ROI in Business-to-Business Marketing

According to an October 2004 study by Patrick Marketing Group, 8% of marketers surveyed said accountability had increased in their marketing organizations over the last 24 months—and 59% of those said marketing programs must show a return on investment.

But that’s a daunting assignment for many business-to-business marketers. Just how do you gauge success in a multi-stage lead generation campaign?

Let’s say that your firm offers white papers, special reports, booklets and CDs to generate leads (a practice known in the trade as edu-marketing). There are several metrics for measuring this kind type of effort:

Inquires: If you send 1,000 sales letters to your target audience and 20 people mail back the business reply card requesting your free white paper, your response rate is 2%.

Cost per lead: Let’s say the printing, postage, production and mailing list cost to send out those 1,000 letters was $700. Divide $700 by 20, and you get a cost per lead of $35.

Cost per order: Now let’s say two of those 20 people place an order with your company for the product you are promoting. Divide $700 by 2, and your cost per order is $350.

Conversion rate: The conversion or closing rate is the percentage of inquiries that convert into sales. If you generate 20 leads and get two orders, your conversion rate is 10%.

Total sales: You generated two orders from the promotion. If they both ordered the same product and it costs $1,000, your total gross sales from the promotion are $2,000.

Brand image and awareness, company reputation: Extremely difficult to measure. Publishing edu-marketing materials undoubtedly builds awareness of your product and your company, but most marketers judge edu-marketing campaigns by easer-to-measure metrics such as inquiries and sales.

Sales force buy-in: Does the sales force distribute your edu-marketing materials and report that customers find the content useful? Are they able to close at least 10% of the sales leads generated by your edu-marketing campaign?

But the most important factor to measure is return on investment (ROI). Quite simply, we want to know that every dollar spent on marketing has returned to us two, three, even four dollars or more in sales.

The only kind of marketing that consistently demonstrates a significant, positive ROI is direct marketing. And edu-marketing is simply direct marketing built around the offer of free, valuable information.

Recently, there has been a trend in the advertising world towards direct response. Building brand is of concern to many marketers. But the economic realities of the past few years have caused marketing executives to change the way they are going about it. They have to be better than they used to be, and they have to justify their activities more thoroughly.

“Marketers want to know the actual ROI of each dollar,” writes Diane Brady in BusinessWeek. They want to know it often, not just annually. And increasingly they want a view of likely returns on future campaigns.”

To do this, they must employ strategies and tactics that produce measurable results. Direct response marketers have always known which programs are showing a direct impact on sales and which are not. Now traditional marketers are using the same techniques to strengthen their programs.

The difference between general advertising and direct response is simple to understand. Direct response ads are designed to generate a response from the target customer. To achieve this, the ad must contain three things:

1. A call to action

2. An incentive to respond (in edu-marketing, this is our free bait piece).

3. A response mechanism.

The call to action tells your prospect what you want them to do, the incentive that rewards them for the desired behavior, and the response mechanism they can use to reply.

It is a simple formula, but it must be executed properly to work. Simply asking someone to call for “more information” and offering a toll-free number is not enough.

The most successful marketers place primary importance on capturing and qualifying leads at every point of contact. These strategies help them to view marketing spending as an investment, not an expense. That’s the reason why market leaders advertising aggressively in difficult times. They understand the importance of strengthening their position and capturing market share when their competition is suffering.

Business-to-business marketers often see their challenges as distinctly different from marketers in other industries. The common claim is that their business is driven by personal relationships and long-standing deals between major sellers and buyers.

Barring major innovation, this would suggest a pretty bleak picture for anyone trying to improve market share. Yet every year, in nearly every industry, market share changes hands.

Good marketing begins with knowing your customers and responding to their wants and needs more attentively than your competitors do. You need to understand what activities are really driving your sales. The marketing department must have ways of benchmarking the success of their efforts.

An important part of this is securing feedback, from your advertising and marketing programs. It is different than it used to be. We all remember a time when the reader service cards in trade publications would serve as a barometer for how our spending was paying off. Today, your customers can visit a Web site in less time than it takes tem to fill in the reader service card.

You must develop a plan to implement tools and processes that allow you to learn from the actions and words of your customers and prospects. Some information will come directly from the sales force. Other information can be aided by technology. Technology can tell you which ads generate which calls and Web inquiries. Lead-capture technology, such as unique URLs and landing pages customized for specific offers, can build a database of names of callers and Web site visitors.

Online surveys are easy to deploy and can give you access to opinions and feedback that you are currently missing. Outbound telephone lead qualification can improve the quality of the leads that your sales team receives.

The tools at your disposal are better than they have ever been. Some new capabilities have evolved, but the ideas have been employed by good marketers for decades.

At its most basic level, advertising has always been about driving sales. Although percentage response is the simplest way to measure the performance of a direct mail package, it’s not the truest test. What you really want to know is: Was the promotion profitable? Did it make money? Lose money? Break even? So you can analyze not only number of replies received, but also gross sales and net profit generated.

Example: You use a lead-generating sales letter with reply card to generate inquiries for a $2,000 business service. Your letter generates a 2% response. That’s 20 replies per thousand pieces mailed. The cost of mailing the letter is $600 per thousand. To calculate the cost per inquiry, we divide $600 by 20 inquiries and get $30 sales per lead.

Let’s say 10% of 20 prospects buy the service. That’s two sales at $2,000 per contact for a gross of $4,000. Your profit per thousand is the $4,000 in gross sales less the $600 per thousand mail cost, or $3,400. To put it another way, you’re getting an almost 7.1 return on your investment ($4,000 sales divided by $600 mailing cost). For each $1 spent on direct mail, you make almost $7 in sales.

Another example: Let’s say we are selling a $149 software product via mail order. The cost to manufacture and ship the product is $15 per unit. Therefore, the profit is $149 minus $15, or $134 per unit sold. Now, we have to print and mail a direct mail package to get orders. Our cost for mailing is $700 per thousand. To calculate the number of orders needed to break even:

Break even = Mailing cost per thousand divided by profit per order

For our example:

$700 mailing expense divided by $134 profit per order = Break even on 5.2 orders per thousand pieces mailed

In terms of percentage response this comes to:

Therefore, we break even on the mailing with only 0.52% response rate. At a 1% response rate, we get $2 in income for every $1 spent on direct mail. At a 2% response rate, we quadruple our instrument every time we mail 1,000 pieces.

Robert W. Bly is a freelance copywriter specializing in direct marketing. This piece is excerpted from his new book, “The White Paper Marketing Handbook” (Racom Communications and Thomson, 2006). Reprinted with permission of South-Western, a division of Thomson Learning: www.thomsonrights.com. Fax 800-730-2215. Copies are available online at: http://www.racombooks.com.