Planning ROI? Turn the Funnel Upside-Down

Many marketers use a funnel to illustrate the progression from prospect to buyer because the narrowing graphic neatly shows the narrowing segments of the sales progression. Most construct the funnel by starting at the top and working their down chronologically through the sales cycle.  They apply projected percentages to each stage, funnel down to a number of buyers, calculate revenue based on average sale, and determine ROI based on promotion costs.

Many marketers use a funnel to illustrate the progression from prospect to buyer because the narrowing graphic neatly shows the narrowing segments of the sales progression. Most construct the funnel by starting at the top and working their down chronologically through the sales cycle. They apply projected percentages to each stage, funnel down to a number of buyers, calculate revenue based on average sale, and determine ROI based on promotion costs.

A different approach to using the funnel starts at the bottom. It has its roots in the tried and true direct response principles of Customer Lifetime Value (LTV) and Allowable Acquisition Cost (AAC). Because these two principles are the components that make up ROI (with LTV as the “R” and AAC as the “I”), the upside-down funnel becomes a useful tool for planning and creating ROI scenarios.

Start with the value of a customer. Set a target ROI and calculate your AAC. For this illustration, let’s assume that a buyer is worth $300 and we set our revenue target ROI at 3:1. This results in an AAC of $100.

See Equation No. 1 in the media player at right.

As you move to the lower portions of the upside down funnel, you apply assumptions about the conversion rates at each stage. For example, if you assume that 30 percent of all qualified leads will convert to buyers, then the Allowable Cost per Qualified Lead is $30.

See Equation No. 2 in the media player at right.

Similarly, you can calculate the Allowable Cost Per Lead, Per Response, and Per Impression all the way to the top of the upside down funnel. So if you estimate that two-thirds of your leads will be qualified, your Allowable Cost per Lead is $20, and so on.

When you reach the bottom of the upside-down funnel, it becomes particularly useful for media planning. You can determine the required response rates from each medium under consideration by:

  1. Dividing the cost of the media by the Allowable Lead Cost to determine the number of leads required from each medium
  2. Dividing the number of leads required by the circulation or number of impressions associated with the medium

For example, see Equation Nos. 3 and 4 in the media player at right.

Then, do a gut check. Is that response rate attainable? Don’t know? Test it. A carefully controlled small test will quantify your assumptions at each point of the upside-down funnel.

Create Powerful Direct Mail Marketing

Increasing your ROI is the goal for all direct mail marketing. So, how can you create powerful direct mail to drive that improved ROI? You won’t believe it is this simple, but just add scent

Increasing your ROI is the goal for all direct mail marketing. So, how can you create powerful direct mail to drive that improved ROI? You won’t believe it is this simple, but just add scent.

Your sense of smell is extremely powerful. A scent can elicit vivid memories that take you to your mom’s kitchen growing up, to the beach or just about anywhere you have been before. Our sense of smell is the most powerful sense, even above sight and sound. The location of our sense of smell, in the same part of our brain that effects emotions, memory and creativity, is the reason we react so powerfully to it.

To harness that power with your direct mail and make people respond is a marketers dream. In order to do that effectively, you will need to take the time to figure out how to tie scent to your marketing message. If you create a message and then incorporate a smell that is not compatible, you have doomed the campaign. They must be symbiotic, both with the message and the visual images.

How can you harness that power for your direct mail? Here are a few things to start with:

  • Identify the message: This is not just conveyed with words, but also with images.
  • Identify the emotion: What are you trying to make people feel?
  • Create the call to action: This needs to be very specific and easy to identify.
  • Create the scent: Now decide what scent will enhance all of the above and drive them to respond.

The first thing to do once you have completed the above is to gather a group of people together to bounce these ideas off of. The group should not be employees of the company. They need to be outsiders who are seeing this for the first time and can give you honest feedback. If any one of the four is out of whack, your mailer will not get the desired response.

Examples of scented mailer ideas:

  • Imagine for a moment that you are a company that needs to sell brownie mix. Of course you will put pictures of brownies on the mailer, but the real good smell of the brownies will invoke emotions and drive the action to buy the mix.
  • Imagine you are a garden center and want to sell more flower seed packets. Add a floral scent to really pack a punch.
  • Imagine you sell a cleanser that gets rid of skunk smell. You can use the scent of a skunk to remind people how horrible it is. I would advise you to use only a small amount. No need to stink them out of their home.

The best part about using scent is that you can use either good or bad scents depending on how you want to spin it. Sometimes the better choice is the bad smell. It reminds people of the bad things that can happen when they do not use your product or service. Do not be afraid to reach a little with your scent connection. Just make sure to fact check it with other people. If it is too far out there, you may lose the desired effect.

