There are five key practices and concepts to master before your CFO and CEO will accept any attempt to prove marketing ROI. These basics create a roadmap to calculating marketing ROI.
1) Learn how to (REALLY) talk the talk
According to many established marketing analysts, one of the more cringe-worthy observations they’ve made of their marketing leaders is their use of business terminology in a way the rest of the business does not. For example, “return on investment.”
Marketers use return on investment in places like Lead ROI, Impression ROI, and Pipeline ROI.
In the financial realm, return on investment calculates dollars realized or deposited compared to dollars spent or credited. Put simply, if the money isn’t in the bank, it can’t be part of an ROI equation.
Instead of talking about ROI when it comes to leading indicators, use the following:
- Cost per lead
- Cost per impression
- Cost per click
- Cost per dollar of pipeline
Shifting how you speak about your business will make more sense to even the most regimented CFO. As a marketer, you know how important the words we choose are to how others perceive and receive the message. Please don’t undermine your authority by misusing a standard business term.
2) Accept that your marketing team isn’t data-driven (yet)
As of 2022, Gartner surveys revealed that marketers admit decisions are influenced by data a mere 53% of the time. The same report found that of all respondents:
- 26% admit they don’t review information provided by their analytics team
- 24% reject their analytics team’s recommendations
- 24% rely on gut instincts to ultimately make their choice
In other words, even if your organization implemented advanced analytics, the odds are high that your team doesn’t use the information in the practical sense. A fully adopted data-driven approach would include:
- Weekly data reviews
- Data recommendations to team members
- Rigor around using data to adjust campaigns
The gap between marketing departments that deploy a data-driven approach and those that don’t warrant an honest look at why.
Do practitioners need to be more familiar with the data to trust it? Do the numbers seem wrong? Are we looking at the wrong numbers for a given channel or campaign?
Accepting where your team is on their data journey is essential to developing a realistic timeline and approach to calculating marketing ROI.
3) Honestly assess your marketing data
Data is never perfect, so don’t wait for perfection – you’ll never get started.
This, of course, requires understanding the state of your data. We recommend using our self-assessment and reviewing our CMO’s 90-day Guide to Better Marketing Analytics.
We’ve also given you some guidelines below:
If you want more on proper campaign setup, check out our in-depth guide for Salesforce administrators.
4) Collaborate on a roadmap to calculate marketing ROI
Meeting with your CFO and CEO and negotiating how marketing ROI is calculated before unveiling a number or model is vital.
Your CFO and CEO, if they aren’t deeply familiar with the nuances of marketing, will think it’s reasonable to ask for a 1:1 analysis of how much money you put into a channel each month and how much money comes out in bookings that same month. That will never be realistic due to the delay between investment and payoff, the fluctuation in channel efficacy, and the average buyer committee size and deal lifecycle for your organization.
Pro Tip: Don’t try to have a conversation about calculating marketing ROI alone. Your analyst or operations professional must be present to understand what your CFO wants versus what is possible today. Prep them to understand this is a fact-finding mission only, but they will need to hear and understand this gap themselves to come up with a clear roadmap.
The purpose of your first meeting with the CEO and CFO isn’t to communicate what you eventually aspire to provide them and deliver a timeline. The purpose is to communicate that there are gaps, and your team will need to do more research to determine how close you can eventually get to the CEO and CFO’s desired state.
Your job will also be to communicate that marketing systems and tactics do not (and never will) create a data landscape that resembles an accounting balance sheet.
You must also ask for help from the finance and sales operations teams and ask your operations team to collaborate with these departments to reach an acceptable data model to calculate marketing ROI. Both teams must see and interact with marketing data to understand why calculating marketing ROI is difficult. If you can get the financial analysts to agree with your approach, convincing the CFO that the approach is correct will be much easier!
If you try to create an ROI model without collaborating with finance, their job is to poke holes in your math. Negotiating and being transparent upfront is simply less painful, even if that means admitting that your data is messy.
5) The recommended “Crawl, Walk, Run” approach to calculating Marketing ROI
We’ve outlined detailed recommendations for calculating marketing spend efficiency (and eventually marketing ROI) by data maturity stage determined in the Honestly assess your data section above.
