During high school math class, chances are you learned that correlation doesn’t imply causation. It’s true, but that correlation still matters a great deal. In fact, correlative relationships in marketing, like the one between revenue marketing and marketing ROI, can reveal a lot about a company’s progress and goals.
Understanding the strong correlative relationship between revenue marketing and marketing ROI is the first step towards using these tightly linked concepts to your business’s advantage.
Defining Revenue Marketing and Marketing ROI, and Their Relationship
- Is a holistic method that aligns sales and marketing to increase revenue
- Yields goal-oriented, cohesive, and predictable results
- Measurably impacts the bottom line and doesn’t leave anything up to chance
- The best way to increase and control your growth
Marketing ROI (return on investment):
- Is the measurement of how profitable your marketing efforts are
- Lets you know if you’re making back your marketing investments
- Can inform where you should allocate your budget
How are Revenue Marketing and Marketing ROI Related?
The relationship between revenue marketing and marketing ROI is simple: The tighter and more precise your revenue marketing strategy, the better your marketing ROI (and consequently, overall ROI) will be. Meaning, there’s a strong positive correlation between an effective revenue marketing strategy and a larger ROI, and a company can use these concepts to generate more business.
Measuring Marketing ROI (And Why It Matters)
Marketing ROI provide incredibly useful data points that can and should help influence business and marketing decisions.
To calculate marketing ROI, use the following formula:
(Sales Growth - Marketing Cost) / Marketing Cost = ROI
It’s important to note that it’s not always possible to associate a certain marketing campaign with a certain amount of revenue. Because of that, when calculating ROI, some also subtract organic sales growth from total sales growth, in addition to marketing cost. To sharpen your thinking about the nuances of Marketing ROI and how to measure it, we highly recommend this HBR article: A Refresher On Marketing ROI.
Deciding to calculate your ROI is beneficial if you want to implement data-driven strategies to increase revenue. Keeping track of how much your marketing efforts are paying off and paying attention to other bottom-line KPIs equips you with the knowledge you need to set your business on the right path in a strategic, informed way.
When you understand what’s working, you can scale those channels and be generally prepared for better decision-making in the future. When you see something isn’t working, you can pause that channel and reallocate to something that is driving revenue. KPIs that are important to your business will provide this information and enable you to make flexible plans.
But choosing to calculate ROI isn’t the simplest decision. Marketing ROI has a tendency to underestimate long-term benefits of marketing campaigns and can be hard to determine in a dynamic market where baseline sales are nearly impossible to measure. However you decide to calculate your MROI, you should take the results with a grain of salt and remember to take into account your business’s growth phase. During growth (or at the beginning of any initiative) a negative ROI might be expected.
Revenue vs. ROI: Sometimes, You Have to Choose
Again, things aren’t always simple when it comes to the relationship between revenue and ROI. Some campaigns might generate revenue, but if they cost you more than you bring in, it’s not always worth it. But that’s not universally true: Sometimes, you have to accept a short-term negative ROI in order to support long-term goals.
For example, you might spend $20,000 on a campaign generating a customer that will bring in $10,000 in the first year but have a $60,000 lifetime value over three years Although your immediate ROI is negative, your long-term ROI is positive, and that can be acceptable, especially during your growth phase.
Similarly, when you enter a new market, your ROI might be negative for the first year, but obtaining new clients is the real measure of success. Having those clients will allow you to build credibility, get references and case studies, and start making a name for yourself that will lead to a positive ROI in the following years.
Other KPIs for Measuring Growth
In addition to marketing ROI, there are other ways to collect data on your company’s progress to see if you’re meeting the right benchmarks and are on an upward trajectory. By finding the most informative and relevant KPIs for you, you can build up a broad array of data points that will keep you making well-informed choices. Here are three of the most essential metrics to measure marketing by beyond revenue:
1) Average LTV:
Average Lifetime Value (LTV) lets you know how much revenue you might earn from a customer throughout their entire relationship with your company. Multiply the value of a customer to the business by their average lifespan, and you’ve got the LTV. The average LTV is a great way to see how fostering long-term relationships with customers can benefit your company.
2) Average CAC:
The Customer Acquisition Cost (CAC) is all of the costs and resources incurred in order to acquire a new customer. This can be used in conjunction with LTV to measure the margin you’re getting from the average customer. You can calculate CAC by dividing sales and marketing expenses by the number of new customers.
3) Average Sales Cycle time:
The sales cycle refers to the period from the moment when you first contact a lead all the way to the deal closing. By looking at how long the average sale lasts and especially paying attention to successful and unsuccessful closed rates, you can determine what areas require a boost in efficiency and what factors are common when you close a deal.
All 3 of these metrics are critical to business success, and often heavily influenced by marketing. If this is the case in your company, remember to include these metrics when you calculate the ROI of your campaigns.
Revenue marketing and marketing ROI are inextricably related, and having a deep understanding of both concepts will enable you to use them to generate growth. When you calculate and use marketing ROI numbers (and other KPIs), you can set marketing goals and comprehensive revenue strategies that pay attention to historical data so that they can best increase your numbers.