Accounting

A Refresher on Marketing ROI

by
• Amy Gallo
July 25, 2017

Summary.

Companies spend a lot on marketing communications. But is all that money well spent?
Marketing ROI (mROI) helps companies measure the return on investment. For marketers (and
other executives), there are several benefits associated with using this measurement, including:
justifying marketing spend; deciding what to spend on, comparing marketing efficiency with
competitors; and holding themselves accountable. It’s not an easy metric to measure, because it
can be tough to determine how much incremental financial value a marketing program add. It
can also be difficult to figure out which incremental profits are attributable to which programs.
Measuring the lag time associated with most marketing spending is another common challenge.
Despite these challenges, measuring mROI is worth it. Ideally your marketing program is not
only affecting sales and profits this year, but is also strengthening your brand equity and
customer relationships over time.

Companies spend a lot on marketing communications. In fact, global spending on

media is expected to reach $2.1 trillion in 2019, up from $1.6 trillion in 2014. But is
all that money well spent? And more fundamentally, does marketing actually work?
Marketing ROI analysis can help answer those questions.

I talked with Jill Avery, a senior lecturer at Harvard Business School and coauthor
of HBR’s Go To Market Tools, about this concept and what it tells leaders about their
spending on marketing.

What is Marketing ROI, and How Do Companies Use It?

Marketing ROI is exactly what it sounds like: a way of measuring the return on
investment from the amount a company spends on marketing. Avery explains that it
is also referred to by its acronym, MROI, or as return on marketing investment
(ROMI). It can be used to assess the return of a specific marketing program, or the
firm’s overall marketing mix.

For marketers (and other executives), there are several benefits associated with using
this measurement, including:

• Justifying marketing spend. “Marketing is a significant expense for most

companies, and leaders want to know what they’re getting for it,” Avery says.
MROI helps prove that “marketing does indeed have an impact on the
profitability of the firm.”
• Deciding what to spend on. MROI is most often calculated at the program or
campaign level so that marketers know which efforts have a higher return and
therefore warrant further investment. It also informs future spending levels,
allocation of the budget across programs and media, and which messages a
marketer chooses.
• Comparing marketing efficiency with competitors. Track competitors’
MROI to gauge how your company is performing against others in the industry.
While MROI is not usually public information, managers can use published
financial statement data to estimate MROI for a competitor.
• Holding themselves accountable. “Good marketing is not about winning
creative awards or telling interesting stories,” Avery says. It’s about “delivering
customers and sales.” Measuring how efficiently the marketing organization is
using the company’s money keeps everyone accountable for using those funds
wisely. “It puts a bit more rigor on what’s historically been much more
intangible,” she explains. The MROI calculation also prompts individual
marketers to think about and justify every dollar before they spend it.

How Do You Calculate MROI?

Marketing ROI is a straightforward return-on-investment calculation. In its simplest

form, it looks like this:

The goal, as with any ROI calculation, is to end up with a positive number, and ideally
as high a number as possible. Some companies establish a threshold for MROI that
takes into account its risk tolerance and cost of capital, below which they are hesitant
to make investments. “If a program doesn’t promise to deliver at or above that level,
they are unlikely to invest,” Avery explains. And if you end up with a negative ROI, the
project is harder to justify on financial terms.

What Are the Challenges of Calculating MROI?

While the calculation looks straightforward, there are a lot of complexities to actually
using it.

The cost of the marketing investment is pretty concrete. “Usually we know how much
we’re going to spend,” Avery says, but it’s often difficult to decide which expenditures
to include. For example, do you include just the cost of the media, or do you also
include the investment of staff time to create the ad? “The MROI of social media
activity often looks very high if you only count financial resources, but if you look at
the human resources required to develop content and respond to consumers’ posts
24/7, the number goes down,” she says. “In principle, managers should try to estimate
the full cost of the marketing activity, including creative development, media spend,
and customer-facing staff time.” Since marketing expenditures tie up capital,
managers may also wish to include the opportunity costs associated with this
spending, taking into account the company’s cost of capital in their calculations.

