Net ROI: 95%

So, we did a formal ROI calculation on marketing and produced a 290% gross ROI and a 95% net ROI. But looking at these results, I’d be underwhelmed as a CEO, and as a marketing professional, I’d be looking for ways to improve these results. But looking at ROI alone, this looks solid.

Again, it’s time to move on from an arbitrary ROI calculation and look more closely at the expected business outcomes and the sustainability of the marketing effort.

As you evaluate agencies, as you evaluate marketing tactics, as you work with marketing leadership, consider these two questions instead of the random ROI calculation.

What Can You Do Today – Marketing has changed so much over the past 10 years, and the pace of change is accelerating. What worked last year probably won’t work this year. What cost $1,000 last year is going to cost $1,500 this year. The ROI calculation is one of those relics that needs to be replaced. Try replacing it with full funnel metrics that allow you to optimize all aspects of your funnel based on the needs of the business. Try replacing it with a revenue scorecard that shows weekly progress on marketing, sales, and delivery/service performance. Start thinking about marketing as something you have to do every day, every week, every month for the entirety of your business, and start thinking about your investment in marketing as money that must be spent smartly and with real business outcomes as the expectation.

If you want to talk about getting something set up like this for your company, or setting something like this up for your agency to use with all your clients, let’s talk.

It’s Time For A Change, Isn’t It?