Measure Marketing Return on Investment (ROI) in

6 Easy Steps
May 18, 2011 By Adam Boatsman 1 Comment

I know, I know, what the heck does an accountant know about marketing? You are
right, not much. But I do know how to measure. And if you dont measure, you cant
improve. If you ask yourself what you would like to improve the most in your
business most folks would agree its sales. If you asked most sales people their
biggest impediment to closing sales they will say marketing and branding, as no
one knows us or our value. There may be other reasons but generally I would
agree with the premise that communicating your brand to your prospective client or
customer is the easiest way to grease the skids for the sales people.

Ask the same business owner their feelings on increasing the level of marketing
spend in order to boost sales and you can guess the reaction. One of several
responses will occur:

1. No
2. We already tried that
3. I would if we could see the Return on Investment (ROI)
I cant help the first two responses but some simple statistical analysis can help
with the third response. I am a firm believer that if you can measure some type of
return on investment for marketing (the Holy Grail) it makes decisions as a
business owner much, much easier and less risky.

So how do you measure ROI for marketing spend? It may not be perfect but heres
an approach that weve seen work at several of our firms clients. The purpose of
this measure is not to measure the effectiveness of an individual program (e.g.
click-through with Google AdWords) however it can be modified for that purpose.
The intent here is to measure overall marketing spend, either as time or resources,
relative to sales in order to establish three things:

Strength of the statistical correlation

The actual financial correlation
When you should see the return to know if youre successful
Heres a real-world example:

Lisa is the owner of a custom retail products company that has end uses also in
commercial hotels and apartment complexes. She knows that she needs to spend
money on marketing and shes established some benchmarks that she should
budget relative to her sales. What she does not know though is whether or not a
specific program would be successful, the actual return on marketing spend to each
one of her audiences (e.g. end retail consumer, business), or the average rate of
return on marketing spend. Nor does she really feel absolutely confident that if she
cut marketing spend in half would she see a resulting 50% decline in sales (or
contrarily if she boosted marketing spend by 50% would there be a 50% increase
in sales?) So, how did Lisa solve this dilemma? Statistics and more specifically,
the use of regression analysis.
Step One Determine Your Theory

In Lisas case, the theory is that if you spend more on marketing there is likely a
corresponding increase in sales. Statistics is not very powerful at proving
correlations that you didnt have a hunch about however it is powerful at either
disproving correlations (e.g. wow, there actually is no correlation A does not
cause B) and proving correlations (e.g. I thought A caused B, now I know
statistically that this is true). In my business, a professional services firm, my theory
is that marketing TIME and MEETINGS correlates to sales and unfortunately we
dont track that, yet. Doh!

Step Two Get Your Data

For statistics to be meaningful you really need a good sized data set. Id suggest at
a minimum three years (or 36 months) of data. In Lisas case, she gathered sales
by customer segment and associated marketing spend by customer segment.

Step Three Build Your Model

It is helpful to have some medium skills in MS Excel for this one. Regression
analysis requires installation of the Analysis Toolkit in MS Excel (comes with MS
Office) http://office.microsoft.com/en-us/excel-help/load-the-analysis-toolpak-
HP001127724.aspx. Once youve loaded the toolkit the model building is pretty
straightforward:

1. Create column X Sales. Going down each row enter in 36 months of sales
(for an individual customer segment).
2. Create column Y Marketing Spend. Going down each row, enter in the
amount of marketing dollars spent in the same month.
3. This ones up to you in marketing its generally accepted that when you
spend $1 it might take a month to a year to actually see the corresponding
sales. Id advocate looking at a three month minimum correlation a lot of this
will depend on your own hunch on marketing. Start three more columns called
month 1, month 2, and month 3. These represents months of marketing
spend. So in Month 1 enter in the amount you spent on marketing that
month. In month two enter the amount of marketing spend the prior month. In
month three, enter the amount of marketing spend three months ago.
Your finished product should look something like this:

Step Four Perform Regression Analysis

Using MS Excel Regression Analysis, go to work. The all data should start at the
third month / row (in this case, March) assuming you are using three months (or
five months, start at the fifth month/row). The X is the sales column. The Y is the
array that starts at the third month 1 column (in this case, 1 $9,000). Set the
Constant is Zero checkbox and also click the Residual checkbox. The output area
can really be anywhere in MS Excel (I like to use a new worksheet).

Step Five Analyze Results

What does it all mean? R Square means the strength of the correlation. 1 is the
best. Anything above 75% or so for this purpose is probably enough to make a bet
on in my opinion. In Lisas case, her R Square was .86, meaning that there was an
86% (in laymans terms) likelihood that if she spent $1 in marketing it would
generate SOME type of sales return. Pretty good odds.

What type of return? This is where the coefficients come into play. If you sum these
you get a pretty good (albeit on the low side) estimate of the actual return. In Lisas
case, the coefficients sum to $5.50 so rounding up she gets a $6 return for every
$1 spent, with an 86% likelihood that this will occur. In Lisas case, this was
confirmed by simply dividing sales by marketing spend for the year for each year
and looking at the average.

When do you see the results? Divide an individual coefficient by the sum of the
coefficients (do this for each of your three or however many months you used)
and you get a rough breakdown of the marketing yield in each month for a $1
spent in each month. In Lisas case, she found that when she spent a $1, 37% of
the return was in the first month, 34% of the return was in the second month, and
29% of the return was in the third month.

Step Six Use the Data

Now what do you do?

1. Use the data to measure the effectiveness of your marketing. If, on a rolling
twelve months, you find that you are BEATING your historic returns (in other
words, if Lisa is beating 6:1 on a rolling basis) you have a good marketing
campaign. If you are lower than your historic return you have a bad marketing
campaign.
2. Use the data to predict sales. If you know that theres a good correlation
between marketing and sales, you can peg your sales to marketing spend (so,
using Lisas percentages, Sales in January would be (6 X November
Marketing Spend X 29%) + (6 X December Spend X 34%) and (6 X January
Spend X 37%). A note of caution in statistics there is always a deviation so
as a whole your predictive model will be good however, in a given month it
will vary up or down (see the residuals in your analysis) be prepared to
operate w/in some boundaries here and see point 1.
In closing this is a powerful tool that takes the guesswork out of marketing
gambles. You still have to decide whether or not a campaign will be effective, but at
least now you have the tools to measure your marketing ROI.
Filed Under: Business Finance, Goal and Metric Creation, Sales, Marketing, and Market
Analysis, Strategy