Crawl Stage
In the crawl phase, the goal is to calculate marketing efficiency, which will be done using two formulas.
LTV: CAC ratio
Meet with your finance team to confirm how to calculate customer lifetime value (LTV) and customer acquisition cost (CAC). Because salary and commission data are typically included in your customer acquisition cost, you may need to rely on finance to provide your team with the final calculated CAC.
In general, LTV is calculated as:
average yearly revenue per customer x customer average lifespan
In general, CAC is calculated as:
(Sales Expenses + Marketing Expenses) / # Customers Acquired
The LTV:CAC Ratio is simply:
LTV/CAC
As a benchmark, bootstrapped venture-backed early-stage SaaS organizations often operate at an LTV: CAC ratio of 1.5 to 4, and, according to Klipfolio, a standard benchmark for B2B SaaS LTV: CAC should be three to five. We’re no longer operating in a world of customer acquisition at all costs.
Marketing Spend Efficiency
Marketing spend efficiency is a comparison of ARR or actual bookings in a given quarter compared to marketing spend in a prior quarter (this is a general guideline – if you know your average sales cycle is six months, compare your current quarter bookings to marketing spend two quarters ago).
Because there is a known delay between marketing expenses and output, we recommend starting with a quarter buffer between when bookings come in and when your spend happens, which should look something like this:
Walk Stage
During the walk phase, you will calculate marketing spend efficiency as we outlined in the “Crawl” section. However, your team should start building a baseline for a more complex marketing spend efficiency model by calculating the average time between a channel engagement and a closed won opportunity. We recommend comparing the first engagement with a channel on an opportunity instead of all engagements to develop a timeline.
Your team should know:
- Average time from first brand engagement to closed won opportunity
- Average time from channel first touch to closed won opportunity
- Average time from opportunity create to closed won opportunity
- Average time from opportunity qualified to closed won opportunity
Once these factors are known, you can have more in-depth conversations with your CFO and CEO about which channels engaged buyers at different points in the funnel and what those timelines look like for your brand. This will eventually set you up for calculating a more precise estimate of marketing spend efficiency, which we’ll detail in the “Run” section below.
Your team will also build valuable muscle memory for identifying when pipeline build is behind schedule and how to fix the problem in-quarter (a skill valued by any investor and CEO!).
Run Stage
To calculate marketing ROI with precision, you will need some kind of multi-touch attribution model and the ability to see a complete activity timeline with prospects and customers. This timeline should ideally include:
- Hand Raisers or Qualified Leads
- Campaign activity
- A division of marketing overhead costs across clients
There are two approaches to a more accurate view of marketing ROI.
Touchpoint ROI
We recommend investing in a data warehouse and analysts or a marketing analytics tool that will do the work for you. A robust marketing analytics solution should allow your team to decide which touch points you will use to calculate a precise touchpoint cost and when to allocate marketing expenses to a monthly overhead bucket for more even distribution.
Single touchpoint costs make sense when you consider a digital advertising conversion or tradeshow meeting. A general overhead calculation is great for ongoing tactics your team does that aren’t easy to single out, like content marketing (social media posts, blogs, website refreshes, etc.), team compensation, and website maintenance.
Staggered Channel ROI Model
The other way to look at marketing ROI is by using average timelines from the channel touchpoint to closed won. For example, we may know that the timeline from the average account touchpoint to the deal close is:
- Digital advertising (paid social and PPC): 12 months
- Tradeshow badge scan: 9 months
- Gated Content: 6 months
- Webinar attendance: 3 months
- Demo Request: 3 months
Using this data, we can estimate when expenses will be reflected as bookings and stagger our expense data accordingly. We still use a “general overhead” bucket for all channels we know can’t be precisely measured and for marketing employee compensation.
Remember that for either of these calculations to be a true marketing ROI calculation versus a marketing spend efficiency calculation, your finance team will need to calculate marketing’s share of the total go-to-market expenses for the quarter versus revenue. Because other teams are also putting effort into securing new logos and keeping existing customers happy, simply dividing revenue by marketing spend doesn’t mathematically make sense.
Team up with CaliberMind
Need some help with helping your team uncover B2B Marketing ROI? Reach out to us at moc.dnimrebilac@olleh.
