How to Calculate Marketing Return on Investment (ROI)

Marketing Metrics: Tracking Return on Your Investment

By Jennifer Beever, Marketing Consultant
© December 2000, New Incite Marketing Analysis and Design

Tracking return on investment (ROI) for each marketing activity in your annual program is essential for effective marketing planning. If you know your total marketing expenditure, you can calculate overall ROI by the ratio of marketing expense to sales revenue. But, without detailed ROI tracking for each marketing activity, you have no objective way to determine which tactics were most effective and which provided lower returns. In other words, you can't see the trees for the forest! Detailed ROI information is critical for deciding which marketing activities to pursue for next year.

Tracking detailed marketing ROI can easily be done by setting up a simple spreadsheet in Microsoft Excel or a similar program. In this article, I'll explain how to set up your own ROI analysis spreadsheet and why each piece of information is important. Begin by listing your company's marketing activities on the left side of your spreadsheet. Next, calculate the total cost for each marketing activity.

Tracking Lead Source
As you conduct your marketing activities through the year, track the source of all leads as they come in. Each lead source is a marketing activity that you conduct to generate sales leads. At the end of every month (or day or week, depending on volume), tally the number of leads that each activity generated. If you are using a spreadsheet to track your marketing ROI, you will need to create columns for the twelve months of the year. Then add up the total number of leads generated by each marketing activity for the year. By tracking leads on a monthly basis, it will be easier to analyze trends in marketing performance. Using an automated automatic graphing capability (like MS Excel's), you can also quickly create bar charts that illustrate trends for leads received over time.

Lead source is one of the most difficult pieces of marketing information to track accurately, especially if you have multiple sales and marketing staff. It's not that lead source is a complex piece of data, but it is dependent on the memory of the prospective customer and/or your staff. Don't forget to include passive sources for leads, such as referrals from customers or your business partners.

The best way to make sure you capture the original source for each lead is to enter new leads into a database as soon as possible after they are received. When other leads come in they are first checked against the database for duplicates. If there is confusion as the exact lead source (i.e., the prospect says they saw your ad and attended a trade show), ask brief questions to determine the source. "Do you remember which publication you saw the ad in?" "Which tradeshow did you attend?" Enter the source that appears to be the first contact the prospect had with your company.

A good way to capture source of lead and other pertinent information for your prospect database is to use lead forms. A lead form is a paper or electronic form that is filled out when a lead is received. If a prospective customer calls in or sends an email, the person responsible for taking the call or responding to the email fills out the form. An electronic form can be linked to your business' contact management system or marketing database. Paper forms that are filled out by hand can be entered into the database for subsequent sales and marketing activity as the lead moves through the sales cycle. Lead forms are also valuable for management follow-up on leads assigned to the sales force.

Your contact management database must have a field for source of lead. Some companies track Original Source, 2nd Source, and 3rd Source. By tracking three sources for each prospect a business can begin to see how each prospect responded to multiple marketing activities, an effect called "response compression." If the correlation of response compression (i.e., leads with several sources) with conversion to sales is high, you have an indication of an effective, integrated, marketing program.

Total Leads by Month
In addition to analyzing total leads for each marketing activity, you can also tally your total leads each month. Analyze total Leads per Month to get a macro view of your marketing efficiency. As a marketing professional, you want to generate a steady stream of leads over a year's time. Otherwise, your sales staff will either be inundated with too many leads that they can't follow up on, or they will have too few leads with which to make their quotas.

Sales by Lead Source
After capturing the number of leads generated by each marketing activity, you should analyze the total number of sales and the revenues generated from the leads. When sales are closed, update each lead record in your marketing database to show that a prospect has become a customer. Use a field in your database to track the dollar value of the sale. Record the date of sale and you can easily run a report that shows which leads were converted to sales each month. Use the information to track two important pieces of information: lead conversion rate and cost per lead.

Lead Conversion Rate
Lead conversion rate is calculated by dividing the number of sales for each lead source by number of leads generated from each source. Lead conversion rate helps you determine the quality of the leads your marketing program generates. If the conversion rate is low, it could be that a particular marketing activity generates a lot of leads, but the leads are less qualified and not easily converted into sales.

For example, three direct mail campaigns had an average conversion rate of 36%. Six advertisements in a business journal had a conversion rate of only 20%. The comparative conversion rates indicate that the direct mail effort generated higher quality leads. Keep in mind that a low conversion rate overall sometimes points to a problem with your sales force, not with marketing.

Cost Per Lead
Cost per lead by lead source provides additional data for determining which marketing activities to continue in subsequent years. Calculate by dividing the cost by number of leads generated for each marketing activity. If the cost per lead is high and the conversion rate low for a marketing activity, you need to replace the activity with more cost-effective one. Cost per lead also provides data for cost of sales analysis.

Return on Investment
Finally, you need to track return on investment (ROI) for each marketing activity. Calculate ROI by dividing the sales revenue generated by the cost of the marketing activity. You can also calculate your average ROI for your entire marketing program. Comparing ROI for each marketing activity helps you prioritize and select the right activities for next year. Comparing average ROI from year to year gives your marketing department an on-going scorecard to judge overall effectiveness.

Written By Jennifer Beever, Marketing Consultant. A sample Marketing ROI spreadsheet is available for your reference. To request a sample spreadsheet, email jenb@newincite.com. ©New Incite Marketing Analysis and Design, December 2000.

This article may be reprinted with permission of the author. Please contact Jennifer Beever at 818-347-4248 or by email, jenb@newincite.com, for permission. Proper acknowledgement of the author, including name, company, and contact information, must be made with use.

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