Talk to your direct marketing company about what they have created or seen done. To really make the campaign perform well, you need to get very creative. By harnessing the power of scent, you can take your direct mail campaign to the next level. Not only will you increase your ROI, but you can drive social engagement when you capture the attention as well as the imagination of recipients.

Marketing ROI in B-to-B: Why Is It So Hard, and What Can We Do About It?

The other day, I had the pleasure of discussing the challenges of marketing ROI with Jim Obermayer, CEO and executive director of the Sales Lead Management Association, on his Internet radio show. Our conversation got me thinking: Why is the Holy Grail of marketing ROI so tough to achieve in business markets? And what can we do about it?

The other day, I had the pleasure of discussing the challenges of marketing ROI with Jim Obermayer, CEO and executive director of the Sales Lead Management Association, on his Internet radio show. Our conversation got me thinking: Why is the Holy Grail of marketing ROI so tough to achieve in business markets? And what can we do about it?

The “why” part is pretty clear: Business buying cycles tend to be long, and involve multiple parties at either end. Marketers produce campaigns to generate an inquiry, and then qualify that interest with a series of outbound communications, and finally pass the qualified lead to a sales rep for follow up. From that point, it can take more than a year to close, and involve a slew of people on the customer side, from purchasing agents, to technical specifiers, to decision-makers.

The sales process is also complex, involving not only the face-to-face account rep, but sales engineers, inside sales people, and others who help get all the buyers’ questions answered, negotiate the terms, deliver, install and trouble-shoot the product, and whatever else needs to be done to satisfy the customer’s needs.

So, consider the difficulty of establishing the numbers that go into an ROI calculation in this kind of situation. Just to put a definition behind the concept: ROI, meaning return on investment, subtracts the marketing expense from the revenue generated, and then divides by the expense, resulting in a percentage that shows how much net return was produced by the investment.

But in this lengthy, multi-party, multi-touch selling situation, the “investment” part can be pretty tough to get at. Frankly, it’s a bit of a cost accounting nightmare, assigning an expense number to each sales and marketing touch that resulted in a particular closed deal. This brings up issues of variable versus fixed costs, marketing touch attribution—the list goes on and on.

Worse, the “return” part presents its own challenges. First problem is connecting a particular lead to a particular piece of revenue, which means carefully tracking a lead over its multi-month process toward closure.

Further, if a third-party distributor or agent is working the lead, it’s very likely that revenue results reporting is not part of the deal. With good reason: The distributor considers the relationship with the end-customer as his, and none of the manufacturer’s business. So the marketer who generated the lead often has no visibility into the associated revenue. Even if the deal was closed by a house rep, you’re looking at the endless squabble between sales and marketing about who gets the credit.

You can’t blame B-to-B marketers for throwing up their hands and relying on interim metrics like response rate and cost per lead. Especially when marketing staffers come and go, and may not even be in the job when the lead generated a while ago finally converts to a sale.

This is why I was so pleased at the arrival of the new book by Debbie Qaqish, The Rise of the Revenue Marketer, where she urges marketers to raise consciousness of their role in driving revenue results. “The revenue marketer uses the language of business,” she says. Examples of the metrics she recommends for revenue marketers include funnel velocity, sales conversion rates, pipeline revenue and campaign ROI.

My conclusions from this investigation:

  • Begin with a deep conversation with your finance counterparts to get at the best way for marketing to serve your company’s financial interests, like:
    • The right approach to assigning sales and marketing expense.
    • Whether to calculate returns based on net sales or on gross margin.
    • Decide which expenses are fixed and which are variable.
    • How to attribute the contribution of sales and marketing touches across the sales cycle.
    • Setting the ROI “hurdle rate” needed to support your company’s profitability goals.
  • Figure out where to get the revenue and expense data—not everything will be in your CRM system. Your finance counterparts should be help you source the data you need.
    • If a distribution channel party is a roadblock to revenue visibility, conduct a “did you buy” survey into accounts to which qualified leads were passed.
    • If the account-based revenue is captured internally, try supplementing your CRM system with data match-back to connect campaigns to sales, circumventing the arduous process of following a lead along its complex conversion process.
  • Set clear objectives for each marketing expenditure, so you know how to declare ROI success when you see it.
  • Get inspiration from The Rise of the Revenue Marketer, Debbie Qaqish’s innovative thinking on the role of marketing in B-to-B.
  • Get an education from Jim Lenskold’s 2003 classic, Marketing ROI: The Path to Campaign, Customer and Corporate Profitability.
  • If to many obstacles are in the way, fall back and rely on “activity-based” metrics like cost per inquiry and cost per qualified lead, which tend to be pretty easy to calculate, being mostly within the purview of marketing.

A version of this article appeared in Biznology, the digital marketing blog.

Social Media and ROI: Strange Bedfellows, or a Match Made in Heaven?

