Look at the some of the fundamental information you collect to guide the strategic market planning process: customer intelligence, competitive intelligence and market intelligence.
Marketers use this intelligence as insight into the types of strategies that are likely to be successful. Bringing financial intelligence into the mix offers new insight into the potential value of strategic and tactical alternatives and also leads to a disciplined approach to marketing campaign development.
With solid marketing return on investment (ROI) techniques and planning tools in place, marketers can improve the effectiveness and profitability of their campaigns.
Marketing ROI as the Core Measure
Traditional marketing measures such as response rates, cost per lead and brand impressions do not capture the complete view of both the incremental profits generated and the expenses invested. Even objectives such as increased customer loyalty must be balanced with appropriate spending levels to ensure that the business generates an acceptable ROI.
Only marketing ROI measures can deliver insight and analysis with sound financial integrity that meet the needs and expectations of the CFO, CEO and the Board of Directors.
For marketers, getting in sync with the objectives of senior executives is not only a business necessity but also a significant advantage. Companies with marketing ROI processes in place experience faster decision-making, support for additional budget funding, and greater respect for their contributions.
Plus, the increased insight into profitability leads to stronger strategies and more precise planning. It is critical to cut the excessive waste of marketing dollars that is abundant in most businesses. Efforts must be concentrated on winning the greatest share—not of customers or revenues—but profits, which benefits shareholders, customers and employees.
Holding true to financial practices, the marketing return on investment formula is as follows:
Return NPV of Gross Margin–Marketing Investment
ROI = -------------- = -------------------------------------------------
Investment Marketing Investment
The ROI value is a percent, and 0% is the breakeven point. As part of the process, companies should define an ROI threshold or hurdle rate above which marketing programs will be funded. There are many considerations that go into setting the ROI threshold, and for the sake of simplicity the examples that follow will use a 50% threshold.
A quick example of the ROI formula: if you spend $1 million on a marketing campaign that generates $1.6 million in gross margin, the ROI will net to 60% (calculated as $1.6 million minus $1 million, divided by the $1 million investment). That exceeds the ROI threshold and would be funded.
Financial Intelligence to Guide Investment Levels
Marketers gain financial intelligence in the campaign planning process by mapping out marketing activities and expected customer behaviors completely through the sales cycle and running alternative scenarios to determine where the greatest profit potential exists. There are a number of marketing ROI planning tools that simplify the math and financial details so marketers can make smarter decisions. Two of these are presented here.
The “customer investment limit” represents the maximum amount of marketing investment that can be made to generate a desired customer behavior. It is calculated by running the marketing ROI formula with the ROI threshold value and the estimated customer value associated with the desired customer behavior. The ROI threshold is input as the ROI figure, the customer value is the return, and the equation is solved to find the investment. Reworking the original ROI formula leads to this one:
Gross Margin
Customer Investment Limit = ----------------
(1 + ROI)
Looking at an acquisition campaign targeted at customers with an average net present value of $1,200 in gross margin, we can determine the Customer Investment Limit, which represents the maximum amount we will spend to acquire each customer, as follows:
$1,200
Customer Investment Limit = ------------ = $800
(1 + 50%)
This tells us that we can spend $800 to earn a $1,200 customer since the $400 net return meets our 50% ROI threshold. Acquiring customers at a lower cost or higher value achieves a higher ROI and is more desirable. This customer investment limit should be used to approve all marketing initiative that can exceed this limit.
The “marketing allowable” translates this value into an estimated cost limit per prospect. If we expect to acquire 10% of those we contact, the $800 per new customer must now be limited to $80 per prospect since we must spend on 10 prospects to close one sale. If we will acquire only 1% of those targeted, the marketing allowable is $8 per prospect.
Now, instead of assessing the average value of an acquired customer, let's break the prospect base into several segments based on their value and look at the marketing allowable at various projected close rates:
Marketing Allowable Chart (50% ROI Threshold)
Sales Rate
| NPV Customer Value | 1% | 5% | 10% | 50% | 100% |
| $300 | $2 | $10 | $20 | $100 | $200 |
| $600 | $4 | $20 | $40 | $200 | $400 |
| $900 | $6 | $30 | $60 | $300 | $600 |
| $1,200 | $8 | $40 | $80 | $400 | $800 |
| $1,500 | $10 | $50 | $100 | $500 | $1,000 |
| $1,800 | $12 | $60 | $120 | $600 | $1,200 |
| $2,100 | $14 | $70 | $140 | $700 | $1,400 |
This financial intelligence can be applied in the campaign planning process in a number of ways. For instance, the chart can establish tiered investment limits so that additional marketing effort can be directed to higher value customer segments. Now instead of relying on average values where $8 per prospect was acceptable at a 1% sales rate, we know that we cannot exceed $2 per prospect to achieve that sales rate for a customer value of $300.
Another application of this intelligence is to compare different combinations of marketing allowables and sales rates.
For example, marketers can apply their experience and knowledge to determine if increasing the spending per prospect from $8 to $40 has the potential to move the response rate from 1% to 5%. This is where marketers can apply creative and strategic thinking to generate innovative marketing campaigns that are within the spending limits and have the potential to generate incremental customer value required.
We are only scratching the surface of financial intelligence for campaign planning. Several other analyses that provide valuable insight include these:
- Marketing Allowable charts can be created to show numerous combinations of input variables for the ROI formula.
- Assessing various campaign scenarios using incremental ROI analysis can provide critical insight into setting the optimal cutoffs for target market selection and offer value.
- B2B marketers can analyze the sales pipeline to determine where changes in results offer the greatest ROI potential.
- Market test results can be analyzed to show incremental value of additional offers, contacts, and targeting.
- A clearer assessment of up-front offers and investments can be made to price discounts and other sales-dependent offers.
- Insight into potential customer value and customer investment limits can be developed into a strategic framework known as Customer Pathing.
Challenges Exist Between Projections and Measures
There are measurement challenges and limitations in capturing a complete and accurate view of the exact return from each marketing investment. However, applying marketing ROI tools and techniques can typically have much more value than most marketers anticipate.
In the planning process alone, the discipline of estimating the sources and value of profit returns, plus running scenarios to determine profit and performance sensitivities can lead to more informed and profitable decisions. Following the planning stage, the ROI process should continue with measurements and validation of assumptions. As the process is refined, the profitability analysis can move from the campaign level to the customer level where true optimization is possible.
Editor's Note: Interested in learning more about marketing ROI and the tools you can apply immediately to evaluate your campaign effectiveness? Jim Lenskold is teaching an upcoming MarketingProfs Know-How seminar, “Unlock Campaign Profit Potential with Marketing ROI.” Click here to learn more.
