Marketing ROI for Dummies – Part Two

So, it’s now time to get constructive about measuring ROI(return on investment) in marketing. And it’s not about the standard of your sales team or finance. 

You need both a smarter and more realistic way to measure impact. Or, just don’t do it. Just don’t. 

If you’re selling 18 U/S/W at 200 locations in only one chain, your velocity may go up with marketing investments. 

But what if your ‘marketing’ killed it? Then, you might double velocities locally. With a corresponding lift of 18 U/S/W at 200 locally concentrated stores, it would take roughly seventeen weeks to break even on your $50K marketing investment. Not bad. Actually, killer. 

But this would be highly aberrant. Your velocity will likely go up no more than 25% at most or 4.5 U/S/W. Then, the timeline to break even would be? 69 Weeks!! Hey, it’s better than a decade, right? 

None of this is a reason NOT to do paid out-of-store marketing (unless your (break-even project generates little repeat purchase). Both of these timelines are feasible. Both of them are justifiable, IF a) you are not spending core operational cash on your marketing(!) and b) you anchor your evaluation of the marketing way down the line past the break-even timeline. 

This leads me to the critical distinction between leading and lagging marketing KPIs, against which you should measure ROI… Thanks to modern platforms, you can now measure pre-and post-brand awareness levels at the metro or state levels using tools like SurveyMonkey (yeah!). This is a huge boon to early-stage brands. Brand awareness should be 2-4 x your HH penetration if you want to create magical upward suction on your retail velocities. Brand awareness, though, is a leading indicator of a successful campaign (when awareness grows for a strong offering, you can measure it quickly, and sales grow as well eventually). Awareness, however, doesn’t guarantee sales on any particular timeline. And depending on how adoption behavior works in your category, the actual sales win of adding each new household might take months to unfold, long after your CFO has questioned the value of the year’s marketing spend. 

In DTC, the data is so precise that one can convincingly create models of customer-lifetime value stretching out a year or two into the future. Believe it or not, nothing stops you from doing the same for a retail-driven CPG brand. 

The most important KPI is a lagging indicator of marketing success. The incremental, sustained HH penetration increase is inferentially tied to your marketing activities. It should be new households not attributable to standard organic rates of HH acquisition (caused by organic discovery and word-of-mouth). Take this number and multiply it by the average $ value of a new HH in 12 months. Whoa. You have your estimated revenue ROI based on measured HH penetration increases.  It sounds more complicated than it is. It’s not direct, but it’s perfectly fine to measure relative growth over time. 

This golden KPI requires that you estimate the baseline rate at which you add buyers (i.e., households) at a specific chain (best data for this is from a chain with loyalty card data). 

Then, you can measure the ‘increase’ on top of that expected trend. You could model the statistical validity too, but for a fast-growing small business, this probably won’t work. Instead, you simply need to estimate (gasp!) the incremental financial value. You’re doing it not with a house of statistical cards but with simple math built on top of a directly measured lift in new buyers. 

The result allows you to measure the relative lift indirectly vs. the actual sales increase your marketing caused (no one can do this, though many fancy models purport to do this). 

Get scrappy, folks. And remember, field marketing (for weekly and impulse purchased categories) remains the fastest way to build offline awareness and penetration. Not ads. Not in the 2020s. Not for early-stage brands.

Interested in hearing more? Join me in the Top Tips for Effective Early-Stage Consumer Marketing webinar starting in a few hours! You can’t be there? No problem, we’ll send the replay.

Dr. James Richardson

[email protected]