TRUTH ABOUT ROI IN MARKETING STRATEGY
Marketing isn’t just promotional communication like people like to think. There is much more in it than you think. The first layer of marketing that people see has a tendency to associate with brands, campaigns, promotions and advertisements. But in fact, these all are the last stage of marketing strategy execution. Whereas the beginning of the marketing journey starts with budget allocation and financial metrics such as ROI.
Many marketing experts say if there are positive ROI, what is the point of running marketing activities and executing marketing strategy? Well, of course, every single business wants to have a good return on investment, however, not everyone gets it straight away. It is a long journey to come to that stage by analysing executed marketing strategy and its constant improvements. ROI is a long-term goal when the short term goals have nothing to do with budgeting and finance, but instead receiving insights about strategy success and what should be changed to achieve positive ROI faster.
ROI and Marketing Strategy
So, let’s introduce you to what ROI really is? With easy words, it is evidence of how well you performed since you started investing or focusing on marketing.
Suppose you invested 500 euros in marketing, and it resulted in 1500 euro profit, which means your ROI is 300% which is higher by 3 times your investment. Remember that profit and sales must be measured both when calculating ROI.
In the situation when you receive lower than 100% of ROI means you have negative ROI. A good example will be if you receive from a 500 euros investment only 250, which means you lost half of your investment and your ROI is 50%.
ROI and Marketing Strategy
Marginal gains is an alternative to ROI but on the micro-level. It is known as many tiny improvements in any process that total up to the bigger improvement such as ROI. By adding together tiny improvements that were made in different areas helps a business to increase its chance of successfully accomplishing its biggest goal. Marginal gains are done through the implementation of company marketing activities.
It can be divided into main areas:
- Profit margin
- Client retention
- Conversion rate
- Average annual client value
Profit margin is one of the areas in which you can influence. You can measure your ROI through the generated profit and not sales value. As a result, if higher profit is acquired in sales, the ROI will be higher.
Execution of the campaign costs $1K, which generates $3K in sales. It might look like it is a good enough return, but it depends on the % of the profit margin. When the profit margin is just 20%, it means the campaign generated a profit of just $600 that leads us to 60% of ROI. Whereas if the profit margin % is higher then it would generate higher ROI.
Tiny improvement in the area of client retention can potentially drastically influence business financial performance.
If your company serves 50 customers and spending of your average customer amounts annually to $5K, where the client retention rate is 60%, means that $300K is what you have in your business to the upcoming year. The improvement of client retention rate only by 2% will provide you with an extra $10K for such a small improvement.
This is one of the areas which you can easily influence in a positive way. You must know your exact conversion rate before making improvements in this area. You should track leads and conversion rates on a monthly basis which is rare to see from the companies would do.
There is double benefit from an improved conversion rate.
1. Improved conversion rate helps you reduce marketing spending as a result of being able to generate the same number of customers from fewer leads.
2. Maintaining marketing spending will help you to simply generate a higher percentage from the same number of leads, as a result, it will lead to client growth.
It is always easier to retain already existing customers through the tiny improvements, whereas it is much harder to attract completely new customers to make these extra $10000.
Average Annual Client Value
This area is one of the most which can significantly influence ROI base on company marketing strategy. Simply said if you can find a way to make your existing customers spend more, you will be no longer attached to the need to attract new customers to result in higher turnover.
If you have a large client base, then the improvements in the marginal area by just a couple of percentages can have a significant effect.
Let’s imagine you serve 100 customers per year with an average annual spend of $2K on each, which results in a $200K sales turnover. If you increase average spend by 3% (or $60 per client). This will add an extra $6K into a business turnover.