Marketing Metrics: The Four Key Measurements By Thompson Morrison, i-OP inc.
Marketing directors are under greater pressure than ever before to justify their budgets. That is why, of the two areas into which companies can invest marketing dollars – building brand awareness and lead generation – the latter, lead generation, tends to be of far greater focus these days, particularly for B2B companies. The reason for the shift is simple: at best, the benefit of brand awareness is difficult to gauge accurately. With the right marketing metrics, however, you can thoroughly evaluate your investment in lead generation. Showing results is a means not only of justifying your budget, but also of competing more effectively in today’s tight market. Whenever I meet with marketing directors to discuss lead generation strategies, I begin by reviewing their current metrics. How many leads are their current activities generating? What’s their conversion rate and cost per lead? What is their marketing CPOD and return on their investments for their marketing activities? Quite often I am amazed to find that many marketing departments do not have consistent metrics in place. In fact, a recent CMO Council study1 found that only 17% of marketing directors have a comprehensive system in place to measure marketing. It takes just four measurements to form an accurate picture of the success of a company’s lead generation efforts. To ignore them is to fly blind.
1. Leads per Campaign (LPC) The simplest measurement you can make is Leads per Campaign. While not an indicator of ultimate success, LPC allows for a better understanding of which type of activity is generating the most number of leads. Within certain types of activities, such as telemarketing, direct marketing, or email marketing, it is also vital to measure response rates. For telemarketing, another good measurement is Response per Hour (RPH) and Lead per Hour (LPH) rates. These numbers help you evaluate your list quality and the efficiency of your telemarketers.
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Measures and Metrics: Assessing Marketing Value and Impact, CMO Council, 2004
Lead Targets must also be in place to evaluate if the current activities are generating enough leads to meet revenue goals. These Lead Targets can be estimated in the following way: Revenue Target/Average Sale Value (ASV) Closure Rate For example, for a new revenue target of $750,000 per quarter in a product area that has an ASV of $15,000 and an estimated closure rate of 20%, the marketing department would need to generate 250 leads per quarter ($750,000/$15,000 over .20, or 250 leads per quarter).
2. Cost per Lead (CPL) An understanding how much each lead ultimately costs is critical for better allocation of resources in your marketing portfolio. Activities like telemarketing may be generating more leads, but such leads also tend to be expensive. Email activities to internal house lists tend to have the lowest CPL. By combining these two activities, you can often meet your lead target while reducing your overall Cost per Lead. What is a reasonable CPL? The rule of thumb is that the maximum cost per lead should be 5% of the ASV, with a target of half that. In other words, for an ASV of $15,000, the maximum cost per lead would be $750, with a target of $375. The wide range between the target and the maximum is to account for the inherent uncertainty of marketing efforts. While you can launch a new marketing effort with a target $375, it is dangerous to start the effort with a target of $750 -- overshooting this more ambitious figure would destroy the economic justification of this investment.
3. Cost per Order Dollar (CPOD) While it is best to evaluate revenue returns in terms of specific marketing activities, most organizations do not have the information infrastructures to calculate this data easily. As a surrogate, you can use Cost per Order Dollar to evaluate marketing investments at an aggregate level. Acceptable CPOD for marketing activities will vary by industry and the stage of a company’s history, but it tends to range between 2% to 10%. Emerging companies tend to have higher CPODs than mature companies. High tech companies tend to have a higher CPOD than industrial manufacturing companies. Your focus, then, should not only be on meeting your lead and revenue targets, but also on decreasing the CPOD of your marketing activities over time.
4. Return on Marketing Investment (ROMI) Return on Marketing Investment is not only valuable for determining which campaigns to launch, but also for the final justification of your investment in marketing activities2. ROMI is calculated simply: Total Sales Revenue Generated Market Activity Investment ROMI targets can range from 1.5 for new launch activities or startups to upwards of 10 for established companies. Many companies set their targets in the 4-5 range. You can estimate ROMI for a new marketing campaign using this formula: Estimated Leads Generated x Estimated Close Rate x Average Sale Value Marketing Activity Investment Let's use an email campaign with an external list purchase as an example. A company buys a 10,000-name list with a $5,000 budget. The estimated response is 1%, 15% of which end up as leads. There is an estimated 20% close rate with an ASV of $15,000. The campaign would then be estimated to generate 3 sales, worth $45,000, for a ROMI of 9. (The target Cost Per Lead would be $375, the estimated CPL $333). Compare the above campaign with this example, a telemarketing campaign. This time there is a total budget of $9,000 for a 2,000 list buy and outsourced telemarketing. Our assumptions: 20% response, 15% lead rate, 20% close rate with an ASV of $15,000. This would generate an estimated 12 sales for total revenue of $120,000, with a very respectable ROMI of 13. (The target CPL would be $375, the estimated CPL $145). Given these two scenarios, the telemarketing campaign would have a better return on the investment It is vitally important not only to use ROMI to evaluate investments before they are made, but also to test the assumptions following the campaigns. The actual response, lead and close rates are critical here. These rates will vary by campaign based on various factors, such as the quality of the lists. But to measure actual ROMI, companies need to have the appropriate campaign and sales tracking in their sales force automation (SFA) systems. With this sales tracking infrastructure in place, you can more accurately estimate close rates in future campaigns. So, for each campaign, the final analysis would include three ROMIs: Target, Estimated, and Actual.
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Powell, Guy, Return on Marketing Investment, RPI Press, 2003
Measurement is critical for marketing directors and their managers in today's world. It is critical for determining your investment in different marketing activities, and for the defense of your marketing budget as a whole. However, I generally advise companies to put these metrics in place incrementally, starting from the simplest ones, gradually building sophistication. Once in place, they are among the most powerful tools in marketing.
About i-OP i-OP creates lead generation programs that help marketers generate more usable sales leads, by improving the customer experience. We do this by building lead generation programs that integrate your email, direct marketing and telemarketing activities. These programs employ Web-based dynamic forms to engage your customers in a relevant dialog that quickly identifies and qualifies new leads. www.i-op.com