CMO Problem #2: Not Knowing your Marketing ROI

What’s a more precious resource than diamonds or oil? As a marketing leader, you know what it is - Marketing Budget. A precious resource: hard to come by, scarce from the start, and constantly at risk of being eroded.  

After 25 years of developing my marketing expertise, I have never met a marketer who has money to burn. And that means you have to prove to the rest of your company that your marketing strategy and tactics are working.  

Although throwing bundles of money into a fire pit and watching it burn might seem like fun, it's no way to run your business. But you might be doing this every day. It could be happening if you aren’t Measuring your Marketing ROI 

Money burning_Sherpa Marketing

If I asked you right now what your marketing ROI was last quarter, would you have an answer? Even worse, what if your CFO walked in right now and asked you to share your marketing ROI metrics to keep your budget off the chopping block?  

Don’t worry, you’re not alone. In fact, you are in the majority of marketing leaders who aren’t able to find the time to keep up with their calculations.  

Never fear – the CMO Dojo is here with key formulas and an easy-to-use online ROI calculator.  

CMO Dojo problem 2_Sherpa Marketing

Your return on investment is one of the most important factors for any of your marketing campaigns because it shows that you’re making money. It’s the one metric that your CFO and CEO are most interested in hearing about.

If every tactic you run is a straight-up bottom-of-funnel digital ad to an e-commerce site, you might have your marketing ROI in your hip pocket and be ready to defend it any day of the week. But for everything else, measuring your marketing ROI is a little more nuanced.

If you can show positive ROI, it unequivocally means you’ve found a marketing formula that works.

Henry Ford once said, “A man who stops advertising to save money is like a man who stops a clock to save time.”  

After years as a marketing expert and business owner, I’ve been through recessions. And in tough times, when companies start seeing troubling financial returns, the very first thing to get leaned out is the marketing budget.  

You know cutting the marketing budget is only going to make things worse. You KNOW that marketing works. Therefore, it becomes your responsibility to measure ROI to demonstrate to everyone that what you and your team is doing is benefiting the company and driving growth. 

Marketing is an investment that is all about producing revenue. And when you focus on measuring your marketing ROI, you can make a solid case for keeping your budget in place and away from the CFO’s chainsaw.  

CMO Dojo_Sherpa Marketing

Marketing ROI is simple formula. I am constantly driving my Sherpa Marketing team to focus on the Return on Marketing Investment, or “ROMI”. This calculation tells us how much money is being generated for every dollar spent in marketing.  

For example, if, for every 3 dollars in sales attributed to marketing, you spent only a dollar in marketing efforts — this would yield a 3:1 ROMI. This a good target ratio and anything higher than a 3 is a great score to show to your finance department.  

Here’s how you calculate it: 

ROI Calculator_Sherpa Marketing

Here’s an example. You invested $100,000 dollars into a Facebook ad campaign, and it generated sales of $600,000. After product costs, your gross profit from those sales is $400,000.ROI Calculator_Sherpa Marketing

 

This example is easy. But many of the marketing leaders I work with have the same complaints because they can’t directly close the loop when their Facebook ad campaign sends leads to a sales team to convert.  

Here’s a breakdown of how you can make it happen. Let’s start with the formula and then scroll down for my CMO Dojo ROMI Calculator. 

Step 1:  Figure out the average Lifetime Value (LTV) of a customer.  

I like to take the average number of years a customer stays with you multiplied by the average revenue for a customer per year.  

This gives you your customer LTV. 

Step 2: Calculate your Cost to Acquire a Customer (CAC). 

My approach takes the marketing investment I spend to generate a lead and divide it by our close rate (the rate that we convert a lead into a new customer). 

Step 3: Look at the data and compare LTV to CAC as a ratio.

A minimum target to aim for is 5:1 LTV to CAC.

 

CMO Dojo_Sherpa Marketing

To really make the most of these numbers, here are my best CMO Dojo Tips: 

  • ​For customers who generally spread their spend with you over a longer period of time, you also want to look at your 3-, 6-, and 12-month average customer value.​
  • I like to target a break-even of 3-6 months, meaning if you took the 3-month average customer value versus your cost to acquire a customer, you should be looking at 1:1. This totally depends on your cash flow, and how aggressive you want to be with your marketing budget.  
  • The first step is finding the formulas that work so you can make an educated decision about how aggressively you want to focus on growing your business. And that’s an important decision to help you fund your marketing efforts in a meaningful way.  

To assist you, I want to share with you our Marketing Campaign ROI Calculator. This will help you with each of these three steps and it’ll make proving your return on marketing investment easier.  

There’s always more to know. If you find my commentary and this calculator valuable and you are a CMO or a director of marketing for your company, I encourage to join my private Facebook group "CMO Dojo". I do monthly coaching calls and publish all my best marketing training & tools, plus you’ll meet an incredible network of amazing and smart business leaders. 

Join CMO Dojo today before you burn any more budget. 

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