Unless you’ve been hiding under a rock during the past few years, you’ve noticed that social media has become the new norm in our lives, both personal and professional. For businesses large and small, what was initially a curiosity has rapidly emerged as a highly effective tool for interacting with their customers and prospects. … As interest and investment in social media continue to grow, it’s inevitable that corporate stakeholders and bean counters across corporate America will begin to clamor for marketers to demonstrate ROI …

Unless you’ve been hiding under a rock the past few years, you’ve noticed that Social Media has become the new norm in our lives, both personal and professional. For businesses large and small, what was initially a curiosity has rapidly emerged as a highly effective tool for interacting with their customers and prospects. In fact, according to Emil Protalinski in an article on ZDNet.com, a whopping 68 percent of small businesses say they use Facebook as their main marketing tool. Wow!

As interest and investment in social media continue to grow, it’s inevitable that corporate stakeholders and bean counters across corporate America will begin to clamor for marketers to demonstrate ROI for their firm’s social media activities. And believe me, Social Media spending will most certainly continue to grow. According to an article on CMOSurvey.com, in the next five years, marketers can expect to spend 19.5 percent of their budgets on social media, which is almost three times more than the current level. That’s a lot of shekels. This year alone, in fact, marketers are already spending 10.8 percent of their budgets on it.

With increased budgets will undoubtedly come increased scrutiny. But as is the case with most things, the devil is in the details, and measuring social media success is much easier said than done. Unlike most marketing activities, you see, which can be traced back to number of leads generated, customers acquired or sales made, Social Media KPIs are anything but clear cut.

Think about it for a moment. How much is a Facebook “Like” worth, anyway? How much would you pay to get a new follower or to be mentioned on Twitter? How much does each LinkedIn connection contribute to your company’s bottom line? Given this environment, it’s not a big surprise that there are some who simply shrug their shoulders and say that trying to pin ROI to Social Media is a complete waste of time. I don’t necessarily belong to that school of thought, but I do think that Social Media is an entirely new beast that needs to be viewed in a manner distinct from other places marketers spend their money.

Fact is, social media is not simply another advertising channel with a specific budget that can be attributed to a specific group of sales or other traditional marketing KPIs. This is because social media can be used by a firm for many different activities by different departments, many of which are not exactly under marketing’s purview or control.

For the customer service team, using Social CRM technologies and listening platforms, Social Media is an incredible tool that can be used to listen to and engage with customers on the Web, supplementing their phone bank and other customer service activities. For the sales team, Social Media presents yet another source of red-hot leads to be contacted—prospects that have expressed interest in their firm’s products or services and can be followed up on in real time. For marketers, social media may play a role in the department’s content marketing strategy, enabling them to disseminate awesome content to a large base of customers and prospects at minimal cost. And for a PR department, social media represents a unique way to broadcast company press and news releases to the press and public in a continuous feedback loop.

But as a direct marketer by trade, I must admit that I have a difficult time accepting that any activity run by the marketing department can avoid the inevitable ROI discussion. Sure, most ROI calculations I’ve seen in run-of-the-mill PowerPoints are 50 percent math 50 percent BS … I should know because I’ve made quite a few of them in my day! But that being said, I do think we’ll eventually get there. And I’m not alone: A recent study published by Mediabistro demonstrated that 64 percent of executives believe that social marketing will eventually produce a legitimate return on investment for their firms.

In many ways, this lack of clarity is a result of Social Media still being in its infancy to a large extent, and regarding ROI we’ve still got a ways to go. So what do I think the answer will ultimately be? I’m not completely sure, but let me leave you with this.

Because Social Media is being used by different departments with different budgets for different things, when evaluating social media a firm needs to grasp a firm understanding of how Social Media is being used within the organization. For each department, success will need to be measured and tracked differently based on performance metrics that are relevant to stakeholders in each of those departments. Sales teams, for example, should use metrics relevant to salespeople, such as number of leads generated, conversion rate on those leads and so on. Customer service departments, not surprisingly, operate on entirely different systems and, therefore, need to evaluate Social Media according to an entirely differ set of KPIs. Ultimately, each department’s success measurements for social media need to be based on their specific goals and metrics.

Okay, I’m out of space so I’ll leave it there for now. Have you tried to work out KPIs or perform ROI calculations for your Social Media program? If so, I’d love to see what you’ve come up with, so let me know in your comments.

—Rio

Point-Counterpoint Emerges Over the ROI of Social Media

It started out innocently enough.

Earlier this month, I posted a simple question online about how marketers measure the ROI of social media and was blown away by all the responses I got.

The question was posted on eM+C contributor Jim Gilbert’s popular LinkedIn Group, Social Media Marketing Questions & Answers.

It started out innocently enough.

