The Rewards and Risks of Measuring Return on Marketing Spend
Get yourself a cuppa, ideally your slippers, and a comfy seat, and we’ll get started on unpacking what can become quite complex quite quickly - don’t worry though, we’re in this together.
Like most long and wordy phrases these days, return on marketing spend has an acronym - in fact there are a few, and they’re subtly different from one another. As part of my role at Fluid I have to demystify these phrases and formulas so that our clients can get on with running their business with confidence. So let’s have a look at the different definitions:
ROMS = Return on Marketing Spend
This one is the revenue generated from all of your marketing efforts. It can be expressed either as an absolute number, like $150,000 - or as a percentage - 345%, which is more common. The key part here is that it should include all of your marketing costs. That means print advertising and print costs, paid marketing like Google and Facebook Ads, Partnerships costs, and anything else that you spend dollars on with the goal of generating leads.
Simply put, it’s what you get back for what you spend on ALL of your marketing. Easy.
ROAS = Return on Ad Spend
This one is a bit more straightforward and is often used on a campaign basis, rather than as a higher level performance analysis. It’s pretty simple to understand - it’s just an evaluation of the revenue you have generated as a direct result of your paid advertising efforts. It usually makes sense to limit this to a per campaign, or at most, a per channel analysis (rather than wrapping up Google and Facebook Ads together and analysing how much return you got). By keeping each channel separate you can easily see how they stack up against one another, and distribute your budget accordingly.
Now, here’s something to think about in case your brain isn’t hurting enough yet.
You’ve probably got an idea of which paid channels perform best for your business? You probably know (or worse, you assume) for example, that one channel brings you more leads and enquiry than another - and you proceed, confidently thinking that channel is your best performer and should receive more of your budget.
It’s far more difficult to close the loop between those enquiries and the actual dollars they lead to. Maybe your business spends heaps of time and resources dealing with cold leads from the channel which generates the most enquiry! That’s not where we want to be - so in that case it makes more sense to redirect that budget to the channel which generates much hotter enquiries on a smaller scale. THAT right there is the power of using revenue as the key performance indicator, and not leads or enquiries.
This approach has a few knock-on effects - the most important being that your business makes more money because you’re focussing on the most interested customers - the low-hanging fruit.
However, it has another impact which is just as important but much harder to quantify. It’s a biggy for any business - happier staff.
Sales staff who are working on warm and hot leads will convert more of them into sales, which means they’re being successful in their job, and that means they have purpose. This is huge. Purpose is all we all want isn’t it?!
It’s a positive feedback loop - happy staff who know and value their purpose in the business will see the importance of their work, perform well, and convert more leads into sales. Everyone wins - and that includes your customers.
Return on Investment
This one crops up often in the world of digital marketing, but isn’t always used correctly. The word ‘investment’ in the digital context is a little bit vague. There’s an opportunity to fudge the numbers a bit when reporting on ROI. Here’s an example:
An agency manages your Google Ads campaigns for you, at a cost of $300 per month.
On top of that, the Ads themselves are spending $400 per month to generate enquiry.
Last month your ads generated $1400 in revenue via sales.
Your total monthly Investment was $700 per month. Your return on investment, therefore, is 200%. When your agency sends you a monthly report with ROI included you should ask for an explanation of the formula used.
For example, the agency could make themselves look like they’re performing better by excluding their own cost from the formula (which would actually be a ROAS calculation) - this number comes out at 350% (1400 / 400) x 100.
Really, to be used correctly, Return on Investment is best left for large and long term analyses, such as property sales. Stick to ROMS and ROAS for marketing performance analysis. That’s how we do things at Fluid anyway.
What if I can’t close the loop from Lead to Customer?
This is a lot more common than you’d think - perhaps your enquiries are generated via digital channels, but your Sales always happen as a result of a meeting or a phone call.
“That’ totally us!” you say? Don’t panic yet!
A CRM or Customer Relationship Manager would help hugely with this, but depending on the size of your business, it might be an expense you can’t justify (though most solutions have tiered pricing so you can gradually see its value before investing significantly).
Cue the alternative solution.
If you have some historic data, then we can reverse engineer your expected revenue per lead. However, there’s a consideration in using this method which might make your head hurt.
