Measuring ROI in Professional Services Marketing

Evaluating campaign performance helps marketers understand the impact of their efforts. Are their campaigns effective, or do they need polishing? When it comes to measuring campaign success, marketers use a value called return on investment (ROI).

This guide is about measuring ROI for professional marketing services, discussing the following points:

• Using the basic ROI formula
• Computing ROI and highlighting organic sales growth
• Calculating long-term ROI
• Defining good marketing ROI

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Using the Basic ROI Formula

Calculating ROI helps in marketing decision-making. Measuring ROI for professional marketing services informs businesses if they need to improve or continue a marketing campaign. Marketers and CMO consultants calculate marketing ROI differently, but the basic formula for ROI is straightforward. It goes like this:

(Sales Growth － Marketing Cost) / Marketing Cost = Marketing ROI

• Sales growth is the increase in revenue or sales due to the marketing campaign. Not all sales growth is directly related to marketing; thus, marketers isolate sales growth directly attributed to a specific marketing activity.
• The marketing cost is the total amount of money spent on the marketing activity. The cost of professional marketing services includes advertising, marketing tools or software, content creation, and so forth.

To compute a basic ROI, follow these steps:

1. Subtract the Marketing Cost from the Sales Growth to get the marketing campaign's net revenue gain.
2. Divide the net revenue by the Marketing Cost to get the amount earned for every dollar spent on the campaign. It is expressed as a percentage.

For example, if a business’s sales growth is $10,000 and the marketing cost is $2,000, the marketing ROI is:

Marketing ROI = ($10,000 － $2,000) / $2,000 = $8,000 / $2,000 = 4

This means the campaign earns $4 for every $1 spent on marketing, producing a 400% ROI. The marketing campaign is generating a high ROI.

Computing ROI by Highlighting Organic Sales Growth

The basic formula assumes that sales growth results from marketing efforts. Thus, marketers also compute ROI by considering organic sales. The formula goes like this:

(Sales Growth － Organic Sales Growth － Marketing Cost) / Marketing Cost = Marketing ROI

• Sales growth is the total increase in revenue or sales for a particular period.
• Organic sales growth is the portion of sales growth attributed to factors aside from marketing efforts. Factors such as repeat customers, word-of-mouth referrals, and product improvements can contribute to organic sales growth. In short, this is growth even without the use of marketing campaigns.
• The marketing cost is the total amount spent on the campaign. Marketing costs might include advertising, marketing tools or software, content creation, etc.

To compute a basic ROI considering organic sales growth:

1. Subtract organic sales growth from sales growth to get incremental sales growth related to the marketing efforts.
2. Subtract the marketing costs from the incremental sales growth to get the net profit from the marketing campaign.
3. Divide the net profit from marketing by the marketing costs to get the ROI. It is expressed as a percentage.

For example, a company with sales growth of $20,000, organic sales growth of $5,000, and a marketing cost of $3,000 has the following marketing ROI:

Marketing ROI = ($20,000 － $5,000 － $3,000) / $3,000 = $12,000 / $3,000 = 4

A marketing ROI of 4 means that the business generates $4 in net profit for every dollar spent on marketing. This is after considering both organic and marketing costs. With this 400% ROI, the company experiences a strong return on its marketing investment.

Calculating Long-Term ROI

All businesses want to create long-term relationships with their customers. Loyal customers will likely become repeat buyers and highly recommend the company. Thus, a critical part of computing revenue is calculating long-term ROI.

Long-term ROI through customer lifetime value (CLV) reveals the value of individual customers to the brand. CLV estimates a customer's total value to a company throughout their relationship with the brand. Marketers use this formula to compute long-term ROI:

Customer Lifetime Value = (Retention Rate) / (1 + Discount Rate / Retention Rate)

• The retention rate is the percentage of customers who remain in business with the company over time. The retention rate shows how effective a business is at retaining customers.
• The discount rate is a percentage that represents the time value of money. Discount rates account for the fact that the dollar earned in future marketing campaigns is worth less than what is made today. It considers various factors, such as inflation and opportunity cost of capital.

To compute the CLV:

1. Divide the discount rate by the retention rate.
2. Add 1 to the answer.
3. Divide the retention rate by the result.

The CLV result is the estimated total value a customer will produce for a business throughout their lifetime. The result accounts for the discount rate, the time value of money, and the retention rate, or how long customers stay with the business.

In addition to ROI, CLV helps businesses understand the long-term effects of customer relationships. CLV can help them choose marketing, customer retention, and acquisition strategies. Getting a high CLV indicates that retaining customers is more valuable, and investments through customer retention are reasonable despite the high initial costs.

Defining Good Marketing ROI

A good marketing ROI can mean different things depending on the industry, business goals, and marketing strategies. What makes a good ROI for one business might not be the same for another. Your FCMO or professional services marketing agency can tell you more about your specific organization.

Marketers consider these points when evaluating good marketing ROI:

• Industry norms. The typical ROI benchmarks for the industry. Some industries have higher marketing ROI because of higher profit margins or lower marketing costs.
• Business goals. The ROI target needs to align with the business objectives. If the goal is increased growth and market expansion, the business must be willing to accept a lower initial ROI to reinvest profits into marketing. If the goal is profitability, companies must aim for a higher ROI.
• Marketing channel. Various marketing channels, such as social media ads, email marketing, content marketing, and pay-per-click (PPC) advertising, have varying cost structures and ROIs.
• Budget constraints. Startups might need a higher ROI to justify marketing spending, while larger corporations might invest in longer-term strategies with lower short-term ROIs.
• Time frame. ROI varies over time. Some marketing efforts, such as content marketing or search engine optimization (SEO) strategies, can take months or years to yield substantial returns.
• Risk tolerance. Sometimes, riskier marketing strategies lead to higher rewards but could result in a lower short-term ROI.

Summing Up

A good marketing ROI depends on various factors specific to the business. Businesses must align their ROI goals with their overall business strategy and monitor performance over time, adjusting marketing strategies on the basis of the results. A good ROI helps them meet their business objectives and generates a positive impact on the business.

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