Chase Your Leads, Not Your Tail.

Using Sales Data to Measure Marketing Return on Investment

Most executives think the acid test of any marketing program is in the bottom line. Period. For them, the point of spending money on marketing is closing sales - not brand building, product positioning or any other communication objective.

To a boss like this (probably most bosses), how do you prove that your individual marketing tactics are worth the investment? Here's how one small company, with a limited budget, solved this marketing return-on-investment (ROI) puzzle.

Curiosity Saved This Cat

CopyCat, a fictitious name, but a true story, sold products made by a major copier manufacturer. They faced stiff price competition from a slew of distributors who were backed by even larger manufacturers with better-known brands and bigger marketing budgets. CopyCat's customers demanded quality and service, and loyalty meant nothing to them if they could save a few pennies. Because their market was so tight, their customers so demanding and their company so small, CopyCat had to get maximum value for every dollar spent on marketing. In other words, they had to justify their marketing efforts out of economic necessity

CopyCat's receptionist asked every prospect who called, "How did you find out about us?" The answer to this question and three others - "What's your name and company?" "Are you a current customer?" "Are you interested in a copier or fax machine?" - she recorded on a simple paper form.

The goal of collecting these data was to determine how fruitful CopyCat's marketing was. By asking questions in "real time" when the prospects called - not calling back several weeks or months later - CopyCat was able to get better, more accurate data to answer these marketing ROI questions:

* What percentage of the leads resulted in sales?

* How many leads did each marketing tool produce?

* Which marketing tool produced the best leads - the ones that were most often converted into sales?

* Which marketing tools provided the most and the least value (cost per lead, or cost per sale)?

To answer these questions, the sales and marketing functions were viewed as a whole. Each tactic was tracked by the number of leads it produced and number of sales that resulted.

[TABULAR DATA OMITTED]

CopyCat's ROI Paw Prints

CopyCat took three steps to document its marketing ROI. First, its managers determined which customers bought what products. Second, they summarized the year's worth of lead and sales data the receptionist collected; and third, they examined the costs of generating each type of lead. Here's how they performed each step.

Step #1 Determine Who Bought What

CopyCat's sales manager went through the leads and tagged the contacts who actually became customers for a copier, fax machine or both. This took several days of pulling customer records, updating the tracking form and verifying each lead one at a time. Not a quick task, but an essential one.

Step #2 Make the Mute Data Speak

This step required CopyCat to take their sales records, enter them into a computer spreadsheet, crunch the numbers and begin looking for trends and insights. It sounds more complicated than it is.

To keep things simple, each line of data represents one contact or prospect. Each column represents one tracking variable - for example, whether the contact was a customer or prospect, the source of the lead ("How did you find out about us?"), whether the contact made a purchase and, if so, what was purchased. The goal was to summarize the numbers in one understandable chart. Below is what the chart looked like:

From the completed chart, CopyCat drew six important conclusions:

* Over one full year, the company received on average 14.5 leads per week - this figure gave them a good idea of the "pace" of new business opportunities.

* Sixty percent of the company's leads were for copiers and 43 percent were for fax machines. Only 3 percent of the contacts wanted information about both copiers and fax machines, perhaps an opportunity for more cross-selling.

* Most leads came from sales reps using tried and true prospecting methods; close behind this category were leads from current customers.

* Although many manufacturers' leads (135) were generated by advertising paid for by those manufacturers, these leads were unproductive for the effort they required (only 2 were converted to sales).

* Almost one in five contacts (17 percent) bought something. The best closing ratio, however, was with current customers (33 percent). The worst closing ratios came from brochures (0 percent) and manufacturers' leads (1 percent).

* Most actual sales came through leads that were generated by sales reps and current customers.

Step #3

Determine the Cost to Make Each Sale

Here's where CopyCat determined their marketing ROI. They had spent almost U.S. $60,000, a very significant portion of their marketing budget, on advertising in two business-to-business directories: the Yellow Pages and the Donelley Directory. But they could trace only 15 percent of their leads - and only 14 sales - to these sources. When overhead and inventory costs were factored into the equation, CopyCat determined that they had spent several thousand dollars to sell each copier and fax machine through this channel.

We're not suggesting that there is anything wrong with directory advertising. For many businesses, those books are essential. But for CopyCat, the amount of money they spent on directory ad space didn't produce the results they needed to justify the cost. Maybe there was something wrong with the ad copy or layout. Maybe it was placed in the wrong part of the books. Other competitors may have had some edge over this distributor in this channel. But the "why" is not so important here. The point is that this kind of advertising wasn't providing adequate return on investment, and the marketing plan would have to be redesigned.

Direction for a new plan came from the realization that the company was getting its best leads from existing customers. Yet CopyCat had no newsletter or formal, ongoing communication with those customers. In other words, CopyCat generated most of their best leads from this source without spending any marketing dollars communicating to existing customers. But in a competitive market like theirs, fortunate blunders are usually short-lived. CopyCat realized that by not communicating with their customers, they were overlooking their most valuable marketing resource.

After the CopyCat owners evaluated each of the company's marketing tactics, they decided to spend more marketing dollars on a customer newsletter and to buy less directory advertising space. To make this decision, CopyCat did nothing more than consistently gather fundamental data and present them in a useful way. The steps they took allowed them to trace the tactics that actually generated sales.

Getting Your Boss to Purr About Your Marketing ROI Results

Why haven't most companies duplicated CopyCat's marketing ROI system? It could be because their marketing and sales departments don't talk with each other as much as they should, but our experience tells us that the marketing ROI problem is a more fundamental one - many companies have only a foggy idea how their leads are qualified and closed.

For marketing departments to be most effective, they should glean ROI insight from downstream sales data. After all, the sales staff is in the best position to discover which tactics generate the leads that will most likely yield sales. On the other hand, the sales team should get direction from upstream marketing activity. In every marketplace, some tactics will always produce more fruitful leads than others, and this crucial insight should help marketing teams focus their efforts on cultivating those lead sources with the most sales potential.

Clearly, a number of factors affect the sales equation. Things such as sales staff experience, brand recognition, price and other marketplace variables make it difficult to guarantee any one way to transform leads into sales. But when a company tracks leads and analyzes data as CopyCat did, not only can they prove which marketing tactics are working, they also can improve their sales.

Lloyd Corder, Ph.D., is vice president, marketing research and leadership communications. Ketchum, Pittsburgh, Pa. He also serves on the adjunct communication faculties of the University of Pittsburgh, Penn State University and Chatham College. He can be reached at [phone] or at [e-mail].

Richard Tourtellott is a senior researcher at Ketchum, Pittsburgh, Pa. He can be reached at [phone] or at [e-mail].