Earlier this month, I posted a simple question online about how marketers measure the ROI of social media and was blown away by all the responses I got.

The question was posted on eM+C contributor Jim Gilbert’s popular LinkedIn Group, Social Media Marketing Questions & Answers.

Perhaps the most interesting response came from an exchange that took place in the discussion section of the LinkedIn Group between Steve Goldner, a social media/social network consultant who goes by the name Social Steve, and Doug Garnett, the founder and CEO of Atomic Direct, a brand DRTV agency. To me, it exemplified the ongoing battle between traditional direct marketers and new media executives when it comes to how to measure social media ROI.

Goldner started the discussion by posting a link to an article he wrote titled, “Measuring the Value of Social Media.” He noted that the article explained there’s a way to measure the ROI of social media, but marketers should be careful not to use “sales metrics” when measuring it.

That got Garnett thinking. “Steve’s article seems to suggest that ‘a metric of tweets, for example, is a valid ROI analysis. I don’t think that’s at all related to ROI,’ he wrote.

He went on: “Having lots of tweets just might contribute to ROI. OR, it might be entirely tangential. You might have higher ROI with fewer Tweets if they’re of better quality.”

Garnett suggested that marketers stick with it and look for true ROI from social media, which he described as “increased sales (at some reasonable point) or same sales with lower marketing costs.”

Goldner countered that what Garnett considers true social media ROI — increased sales (at some reasonable point) or same sales with lower marketing costs — is really lead generation and that “social media should be measured in lead generation and increasing the probability of sales, not sales. Same is true for all other marketing endeavors.”

Garnett countered, “[I] guess one place we part ways is the goal of marketing. The advertising and communication goals are not necessarily focused on sales. But to me, marketing is the process of bringing an entire range of efforts (yup, the ‘4P’s’ are still quite valid) together to create revenue, profit, and market share.”

To read the whole discussion, click here.

I guess it all really depends how you look at it. Coming from the direct marketing world, I hear what Garnett is saying. But as I get more immersed in new media as editor of eM+C, I see Goldner’s point as well. So, I guess I haven’t made up my mind yet about what is the right way to look at it. What’s your take on the ROI of social media? Or on the role of marketing in general? Let’s start a similar discussion here.

Point-Counterpoint Emerges Over the ROI of Social Media

It started out innocently enough.

Earlier this month, I posted a simple question online about how marketers measure the ROI of social media. I was blown away by all the responses I got.

The question was posted on eM+C contributor Jim Gilbert’s popular LinkedIn Group, Social Media Marketing Questions & Answers.

It started out innocently enough.

Earlier this month, I posted a simple question online about how marketers measure the ROI of social media. I was blown away by all the responses I got.

The question was posted on eM+C contributor Jim Gilbert’s popular LinkedIn Group, Social Media Marketing Questions & Answers.

Perhaps the most interesting response came from an exchange that took place in the discussion section of the LinkedIn Group between Steve Goldner, a social media/social network consultant who goes by the name Social Steve, and Doug Garnett, the founder and CEO of Atomic Direct, a brand DRTV agency. To me, it exemplified the ongoing battle between traditional direct marketers and new media executives when it comes to how to measure social media ROI.

Goldner started the discussion by posting a link to an article he wrote titled, “Measuring the Value of Social Media.” He noted that the article explained there’s a way to measure the ROI of social media, but marketers should be careful not to use “sales metrics” when measuring it.

That got Garnett thinking. “Steve’s article seems to suggest that ‘a metric of tweets, for example, is a valid ROI analysis.’ I don’t think that’s at all related to ROI,” he wrote.

He went on: “Having lots of tweets just might contribute to ROI. OR, it might be entirely tangential. You might have higher ROI with fewer Tweets if they’re of better quality.”

Garnett suggested that marketers stick with it and look for true ROI from social media, which he described as “increased sales (at some reasonable point) or same sales with lower marketing costs.”

Goldner countered that what Garnett considers true social media ROI — increased sales (at some reasonable point) or same sales with lower marketing costs — is really lead generation and that “social media should be measured in lead generation and increasing the probability of sales, not sales. Same is true for all other marketing endeavors.”

Garnett countered, “[I] guess one place we part ways is the goal of marketing. The advertising and communication goals are not necessarily focused on sales. But to me, marketing is the process of bringing an entire range of efforts (yup, the ‘4P’s’ are still quite valid) together to create revenue, profit, and market share.”

To read the whole discussion, click here.

I guess it all really depends how you look at it. Coming from the direct marketing world, I hear what Garnett is saying. But as I get more immersed in new media as editor of eM+C, I see Goldner’s point as well. So, I guess I haven’t made up my mind yet about what is the right way to look at it. What’s your take on the ROI of social media? Or the role of marketing in general? Let’s start a similar discussion here.