Justifying spend: why 'marketing ROI' isn’t enough

Marketing ROI (return on investment) is notoriously tricky to calculate. Yet, most marketers continue to plow on, trying to capture accurate ROI to justify their expenditures.

When you’re using a metric that’s difficult to calculate, it’s hard to have faith in its accuracy. Thankfully, there are other ways to showcase your marketing successes while communicating a more compelling story to stakeholders. 

Return on investment: marketing ROI explained

An accurate ROI measurement is one way of understanding the impact of your marketing activities. Measuring marketing ROI is also a great way to gain the buy-in of stakeholders involved in signing off on your next round of marketing investments.

ROI literally means how much you get back compared to what you put in. A positive ROI indicates business growth, so it’s a popular way to demonstrate to finance teams just how effective your marketing campaigns are.

Marketing campaign ROI formula

Here’s a marketing ROI calculation many marketers use:

[Sales attributed to marketing campaign] – [Marketing costs] = ROI in dollars

For example, if you spend $500 on digital advertising in one month, and achieve sales of $5000, your ROI is $4500. This is a very clear and powerful way to present figures to stakeholders.

Of course, it’s not really that simple to calculate marketing ROI. Figuring out the overall marketing cost might be the simplest part of figuring out how to calculate ROI. However, the gains you make from every campaign are considerably more challenging to assess.

For example, what if those digital ads led leads who are taking their time making a decision? They may buy your products and services later, but you might attribute those sales to another aspect of your marketing strategy. Which leads us to…

Why ROI isn't enough for whole marketing effectiveness

A good marketing ROI seems like a great figure to take to your finance heads and ask for more marketing investment. However, marketing ROI has several shortcomings.

For a start, there are numerous mistakes marketers make when calculating ROI, including:

• Ignoring the indirect impacts of digital marketing campaigns
• Attributing organic sales growth directly to specific marketing efforts
• Focusing solely on short-term profits gained from marketing dollars
• Ignoring qualitative metrics

Attribution is a significant challenge when calculating marketing ROI. Traditional ROI models tend to massively oversimplify the customer journey. Think about a pay-per-click (PPC) ad, for example. If someone clicks an ad and then buys your services, it’s easy to assume the ad was solely responsible for that conversion. 

But what if the journey went like this:

1. The customer did an online search of service providers and came across your blog
2. They read and enjoyed your blog and bookmarked it for later
3. A few days later, they remembered that they still needed the service they were researching and search for your company directly
4. Your ad comes up at the top of the SERPs (search engine result pages), and they click and buy

Suddenly, attribution isn’t so simple. This becomes problematic when you pump money into ad campaigns that aren’t, as it turns out, as powerful as you thought.

However, marketing ROI is a great way to compare different marketing channels. Understanding the marketing costs for tactics like paid and shared channel (and how much revenue each channel generates), can form a compelling story to stakeholders.

ROI might not be enough to gain the marketing investment you need

If you can’t explain exactly how you’ve come to your ROI figures or prove that they’re accurate, you may receive nothing more than raised eyebrows from your finance team.

The following methods help you justify your marketing spend without having to rely solely on a potentially dubious ROI figure.

Incrementality

Incrementality helps to identify which of your marketing takings is contributing most to your overall results. It aims to calculate a sort of baseline result (i.e., how many sales you would have converted had you done nothing in a time period) that is compared to the incremental effects of each of your tactics. 

For example, a paid social media promotion may coincide with a growth in sales, but how much revenue would have occurred anyway due to an organically increasing interest in your brand? You need to know how much of your new success was caused by social media posts. Incrementality is a way to understand which campaigns generate revenue and which aspects are most successful. 

Here are a few incrementality testing methodologies:

Geo-testing

Marketers can split a geographical area into smaller areas, exposing some to certain marketing materials or ads while keeping the rest as a control group. If the non-control groups have more leads and conversions, this geographical location is responding positively to the campaign. It’s worth remembering that correlation is not causation, and there may still be other factors at work.

Holdout groups

Additionally, holdout groups are also types of control groups that help show whether the marketing campaign is causing growth or something else. However, unlike geo-testing, they’re not limited to geographical differences/similarities.

By indicating exactly what aspects of your campaigns are driving growth, incrementality helps measure current marketing success with the goal of improving future marketing efforts.

MMM

Your marketing teams will, no doubt, use multiple techniques and channels to reach your target audience. This is known as your marketing mix.

Marketing mix modeling uses statistical analysis to understand how each part of your marketing mix (particularly upper-funnel tactics) drives sales. It relies on accurate data from each of your marketing channels and various connected sources.

MMM aims to give you perspectives on how to best allocate your budget across your various tactics, and how changes in spend levels can increase or decrease revenue. For instance, you may be running out-of-home billboards, transit ads, television spots, radio spots and a few targeted print ads. Most modern tracking and attribution methods can’t solve for these offline tactics. However, MMM can analyze historical and current data to identify that (hypothetically) moving 10% of the print spend to television would have a cumulative 15% increase in sales. 

Cool, right? MMM helps you create meaningful marketing predictions using the following variables:

• Date-based events and variables
• Expenditure per media channel (both physical and digital)
• External factors such as competitor activity and market fluctuations
• Internal variables such as product or pricing changes

Implementing MMM as part of your justification for marketing is a fantastic way to show an in-depth understanding of costs and benefits. However, models can be complex and companies may need to invest in specialist platforms to utilize MMM methodologies.

Experts concur that MM works best when you’re able to collect the right data. It’s a case of quality over quantity — as with most things in marketing and life. Advanced web analytics and a platform that visualizes data for actionable insights are the keys to effective MMM. You also need to consider integrating data from all platforms connected to marketing, customer journeys and customer lifetime value, for example, your customer relationship management (CRM) system.

The "power couple" of MMM and incrementality

Putting MMM and incrementality together creates a power couple that overshadows even the Beckhams or Chalamet/Jenner. Marketers shouldn’t have one without the other. Just like any great power couple, MMM and incrementality complement each other. 

Utilizing existing marketing data for ever-more granular insights is essential. First-party data returns marketers to the core of successful marketing: a deep understanding of the target audience combined with accurate and meaningful data.

And for those marketers (most marketers) also using digital tactics, multi-touch attribution forms the third corner of the triangulation methodology — giving you an even clearer picture of how all of your marketing efforts are impacting the business. 

Putting it into practice in your marketing campaigns

Of course, these concepts are only useful if you know how to use them in ways that genuinely impact campaign success and justify marketing spend to stakeholders. Even for those with a data and marketing background, it behooves you to make your results relevant and easy to understand.

Storytelling

Your marketing performance should tell a story. Simply stating that social media engagement is a driver of your consistent sales baseline might leave your finance team cold. However, when you can talk about how hard your social media team has worked and present how their successes relate to the company's growth, you’ll get your stakeholders' attention.

Data visualization

The best accompaniment to a great story is always beautiful imagery. The right visualization can take data from MMM and incrementality testing and present it in a compact package that can be understood in an instant.

You can visualize how many new customers you've earned or how customer relationships have improved. You might also use data visualization to show one marketing channel versus another, or how marketing expenses have risen and the related impact. Of course, you'll definitely want charts that show revenue growth, gross profit, net profit and all the other factors that show your stakeholders accurate marketing return on investment.

With the power of MMM and incrementality, you can transform the vague ROI of marketing strategies into confident figures and forecasts that will surely impress any finance director. Just make sure you have the right tech stack in place to gather the online and offline measurements you need to present those figures.