Wednesday February 20, 2013

Simple Way to Calculate B2B Marketing ROI

Calculating Marketing ROI

For B2C marketers (at least those selling products), tracking ROI is often as simple as making sure you know where your traffic comes from – it’s pretty easy to translate it to dollars from there. For B2B marketers, however, the sales process complicates the situation greatly. Not every lead is a sale, and not every sale is equal – so how much is a lead really worth?

*Related: Download our handy calculator to determine your Customer Lifetime Value*

First, let’s think about what we want to use this information for. Channel ROI is a gauge for the overall effectiveness of the channel measured. Channels with positive ROI are making us money, whereas channels with negative ROI are losing money and each must be dealt with accordingly. So what channel ROI helps us to do is to make decisions about how to change our executions – whether to maintain a channel, to improve a channel or to discard a channel.

Here’s a simple (five step) method to get a marketing channel ROI metric that will help you make decisions about your marketing investment:

1. Track leads by channel

This part sounds obvious, but you may be surprised how many businesses don’t do a good job of this. You can probably use your CRM (or Excel if you don’t have one), but what you ultimately need is to tag every single lead with the channel that brought it to you. There can be no ambiguities here – if someone heard about you from an ad and then remembered you two months later when your website popped up on search, you must choose the channel that you credit and stick with it. Make sure you can export these into a list somehow because you’ll need to identify and count them.

2. Determine channel cost

How much have you spent on each channel? The key here is to include the hourly cost of managing or executing each channel in with the hard media costs. I recommend using a yearly cycle – so you end up with total dollars spent on each channel as a function of media cost and labor.

3. Determine average client value

Sales and finance will have to help with this one. Find out how much revenue the average client produces over the course of twelve months (or however much time you’ve decided to use for you marketing cost cycle). This can be complicated if you sell a product and then support it, but all of the revenue that is produced over the budgetary period needs to be factored in. Ultimately, you need to end up with a single dollar amount describingaverage yearly revenue produced by a single client.

4. Determine sales conversion rate

A lead, of course, is an opportunity, and opportunities must be measured by the range and likeliness of their potential outcomes. The average client value gives us a good input for the range of outcomes if the lead hits, but we also need to factor the chance that it will hit, which is the rate at which your sales team converts its leads. If your sales team is currently trying to increase its conversion rate, you may want to use its goal conversion rate instead of its actual conversion rate. After all, the goal of your marketing is to provide value to your sales team, so you’ll want to measure your leads through the same lense.

5. Put it all together: determine your “Magic Number”

The “magic number” represents the amount, in dollars, that a qualified lead is worth to your sales team. The equation to determine this is as follows:

Average Client Value x Sales Conversion Rate = Magic Number

Now, you have to determine what your company is currently paying for the leads you’re providing. For each channel, determine an average cost per lead by this equation:

Channel Cost / Total Channel Leads = Cost Per Lead (CPL)

All that’s left to do now is compare. Any channel that is producing a CPL equal to or below the Magic Number is providing positive ROI, and anything producing a CPL higher than the Magic Number is losing money. You may be surprised to find that channels you’ve come to rely on as a steady source of leads are actually a net negative because the leads they are providing cost more (on average) than the revenue they generate.

Some channels may be beyond repair and should be discarded, but remember that many will be close enough or central enough to your lead generation that you can work on ways to bring the CPL down to acceptable levels.

See? I told you it was simple. 

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Michael Holley
Simple Machines Marketing

 

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