Marketing ROI: From Art to Science

Did your marketing campaign allow you to acquire customers faster or more cheaply? Build a pipeline of leads? Burnish your brand’s reputation? Or something else entirely?

In recent decades, marketing efforts have grown in sophistication, speed and expense. Now the field’s metrics need to catch up, so that marketers can effectively assess what a campaign did — or failed to do.

“We’re seeing an overall move to make marketing more accountable,” says Paul Farris, Darden’s Landmark Communications Professor of Business Administration and co-author of Marketing Metrics: 50+ Metrics Every Executive Should Master. Farris is co-leader of marketingdictionary.org, an effort to standardize marketing metrics that’s endorsed by the American Marketing Association and other industry groups. “More and more, companies are asking marketers to show their estimated return on investment (ROI) before they make decisions.”

Farris believes that marketing return on investment, or MROI, is the field’s most powerful metric — and also one of its most misunderstood.

MROI can measure marketing gains that are total, incremental or marginal. It can account for the scope of spending, the valuation method and the time period for the returns.

“As a term, MROI rolls up so much of what marketers do,” says Farris.

Finally, MROI is “valuable as it recognizes marketing spending as investment and imposes rigorous criteria for accountability,” Farris and colleagues write in their paper “Marketing Return on Investment: Seeking Clarity for Concept and Measurement.”

Yet there’s evidence the metric’s value is poorly understood. Farris’ research has shown that more than three-quarters of executives and managers believe that traditional ROI is a useful performance metric, but less than half said calculating marketing-specific ROI was valuable to them. That’s despite a 2013 study from Louisiana State University that showed applying marketing ROI metrics significantly improved business performance.

“Continued confusion could undermine MROI and make people reluctant to use it or reluctant to make decisions based on it,” Farris says. “It’s important that when marketers present MROI, they articulate what’s behind the measure and how it was derived.”

Farris defines MROI as “the net after-marketing profit impact of a given marketing effort or campaign, calculated as a percentage of the money spent for that effort or campaign.” As an equation, that’s:

MROI = (Incremental Financial Value Generated by Marketing – Cost of Marketing) ÷ Cost of Marketing

For instance, in a scenario Farris outlines in his paper, a technology company spends $80,000 on an integrated marketing campaign to promote a software package. They calculate the campaign produced 190 additional unit sales over what would have been expected without marketing. Each sale netted $522, for a $99,180 incremental profit. Applying the MROI formula, (99,180 – 80,000) ÷ 80,000, the MROI is 24 percent.

MROI can also be used to calculate performance gains that come as cost savings. In another scenario, an Internet retailer spends $1,000 on improving its site’s search ranking, which increases the number of organic clicks and decreases the costs of paid search. This saves the retailer $2,000 per year. Applying the MROI formula (2,000 – $1,000) ÷ $1,000 = 100 percent, MROI for the website upgrade would be 100 percent.

Farris cautions executives against getting giddy when they calculate MROI.

“Often, MROI can be a rather large number, given these estimates tend to only look at the impact of the marketing spend,” without tabulating the costs “of the infrastructure that often make the delivery feasible,” the paper notes. If a marketing campaign requires new people be hired, or a significant new asset purchased, then those expenses should be reflected in the overall calculation.

Farris also emphasizes that, in many (but not all) cases, marketers will need to calculate a baseline sales performance in order to estimate MROI.

“Any time we wish to assess the ROI of a marketing activity, we need to know what would have happened (to sales and any metrics derived from sales) if said marketing activity had not taken place,” the paper notes.

That can be done through A/B testing — test marketing with a control group — or by comparing results of a campaign to historical data.

Finally, when executives use MROI to set future strategy, they need to consider their firm’s “hurdle rate,” or the minimum level of returns in order for the marketing investment to be considered valid, Farris says. A startup company might set its hurdle rate at 20 percent or higher, whereas a large, established company, because of the scale of business, might fund an effort that has a small percentage return.

“Breaking even is not enough,” Farris and his colleagues write. “But how much more is largely a function of the company’s strategic stance toward a market, the depth of its pockets and perceived risk.”

As marketing grows in sophistication and cost, expectations are rising.

“At this point, the job of marketing is not to spend money, but to constantly look for ways to spend it more efficiently and effectively,” Farris notes. Given this, it’s important for marketing executives to calculate and apply MROI in standardized ways.

“It’s important that definitional ambiguity does not plague the already-difficult job of assessing marketing’s contributions to the firm’s health and profitability,” says Farris.

Paul W. Farris, Landmark Communications Professor of Business Administration, is co-author of “Marketing Return on Investment: Seeking Clarity for Concept and Measurement,” published as a Marketing Science Institute working paper (Series 2014, Report No. 14–108), with Dominique M. Hanssens, James D. Lenskold and David J. Reibstein.