- Is your marketing working?
- How do you know?
These are two simple questions I ask every single business executive, and most can’t answer both. The reason is always the same: “I am an ‘X’ and I want to spend more time doing ‘X-ing’.” Lawyers want to spend time with their clients. Doctors want to spend time with patients. Manufacturers want to spend time with their product. And so on.
Unfortunately, when you signed up to be a leader in your business, you signed up to do more than employ your primary skillset. If you don’t have people buying whatever it is that you sell, you won’t have a business. Don’t leave marketing to chance by not monitoring its effectiveness. Fortunately, it is likely that you can effectively monitor your marketing efforts in as little as five minutes a month using the Return to Cost ratio. (R:C)
R:C is ultimately a simplified version of Return on Investment. You divide your gross sales generated from marketing by the total cost of your marketing. There are only two numbers needed. Let’s investigate each one and see where people run into problems.
R:C = Return From Marketing / Marketing Costs
Return From Marketing
For most people, the No. 1 factor that gets in the way of calculating R:C is not knowing where their sales are coming from. With today’s technology, there really is no excuse not to have a system in place to collect this information.
From my experience, e-commerce does the best job of tracking this information, because it is all automated. There are also call-tracking services to assist with phone conversions. If you don’t have an automated system, you probably have at least some sort of customer management system. Just like they ask for the customer’s name and contact information, your customer service rep should ask where they found out about you. The bottom line is: tracking is doable and will probably require only a one-time effort to set up the system.
If you hire an agency for all of your marketing needs, it is relatively easy to calculate marketing costs. Use the total amount that you pay the agency plus any extra external costs, such as ad spend, directory fees, etc. Do not try to determine what portion of internal costs are attributable to marketing. This will only make your calculation harder, which means you are less likely to perform it on a monthly basis.
If a significant amount of your marketing is performed in-house, this is where you need to rein-in your demand for detail. If you try to get too precise, the process is going to become too cumbersome, and you will end up not making the calculation on a regular basis. Even executives at Fortune 500 companies use generalized metrics to make decisions. Here are a few tips for calculating marketing costs:
Include all external costs dedicated to marketing.
Include any internal resource that is 100% dedicated to marketing.
Determine which internal costs you could get rid of or significantly lower if you were to perform zero marketing. For example:
Rent and utilities are unlikely to change as your marketing budget changes. You would incur these costs in any case; therefore, do not include them in your calculation.
You might have an assistant who costs $5,000 in salary and benefits per month. If the assistant spends 50% of their time on marketing tasks, include $2,500 in your monthly marketing costs calculation.
Be consistent in the formula you apply each month unless something significantly changes.
When To Get More Detail-Oriented
Having a detailed breakdown that shows where your profit is coming from is very beneficial. Even though we don’t recommend it on a monthly basis for most businesses, we do recommend a deep-dive once a year. However, there could be times throughout the year when you might need to troubleshoot your R:C. These are some possible scenarios, but also note that these are some of the reasons for tracking R:C:
Your R:C is lower than normal.
- Is this because your costs went up, your return went down, or both?
- Is this seasonal?
- Are there new competitors?
You realize your R:C is lower than the industry standard.
- Are you charging enough?
- Are you less efficient than your competitors?
- Is your marketing under-performing?
You want to be more aggressive and aim for a higher R:C.
- Track the R:C for individual campaigns so you know which are over/underperforming and where to spend more money.
What Is A Good R:C?
(Example: A 5X R:C means that if you spend $1,000 on marketing, you should generate $5,000 in gross sales.)
An R:C of:
2-3X: Would generally be considered a poor return unless it is for a brand-awareness campaign and you are trying to profit from volume sales. Big brand television ads will often fall into this category.
4-6X: Not a terrible return and generally considered the benchmark for actually making a profit.
7-10X: Usually established campaigns that are performing well. (After checking over 40 agency websites from our internal marketing study, this is the range of return most often advertised.)
10-20X: Campaigns that are leading their industry or experience very weak competition.
20X or More: Campaigns that are exceptionally well targeted. One example would be email campaigns targeting previous customers in order to seek a repeat purchase.
About the Author: Adam Draper is owner of Gladiator Law Marketing, an agency dedicated to helping lawyers and other professional service providers connect with clients.