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)

Subscribe today...it's free!

MarketingProfs provides thousands of marketing resources, entirely free!

Simply subscribe to our newsletter and get instant access to how-to articles, guides, webinars and more for nada, nothing, zip, zilch, on the house...delivered right to your inbox! MarketingProfs is the largest marketing community in the world, and we are here to help you be a better marketer.

Already a member? Sign in now.

Sign in with your preferred account, below.

Did you like this article?
Know someone who would enjoy it too? Share with your friends, free of charge, no sign up required! Simply share this link, and they will get instant access…
  • Copy Link

  • Email

  • Twitter

  • Facebook

  • Pinterest

  • Linkedin


ABOUT THE AUTHOR

image of Jim Lenskold
Jim Lenskold is founder and president of Lenskold Group (www.lenskold.com), a consultancy that delivers a comprehensive approach to marketing ROI measurement and management. He can be reached at jlenskold@lenskold.com.