How to Measure Marketing ROI and Prove Value
With this article, I aim to help executives accurately and efficiently calculate the return on investment for their marketing budget by focusing on liabilities versus net value directly on marketing spend, rather than oversimplifying ROI based on net profit or final sales.
Most marketing executives have challenges when quantifying the return on investment of the marketing budget that is allocated to them. It’s crucial to maintain a specific perspective when approaching the “R” (return) part of ROI in marketing. I believe ROI means different things for sales and marketing.
Measuring Marketing ROI in High-Touch, Appointment-Based Sales Models
For businesses that need appointments to make sales, measuring marketing ROI becomes more challenging. A prospect’s individual decision-making process when accepting a meeting may be driven by several different factors, such as brand value, value proposition, or competitive pricing. Companies that offer services or need appointments have tried several methods to assign ROI to marketing departments, such as reverse engineering end sales to “marketing touches,” calculating the number of appointments, appointment-to-sale ratios, and appointment-to-held ratios.
In a high-touch business model, executives should take a holistic approach when identifying marketing ROI. The main reason for this is that sales are a direct component of “all touches” — hence the “return” on investment.
What Doesn’t Work in Measuring Marketing ROI for High-Touch Sales
I have personally witnessed businesses putting pressure on marketing when things don’t go in the right direction. “Sales are down because we don’t get enough appointments.” The term “enough” is where executives lose touch with their marketing departments, because “enough appointments” varies with the appointment-to-close ratio of the sales department.
Let’s quantify this:
- Business monthly sales goal: 60 accounts
- Sales appointment-to-sale ratio goal: 10%
- Monthly qualified appointments set by marketing: 600
- 10% of 600 = 60 sales
In this scenario, both sales and marketing meet their goals.
I wish the world were full of rainbows, but perfection rarely happens in real life. Problems arise when end sales fail to meet the goals set by the executives. If marketing provides 600 appointments a month but sales closes only 5%, then the sales department is likely to say, “The quality of the appointments delivered by marketing is poor.” And marketing will respond with, “The sales department should be more aggressive.”
Good luck solving this century-old conflict. I will illustrate this for a cybersecurity business, since I have 12 years of firsthand experience there. Here is what I did:
- If you already have a marketing database, make sure it’s cleaned and enriched based on the attributes most relevant to your target audience. If not, build a list with the attributes you identify with the sales team to define “qualified” appointments. Here is an example of the attributes:
- Location: US, Canada, Germany, and England (include or exclude states, cities, or districts if applicable)
- Company size: 50 to 200 employees
- Titles/Personas: CTO, CISO, Director of IT, CIO
- Industries: Healthcare, Education, Green Energy
- Communicate this with marketing and set goals for the number of appointments.
- Have both marketing and sales agree.
Determining Budget for Marketing
Reverse engineering the sales funnel becomes critical. Note that I base my calculation on net value, not net profit. This focuses on the efficiency of the marketing and sales “machines.” The main purpose of calculating net value is that you can subtract your marketing cost (liabilities) from what it contributes (net value).
Using net profit can result in unreliable and inconsistent numbers due to external impacts such as pricing adjustments, solution upgrades, or adding new products. You can sell “enough” but not generate enough profit, which is a separate issue outside your marketing and sales departments. I have seen many companies trying to fix what works, such as modifying sales and marketing processes, while avoiding the underlying issues.
Assuming you have some historical data on sales, you should have some idea of the average sales value and LTV (lifetime value) per client. Let’s simplify LTV:
Metrics Needed
- Retention: Average number of months you retain a paying customer
- Revenue per user: Average monthly revenue generated per account
- Churn rate: Monthly percentage of paying customers who discontinue your services
Calculating LTV
- Average Monthly Revenue Per Customer (ARPU): $2,000
- Average Customer Retention: 6 months
LTV = ARPU × Customer Retention = $2,000 × 6 = $12,000
Calculating Total Revenue from the Sales Goal
- Monthly Sales Goal: 60 accounts
- LTV per Customer: $12,000
Total Revenue = Monthly Sales Goal × LTV per Customer = 60 × $12,000 = $720,000
Calculating Total Costs
Sum all monthly costs (salaries, tools, software, overhead, etc.).
Total Costs = Sales and Marketing Salaries + Tools and Software + Other Expenses
Calculating Net Revenue
Net Revenue = Total Revenue − Total Costs
Calculating the Appointment Value
- Monthly Qualified Appointments Set by Marketing: 600
- Sales Appointment-to-Sale Ratio Goal: 10%
Sales from Appointments = Monthly Qualified Appointments × Sales Appointment-to-Sale Ratio = 600 × 0.1 = 60
Net Appointment Value = Net Revenue ÷ Monthly Qualified Appointments
Example Calculation
Given:
- Average Revenue Per Client: $2,000
- Client Retention: 6 months
- Monthly Sales Goal: 60 accounts
- Monthly Qualified Appointments: 600
- Sales Appointment-to-Sale Ratio Goal: 10%
Calculate LTV: LTV = $12,000
Total Revenue from the Sales Goal: Total Revenue = $720,000
Assume Total Monthly Costs:
- Sales and Marketing Salaries: $100,000
- Tools and Software: $20,000
- Overhead: $30,000
- Other Expenses: $10,000
Total Costs = $100,000 + $20,000 + $30,000 + $10,000 = $160,000
Calculate Net Revenue: Net Revenue = $720,000 − $160,000 = $560,000
Calculate Net Appointment Value: Sales from Appointments = 60
Net Appointment Value = $560,000 ÷ 600 = $933.33
The net value of each appointment, after considering all costs, is $933.33.
Monthly Basis Calculation
600 appointments × $933.33 = $560,000 net value.
Use this number as a benchmark when optimizing your investment based on net value expectations. Reverse engineering from net value will help you tailor the marketing and sales process to identify bottlenecks and make improvements.
Conclusion
By now, you should know the following:
- What a qualified appointment is (since both sales and marketing agreed on the specific attributes),
- How many qualified appointments marketing needs to set for sales to reach the monthly goal,
- Net value per appointment,
- Monthly net value of marketing.
Remember, the methods I mentioned above to help you calculate ROI from marketing are just there to set up your foundation. With this approach, you will have an initial educated idea of how marketing impacts your business growth.