That challenge, however, pales in comparison with the difficulty of measuring

incremental financial value. To do this, you need to establish your sales baseline. What
would our sales and profits have been if we didn’t spend on this marketing program?
“The baseline is hard to establish in a dynamic marketing environment,” Avery says.
Usually companies look at their historical data and project them into the future. But
even that can be complex, she says: “Last year’s sales line had a bunch of marketing
behind it. It’s hard to strip out everything that would give you a pure baseline.” Some
firms use A/B testing to assess the incremental lift that a marketing program gives,
with the B group serving as the no-marketing control case, Avery explains. “But
sometimes, the incremental financial value attributable to marketing derives from its
ability to increase customer loyalty and reduce customer churn. In this case, managers
need to measure how much profit was retained that would have been lost without the
marketing program.”

Measuring the lag time associated with most marketing spending is another common
challenge. If you spend $1 today, it might take three years for the marketing to “work”
and for the consumer to make a purchase, especially with products, like cars, that are
purchased less frequently. “It’s often tough to link spend to purchase,” Avery says.
“Time lags can also complicate the MROI formula, which needs to be adjusted to
account for the risks of a changing environment and the time value of money.”

It can also be difficult to figure out which incremental profits are attributable to which
programs. “Most companies are using a mix of programs to persuade consumers,”
Avery says, making it tough to parse which are having the largest impact on profit. It’s
sometimes simpler in digital marketing, she points out: “Say I run an ad — they click
or don’t click; they buy or don’t buy.” To overcome this attribution challenge, many
marketers credit the sale to the last touch point, whether that’s a search ad, a coupon,
or something else. “But consumer behavior may be the result of 30 years or more of
marketing,” Avery says. “Google search ads look like they have a high ROI, but they are
often building on and benefiting from many other forms of marketing.”

Avery points out that several companies now sell marketing mix software, which uses
complex algorithms to help managers disentangle the attribution problem.
“Algorithms are fabulous as long as they are based on good assumptions and good
data,” Avery says, but most managers find that collecting data needed to make good
assumptions can be the most difficult part of the process.

What Mistakes Do Companies Make When Using MROI?

One of the downsides of marketing ROI is that it is easy to only recognize the
incremental profits in short-term sales and underestimate the long-term benefits that
marketing brings to brand value.

This “can be particularly challenging for executives who might be impatient to see a
return. A CFO might just see marketing expenses walking out the door and not a
corresponding build-up of cash flows and assets,” Avery explains. As a result, CFOs
and CMOs are often at odds. “CFOs are under tremendous pressure to deliver
quarterly earnings, and may not be patient for the longer-term effects of marketing to
take hold. You’re asking them to believe in forward movement in a progression
through a customer’s purchase journey, and that can take a long time,” she says. But
marketing does more for a company than generate profits in the short term; it also
builds lasting value and drives future profits.

This is where the concept of customer lifetime value can be useful. By calculating how
much one customer is worth in comparison with others, marketers can show a CFO
(and other skeptics) the impact of marketing spend over the course of the company’s
ongoing relationship with that customer. Avery says that some companies also build
in “proxy measurements,” such as brand awareness, brand liking, and brand
knowledge, that help demonstrate that marketing dollars are helping customers move
along the decision journey even if they’re not making purchases now.

The key is to remember that while marketing expenditures hit the P&L immediately,
every dollar you spend today is building your brand as an asset for the future, Avery
explains. So, ideally your marketing program is not only affecting sales and profits this
year but also strengthening your brand equity and customer relationships over time.

Read more on Accounting or related topics Financial analysis and Financial

management

• Amy Gallo is a contributing editor at Harvard Business Review and the author
of the HBR Guide to Dealing with Conflict at Work. She writes and speaks about
workplace dynamics. Follow her on Twitter at @amyegallo.