If you’re like any other marketing department we’ve ever talked to, your boss wants to know exactly how much your efforts are contributing to the company’s overall sales. You probably also know that proving that number isn’t as easy or as straightforward as you’d like.
Too often, companies put pressure on the marketing department to track every single outbound marketing dollar spent to a lead generated or a sale closed. And because marketing does things like create brand awareness and foster positive relationships, that can be difficult to quantify. That’s why we use an ROI Model to calculate the budget and ROI of the marketing campaigns we create.
When you take a good hard look at your marketing investment as a whole, and you have clear goals for your marketing department, it’s actually not impossible to calculate your marketing ROI. And we’re going to show you how to do it, using an ROI Model. First, definitions!
What is Marketing ROI?
All spelled out, Marketing ROI stands for Marketing Return on Investment. That is, how much money you make off of your marketing campaigns, minus how much those marketing campaigns cost you. Check out an in-depth definition of ROI in this Digital Marketing Glossary.
What is an ROI Model?
If you want the textbook answer, “a Return on Investment Model is a comprehensive, customizable model that allows you to input your project assumptions and quickly understand potential returns.”
In English, an ROI Model is a method of calculating not only how much you need to spend to generate a certain amount of income, but also how much traffic, how many qualified leads, and how many sales you need to close on each month to reach that goal.
Your marketing ROI Model is a simple, 4-bullet point statement that outlines your company’s business goals, while also outlining specific goals for each your sales and marketing teams.
Your marketing ROI Model shows everyone exactly how your sales and marketing teams are going to complete your company’s overall growth goal. It clarifies expectation for both teams and helps you calculate exactly how much you need to spend on your marketing budget to achieve your projected goals.
Your superiors want to get the word out about your company, but they also want specific, measurable reports about how your marketing efforts are contributing to the bottom line. We get that.
This ROI Model will help you figure it out. It’s what we use to help our clients measure ROI and determine a marketing budget that can deliver legitimate growth. This is how it works, in 4 simple steps.
Step 1: Know Your Customer Lifetime Value and the Value of New Sales
How much does the average new client deliver your company in sales?
This number is important because you can use it to figure out how much you’re spending to market to that person, relative to how much you’re making on them. That’s your marketing ROI right there. So, before you go any further, figure out on average how much revenue you make from a new client. Then figure out how much you make in the lifetime of your relationship with a customer.
When you know how much revenue you generate from each client, you can figure out a reasonable amount to spend on your marketing budget.
Step 2: Set Your Goals
Goal setting is the first step to actually developing a solid marketing budget. And when we talk about goal setting, we’re talking about the whole company.
What are your company’s goals for the next year? Do you want to grow by 10%? Do you want to close a certain number of leads each month?
It’s important to set these goals and make sure everyone in your company understands them. This way, everyone can work toward this singular goal, together. With an overarching company goal set, the rest of your sales and marketing team goals will fall into place.
Step 3: Use A Digital Marketing ROI Model
Alright. Now you know how much a new client makes you, and how much you need to make in the next year or month. Let’s get to the Digital Marketing ROI Model.
Ours functions like a funnel, starting with the traffic your site sees per month and moving down from there to determine the number of closed sales you need to reach your monthly revenue goal. Let’s use an example to help clarify this.
Acme Corp is a manufacturer of anvils, rockets, explosives, and magnets. Last year, Acme Corp made 22 million dollars, which was flat from the year before. Let’s take a look at the ROI model we’d use to calculate the best marketing budget for their goals.
First, we need to know what their goals are, and how much revenue a sale brings to their company:
Goals: Acme Corp wants to grow their company by 5-10% this year.
Value of a New Sale: $25,000
Average Customer Value: $200,000
With this information, we can figure out how much income Acme Corp needs to generate each month to reach that 5-10% growth goal. From there, we can work backward to determine exactly how much site traffic we need to drive to achieve that goal.
Given Acme Corp’s goals, we’ve determined that they need to generate $375,000 in new revenue a month.
With an average new client sale price of $25,000, that means they need to close on 15 new sales each month.
Now, Acme Corp has a strong sales team, who works to close on an average of 5% of their marketing qualified leads. If Acme Corp closes on 5% of their qualified leads a month, they need 300 leads to reach that 15 sales per month goal.
Let’s work back one more step to figure out how much traffic Acme Corp needs to bring in 300 leads per month.
They have an average traffic conversion rate of 3%.
That means they need to bring in 10,000 site visitors per month. Believe it or not, we’ve just figured out Acme Corp’s entire Marketing ROI Model. Here’s what it looks like all condensed into 4 simple bullets. It might be only 4 bullet points, but it’s still a lot of info. We’ve just built out Acme Corp’s ROI Model to grow their business by 5-10% in the next year. This ROI model accounts not only for their marketing budget but also for their monthly marketing and sales goals.
The Acme Corp marketing team needs to bring in 10,000 visitors per month, and they need to convert 3% of those visitors into qualified leads.
The sales team is responsible for converting 5% of those leads into sales, to ultimately deliver on Acme Corp’s growth goal of 15 new sales or $375,000 in new revenue per month.
Finally, and perhaps most importantly for the purpose of this blog, Acme Corp is spending just 5% of their total gross income from new sales on marketing. That adds up to $18,750 per month or $225,000 a year.
To some, that might sound like a lot. It’s important to know that this is a fairly conservative marketing budget estimate.
Many companies, especially those with aggressive marketing campaigns dedicated to increasing brand awareness, spend anywhere between 12 and 20 percent of gross revenue on marketing efforts. Even a standard marketing budget for a company that's well placed in its market tends to spend between 6 and 12 percent of gross revenue on marketing. Click To Tweet
In the grand scheme of things, 5% isn’t actually all that much to spend on your marketing budget, but that’s where your marketing strategy comes in, bringing us to the very last step:
Step 4: Invest Your Marketing Budget Wisely
You’ve completed your Marketing ROI Model. You know how much traffic you need to pull in, and how many leads you need to convert to meet your growth goal, and you know exactly how much you want to spend to do it.
It’s important to remember that while this ROI model can give you a good picture of how much you should be spending to get the right results, you have to be investing in the right marketing tactics to see actual results.
Where you allocate your marketing budget is what will make or break your ROI Model. Your marketing and sales teams have their goals, but if they don’t have the tools and training necessary to meet those goals, you won’t see your ROI Model realized, and you’ll probably end up spending more than the budget you allocated to reach your growth goal.
If you don’t have landing pages, are working with a website from 1995, or aren’t strategically targeting your paid advertising campaigns, you’re probably not going to see the results you want from what you’re spending on marketing.
That’s where the inbound marketing methodology and things like keyword research, buyer personas, and content calendars come in.
If you've calculated your marketing budget carefully using an ROI model like the one above, but aren't seeing the results you planned for, there's probably a breakdown in your marketing strategy somewhere. Click To TweetTalking to a professional can help.
We hope this blog helps your sales and marketing teams align to reach your company’s growth goals, and gives you a good starting spot for determining a realistic marketing budget.
Marketing ROI, marketing budgets, and especially inbound marketing strategies are kind of our jam, so if you have any questions about anything we covered in this blog, please don’t hesitate to get in touch!
And if you want to grow your company by 20% in the next year, we can help. Growth marketing is kind of our thing, so if you’re interested, let’s chat.