How To Measure 360° Marketing ROI – Part 2: Value of Commercial Effectiveness
In part 2 of my blog post ‘How To Measure 360° Marketing ROI’, I elaborate a bit more on the practice of calculating Total Marketing Income. In part 1, I indicated that marketing cannot and should not measure its success directly based on sales revenue. This is because marketing usually doesn’t sell directly. Sales does. In determining Total Marketing Income, marketing should focus on how successful it has been in maximising the company’s commercial profitability. And marketing has three value drivers at hand to accomplish this:
- Sales cost reduction
- Sales cycle time acceleration
- Incremental profit streams generation
The first two marketing value drivers together increase the commercial effectiveness of a company. After all, being able to sell more within the same time period at a lower cost is a compelling value proposition. Here’s how you measure the value of increased commercial effectiveness:
Step 1 – Base Measurement
“You can’t know where you’re going, until you know where you’ve been” (George Duke in Ancient Sources on his Album ‘Cool’). In this context, it means that you need to know what the commercial effectiveness would be without marketing intervention. It is, in fact, the benchmark against which you measure marketing’s impact on commercial effectiveness. I often call this benchmark the ‘Sales-Only’ scenario. Because if there’d be no marketing, sales would be on its own to manage the FULL sales cycle – from suspect identification to cold acquisition; from response handling to lead conversion; from closing the sale to continue to engage the customer. So at its core, the marketing business case is a make-or-buy consideration. Especially from the perspective of sales.
With the help of internal data sources (financial, CRM, etc.) it is not so difficult to conduct a base measurement on commercial effectiveness. In the illustration below, you see an example of what variables can be used for this.
From the example above, we can say that for every 1,000 orders received from existing customers:
- 2,857 prospects, 11,428 leads, and 57,143 suspects are required
- Suspect ID costs will be €17,143 (57,143 suspects x € 0.30)
- 952 prospecting hours of sales are required (2,857 prospects / 3.0)
- 1,758 lead hours of sales are required (11,428 leads / 6.5)
- 7,143 cold acquisition hours of sales are required (57,143 suspects / 8.0)
- Sales spends a total of 9,853 hours (x € 75 hourly sales rate = € 738,975)
- Total existing customer sales cost is € 17,143 + € 738,975 = € 756,118
- Total existing customer sales cycle time is 15 + 15 + 14 = 44 days
Step 2 – Plan & Measure Marketing Impact on Commercial Effectiveness
As a general rule, rather than to just start measuring, make a forecast of the expected commercial effectiveness improvements. I often call this the ‘Marketing-Inside’ scenario (hope Intel won’t mind my plagiary…). Continuing with the example given in step 1, the illustration below shows an example of the variables that can be used to determine marketing’s commercial effectiveness:
From the example above, we can say that for the same 1,000 orders received from existing customers, the marketing effectiveness looks as follows:
- 2,816 prospects, 10,711 leads, and 89,255 suspects are required
- Suspect ID costs will be €15,173 (89,255 suspects x € 0.17)
- Total lead costs are € 80,333 (2,816 prospects x € 7.50)
- Total prospect costs are 63,360 (10,711 leads x € 22.50)
- Total prospect-to-sales conversion costs are € 17,500 (1,000 x € 17.50)
- Total existing customer marketing cost is € 176,366
- Total existing customer sales cycle time is 37.5 days
To determine the total sales cost, you should add the sales force costs to the marketing costs. In the ‘Marketing-Inside’ scenario, the sales force costs can be determined as follows:
|Sales Force time spent on:||Sales-Only scenario||Marketing-Inside scenario|
|% outsourced||# hrs.|
|Suspect-to-Lead Conversion||7,143 hrs.||90%||714 hrs.|
|Lead-to-Prospect Conversion||1,758 hrs.||65%||615 hrs.|
|Prospect-to-Sales Conversion||952 hrs.||0%||952 hrs.|
‘% outsourced’ means that, for instance, in the case of lead-to-prospect conversion, on average 35% of leads continue to be converted by the sales force. For 1,000 orders received, therefore, the sales force costs are € 171,075 (2,281 hours x € 75 average sales hourly rates). This means that the total existing customer sales cost is € 347,441 (€176,366 marketing costs + € 171,075 sales force cost).
It may prove useful in the planning / forecasting stage to play around with different scenarios. The illustration below shows how tools can effectively support you in this exercise by clearly visualising the relevant data.
Step 3 – Convert Commercial Effectiveness Improvement in Monetary Value
The monetary value, we’re about to calculate has two components: (1) sales cost savings and (2) sales cycle time acceleration. To start with sales cost savings, that’s an easy one: It’s the sales cost under the ‘Sales-Only’ scenario minus these costs under the ‘Marketing-Inside’ scenario. In the case of the example we took:
The total existing customer sales cost saving is €408,677 (€ 756,118 – € 347,441).
The sales cycle time acceleration requires a bit more attention. From the examples above, we could already see that the sales cycle is 6.5 days (or about 15%) faster under the ‘marketing-inside’ scenario. To quantify the value of this time saving, you need to know the average profit per sales order. Let’s say that the average profit per sales order is € 7,500. In that case, the the time savings value is € 1,107,955. Here’s how you calculate that:
Time saving % x Total sales orders received x Average profit per sales order OR
14.8% x 1,000 x € 7,500 = € 1,107,955
Keep in mind that there are other ways to conduct the base measurement. To do this successfully, you must first understand your sales value chain. Different sales value chains will require different variables to determine your base measurement. In part 3, I will elaborate on quantifying the third marketing value driver – generating incremental profit streams. This has everything to do with new market and product development. Until then.
CALCULATED MARKETING SUCCESS!