By using this method we’re assuming exactly the same conversion rate to sale for leads from every marketing channel. Which means we’re back to the risky assumption that the highest lead volume means the best performing channel. It sometimes is the best performer, but not always.
The number we end up with can be understood as the following:
Revenue per lead is the number of dollars your business generates for every person who enquires about your services.
Let’s unpack that a little more using an example.
Last month you generated 100 leads.
In that month you made 5 sales for a total value of $20k, and spent $500 on Ads to get them.
Your conversion rate to sale is 5%.
To calculate your revenue per lead we take $20k and divide it by the 100 leads. So our revenue per lead is $200.
Now, let’s say that the time investment from your team in communicating with the 95 leads who do not convert to sales was $250 per lead. 250 x 95 = $23,750. That means those leads cost you more than you generated, even though your ROAS was 4000% (20,000 / 500) x 100.
Are you still with me?
The subtle difference in the example above is that we’ve included a direct cost - the time/salary of your staff. That muddies the waters a little bit but demonstrates the importance of detailed analysis. Ultimately it’s important that your team has work to do, so all is not lost in the above example, not exactly.
What we learn from the example is a couple of things. The first is that ensuring your team is focussing on the lowest hanging fruit is extremely important, those will convert better to sale, which means less wasted time. As we’ve already mentioned, a CRM can be a game-changer for this.
The second is that aiming to drive up the size of each sale is also a good move - more revenue for the same number of sales.
The third is the value of repeat customers. Customers who come back for more are doing so because they have a need and they already trust that you can deliver to that need. That means a far lower time cost in converting them into a sale - the value of loyalty programs can’t be overstated - look at how much work Air New Zealand puts into this, for example.
I know revenue per lead, what next?
Now that we’ve got our revenue per lead number, we can apply it to each channel to get some idea of where to focus our future spend. Remember that this approach is only a volume-based one - we’re not considering lead quality and in the digital world today that’s risky.
Regardless, it’s more informed than playing pin the marketing budget on the donkey. So let’s apply it:
Google Ads generated 100 leads last month.
FB Ads generated 55 leads.
Newsletter referrals generated 20 leads.
Organic traffic generated 75 leads.
That’s a total of 250 leads. We know we generate $200 per lead, so we’re looking at $50k in revenue from the month’s marketing efforts.
Given where the volume came from, Google Ads would get the most budget for the following month, followed by Organic (investment in content writing, perhaps), then Facebook, then Newsletters.
You can see that this is a risky strategy because the likelihood is that your Newsletter audience is fairly engaged, and could lead to repeat custom (that means low cost of sales). Organic traffic is also likely to include some returning visitors/customers. If we let those channels drop because we’re using the volume-based approach we’re definitely going to miss some opportunities.
So what’s the recommendation?
Ultimately it’s easy to get ‘paralysis by analysis’. You don’t make significant decisions because you’re not confident enough in your data to do so. You should absolutely tread carefully if applying the revenue per lead approach. However:
More is lost by indecision than by wrong decision.
In digital marketing, never a truer word was spoken!
The best possible solution is to use a CRM which is capable of managing your lifecycle stages for your contacts. Some will be existing customers or raving brand evangelists, others will have seen an ad and filled in a website form, and have no further info to go on yet.
A CRM will help your team develop those relationships, build trust, and convert more sales. It will also capture the channel those contacts were created from.
Suddenly we're not only focussed on the lowest hanging fruit, we're nurturing relationships over the longer term. On top of that we know that the sales process is no longer perfectly linear or funnel-shaped. Touchpoints are random and purchase-decision times varied.
Now we're cooking on gas! Once you know the channels generating the hottest leads, because you are able to close the loop to sales, you can make highly informed decisions, leading to happy teams and happier customers.
Pair that with the ability to better nurture relationships with non-customers, and you're staring growth in the face.
To get started, at the very least you should consider capturing an answer to the question: ‘How did you hear about us?’ for every customer. Over time, this builds a picture of what’s working and what’s not, and is a good place to start.
If you’ve made it all the way down to here and you’re keen to see some return on your marketing investment, fill this form in and we’ll get started.