No matter the size of your business, you are most likely spending money on marketing. In total, companies in the United States spent $2.1 trillion on marketing in 2019. To put that in perspective, that represents about 10% of the total US GDP (healthcare spending ranks just a little higher at 17%). In other words, marketing is a significant expense for most businesses.
Commerce Signals estimated that 40% of all media spend is wasted — a number that comes from about 60 studies, said Tom Noyes, the company’s founder. On a much more micro level, most businesses spend typically between 2-5% of their revenue on marketing. If 40% of that is waste, a business with revenues of $1 million is wasting between $5,000 – $20,000 in their marketing strategy.
Smart vs. Dumb Marketing
When I took over a family entertainment business in 2015, the primary marketing being done was in local magazines. I inherited two different contracts that called for $12,000 a year to place one ad a month. Let’s skip the discussion about whether this was a good use of funds for a moment. There were three initial problems I had with this –
- The success of the ad campaigns was not being measured in any real way. The previous owner had no idea if these ads were having any impact on the business.
- There was no way to tell if the ads were reaching their desired audience. Sure, these were running in family-oriented magazines, but the distribution of the magazines was in many areas that customers weren’t.
- There was no overall purpose for this campaign. You could say it was building the brand, but the messaging wasn’t coordinated with any social media or in-store efforts. Even worse, the messaging and branding were changing each month.
The magazine advertisements in this example is what I would refer to as “dumb” marketing. Not because it was done in a media that I disagree with, but rather for the lack of strategy that it was done with.
“Smart” marketing takes a much more data-oriented approach. It uses customer data to figure out what should be implemented to ensure it is reaching its desired audience. This is one of the reasons I love Facebook, Google, and other social media marketing so much.
“Smart” marketing also pays close attention to return on investment, one of the more popular metrics. Every strategy will have a different return on investment (ROI). The best business owners, no matter their size, find their maximum ROI while balancing building their brand.
How Do you Calculate Marketing ROI?
ROI is a straightforward calculation. In its simplest form, it looks like this:
Marketing ROI = Increase in Sales as a Result of Marketing – Marketing Expense / Marketing Expense
In my earlier discussion about advertisements in magazines, each ad cost approximately $500. If the previous owner had run an ad with coupons that would have been turned in at the store by customers, they could have calculated a simple ROI. For instance, if they would have gotten coupons turned in that resulted in $1000 in sales, our ROI would have been 100%.
The goal, as with any ROI calculation, is to end up with a positive number, and ideally as high a number as possible. While the overall formula seems simple enough, there can be some complexities.
There can be difficulty in measuring sales that are attributable to a specific marketing effort. In my coupon example, how can we be sure that some of these customers would not have come in regardless of getting a coupon?
To do this, you need to establish a sales baseline. What would our sales have been if we didn’t spend on this program? The baseline can be hard to establish. Usually, business owners can look at their historical data and project them into the future.
Measuring the lag time with most campaigns is another challenge. If you spend $100 today, it might take years for the marketing to “work” and for the consumer to make a purchase. I often associate this with brand marketing. Some is needed for every business, and it may not be possible to track that ROI, especially for smaller business owners. However, this marketing should still be strategic.
Benefits of Tracking ROI
While some of the benefits may seem obvious, let’s discuss three reasons a business owner will want to track their marketing ROI.
- Track ROI to justify marketing spending. Remember when we said a business could be saving a lot of money each year by eliminating marketing waste? ROI helps show that marketing does have an impact on the revenue of a business.
- Tracking ROI helps a business allocate their marketing dollars. ROI is most often computed at the campaign level so that owners know which efforts have a higher return and should be further invested in.
- Tracking ROI holds marketing teams accountable. One of the worst things I think business owners can do is not hold their marketing team or consultants accountable for results. These folks can come up with a lot of different and creative ways to spend a business’s marketing budget. An owner needs the tools to build accountability in their organization and marketing ROI is one of those tools.
How Does Your Accounting and Finance Team Figure Into This?
I am a huge advocate that your accounting team should be helping with our marketing. Businesses often have loads of data that they are not taking advantage of that can turn “dumb” marketing into “smart” marketing. You can read more about the power of customer data here. While most smaller business owners might not know it, they are sitting on a treasure chest of data.
Your outsourced CFO or accounting team can also be extremely helpful in setting up system to track marketing ROI. Tracking ROI often requires some thought and planning as to how it will be done. Outsourced CFO’s for smaller businesses are often the ideal resource for designing these tracking systems and implementing reporting around them.
About Krieger Analytics
My name is Matt Krieger, and I am the founder of Krieger Analytics, an accounting and advisory partner for small businesses and franchisors. Our goal is to completely outsource your accounting department from bookkeeping and taxes to CFO advisory services. I am also the owner and franchisor of a concept called Monkey Bizness, in Denver, Colorado.
As a small business owner with a background in finance and strategy, I realized the benefits that a CFO could bring to smaller organizations. Most franchisors and small business owners don’t have a need (or budget) for a full-time CFO or bookkeeper. To better fit my clients, Krieger Analytics is a part-time resource. While most think of CFO’s being involved in finance and accounting (we are), we are also involved in much more. We partner with clients by coaching, giving them clarity into their business, and creating growth strategies. Conversations are free, so don’t hesitate to reach out to me at [email protected].