For those marketers with limited financial skills the first thing you need to know is that marketing spend is accounted for as fixed cost (ask your CFO). It’s fixed because when you sell something to a customer you usually don’t incur variable costs associated with marketing. There are exceptions like rebates and market development funds, but you’re likely to have the bulk of your marketing budgeted accounted as a fixed cost.
To keep it simple, let’s look at a formula that connects how much is spent with how much you get…
Marketing Return on Investment = Revenue Booked / Marketing Spend
Notice that revenue is represented by Revenue Booked and not Revenue Recognized. The reason for this is to connect the marketing investment with the overall revenue booked because for large deals (or SaaS subscriptions) revenue could be recognized over several years.
As an example if your annual revenue was $50M and your marketing spend was $5M, your Marketing ROI = 50/5 = 10. Clearly a higher revenue to marketing spend results in a better Marketing ROI. If your competitor has revenue of $50M but is spending $10M on marketing (MROI = 5) you would be twice as efficient.
The incremental impact of marketing can be measured year over year with this approach. Building on the previous example, if your marketing budget increased in the following year to $6M and revenue increased to $80M your MROI = 80/6 = 13.3, an overall increase in MROI from 10 to 13.3.
So what’s a good number for you? I don’t have industry specific numbers (anyone who does please send me a link) but you should consider benchmarking your MROI with your nearest competitors. A relative comparison is a good start but take care to measure apples to apples as best you can. Also consider that if you have mature products in a mature market you may have a higher MROI that doesn’t transfer to a new product in an emerging marketing where a higher marketing spend (and by extension a lower MROI)may be necessary.
Going one step further you could analyze MROI for new license revenue versus recurring revenue to see how you measure up. You may say that recurring revenue shouldn’t be counted. Not so fast. No customer, no recurring revenue. If you do things like newsletters and customer events that are focused on existing customers (hopefully supporting a customer retention goal) they would count. I would expect your MROI to be significantly higher if you are doing a good job of solving market problems and providing sound customer support.
Controversial? For some, no doubt. But for others it’s a meaningful starting point.
What’s your MROI?
What’s the minimum MROI you need to maintain current revenue?