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These days, marketing initiatives without a solid business case based on real-world ROI projections don’t see the light of day. But most metrics that marketers live by – delivery and open rates, clickthroughs, bounce rates, conversion rates, etc. – don’t have much value to non-marketing decision makers. So how do you correlate marketing success in terms that the C-suite appreciates, like net new revenue, increasing gross margins, and higher profits?

Here’s a fairly simple formula that Sierra uses to help connect the dots and deliver an ROI calculation that bench tests a campaign before the first dollar is spent and delivers the financial metrics that executives are looking for:

(C x D x E)+ B

The formula may be easy, but filling it in is a different exercise entirely. To begin with, you’ll need to challenge your team or client to fill in the following variables, using profit dollars, not revenue dollars. All we care about as marketers is generating profitable growth, not just growth.

a. _____________ Sales team’s average conversion rate – if given 100 prospects, how many do they historically convert to customers?

b. _____________ Average profit for month #1 of net new customer – Due to installation or start-up fees, inception fees, etc. a new customer may pay more in the first month than following months. If there are no one-time expenses, take whatever you figure you have in item C and write it here.

c. _____________ Average net new profit per month per unit of measure – this could be seat licenses, facilities, contracts, or products.

d. _____________ Average number of units per customer – How many of these units do you sell on average for each net new customer?

e. _____________ Average customer lifetime value in months – Some customer relationships past months, others may last decades. If this average isn’t known, use 36 months which is the standard value for Customer Lifetime Value calculations.

Let’s plug in some hypothetical numbers to show how this works:

“ISV” is a software developer producing project management software for small to mid-sized businesses on a per-seat basis. Their average customer is a 12 seat license holder that nets about $25 per seat per month for ISV. This product is fairly new, so long-term lifetime value isn’t known. We’ll assume it’s 36 months. Lately, ISV estimates it has has been closing about 25 out of every hundred demos they provide within 30 days of the demo date.

Here’s how the numbers fall into place:
A. Sales team’s average conversion rate = 25%
B. Average profit for month #1 of net new customer = no start up costs, same as month two and beyond
C. Average net new profit per month per unit of measure = $25
D. Average number of units per customer = 12
E. Average customer lifetime value in months = 36

The formula would then be as follows:

($25 x 12 x 36) + $300 = $11,100

Every new customer for ISV means $11,100 of profit for the company, on average. Not bad in a volume play like ISV’s.

So what about the value for A? That comes into play when it’s time to develop the business case and ROI models for any new marketing initiative. We know that 25% of any prospects that request an online demo convert to customers. That’s one conversion for every four qualifies leads.

By applying the formula above, ISV’s marketing leaders can remove much of the guesswork from the go/no go decision: any marketing support activity that costs less than $11,000 to deliver every four qualified leads should cross the 100% ROI threshold and net positive return in the end.

If ISV embarks on a $60,000 marketing support campaign, it would need to generate 24 demo requests (and thus six new customers expected to generate a total value of $66,600 to the company) to deliver 100%+ ROI.

The question then becomes which tactics should be executed within that $60K budget to deliver the most leads, and what can be done to increase the conversion rate? In our opinion, the question should never be IF a campaign can break the 100% threshold, but by how many times that magic number can be bested using the dollars allotted.

Have a different way to determine ROI or see a flaw in our formula?  Post your thoughts below!