Use The NPV method to Calculate MarTech ROI
There are multiple ways to calculate the value contribution of a marketing technology tool.
All methods have their advantages and disadvantages. Picking one means balancing the pros and cons for your specific goal.
To calculate the value of MarTech programs I recommend using the Net Present Value (NPV) method. I often get the question of why.
In this post, I share my simplified take on the differences between ROI, PP, and NPV calculations and why you need the latter for your MarTech project.
Warm-up
Let's start with an example to set the scene of what we are talking about.
If you borrow me $50,- and I give you back $60,- the ROI of your investment is 20%.
If I borrow today and give you back tomorrow, that 20% is a great number. You'll say YES.
If I borrow today and give you back in 10 years, that 20% is a lousy number. You'll say NO.
In this example, you see that the same ROI% and a different timeframe result in a different decision. The reason is that the money in your pocket today is worth a tiny bit more than that same money in your pocket tomorrow, and a whole lot more than that same money in 10 years.
There is a time component to value. And the more strategic your MarTech project is, the more important this time component becomes.
Hold that thought while we dive deeper into the different calculation methods, starting with the good old ROI.
Return on Investment (ROI)
The classic ROI calculation measures the results minus the investment.
It is measured as a percentage and the formula looks like this...
When to use ROI?
If the time between investment and return is (let’s say) less than a year, and investment risks are unknown, then ROI calculations are a valid option.
When you want to measure the result of marketing campaigns and compare the effectiveness of different marketing channels, then ROI calculations are easy and practical.
There is an entire domain of marketing technology tools dedicated to this. With the help of Marketing Attribution tools, you discover which activities and customer journeys lead to the highest return-on-investment, so you can allocate your budgets in a smarter way.
The expression "showing ROI" has become a synonym for "proving positive value". Marketers just Love ROI. (I should print that on a t-shirt).
While ROI is the logical weapon of choice for campaigns, for MarTech investments the method falls short. Technically speaking, there are other methods under that same umbrella term that are a better fit to prove the value contribution of MarTech projects.
Payback Period (PP)
Another ROI-ish calculation that regularly enters the stage is the Payback Period.
This calculation shows the time required for the cash inflows to equal the original outlay. Here is the formula...
When to use PP?
If the final impact of the project is not entirely clear, but there is a good chance the invested funds will be recouped within a fair number of months, then a PP calculation can pull in the investment.
A typical Payback Period conversation sounds like this:
Q: What is the expected ROI of the new marketing platform?
A: No idea, but the savings are significant. If we Go-Live on January first, we break even in April already. And that's only on reduced manual content creation costs. It's a no-brainer.
The Payback Period calculation is more of a cover-your-ass-metric than a well-grounded foundation for a MarTech investment in my opinion.
That's why we go full on the offense with the next one.
Net Present Value (NPV)
The NPV calculation shows returns, investments, capital cost, and a risk premium, all in one equation. It's the whole enchilada of ROI calculations.
It looks intimidating, but it is the proper way to wheel in the funds. You'd better become besties soon.
When to use NPV?
When an initial investment is generating results over multiple years, you need to add future costs and results to the equation as well.
NPV calculates risks and returns over a more extended period and shows you the total value it resembles today. It discounts (that's the "r" in the formula) or removes the interest component from the future cash flow, allowing you to put the initial capital investment and future cash flows on the same level playing field.
This is why you should pick NPV
An investment in MarTech should be seen as an investment in infrastructure.
It has a long-term and sustainable impact that's similar to introducing robots to a manufacturing process.
Engaging in enterprise-level MarTech programs requires managers to broaden their vision and show their dedication in exchange for significantly increased returns in the mid-term.
The Net Present Value calculation opens up a lot of possibilities. As operational marketing excellence facilitates higher returns, drives lower investments, and lowers risks over a more extended time, all elements are present to create a realistic and fair picture.
The NPV calculation offers a standard format that can be easily compared with other company projects and is the right format to convince top-tier management.
Now all you have to do is to get the right numbers in.
The MarTech NPV dashboard
For our projects, we used the NPV calculation to create a Marketing Operations NPV dashboard.
The NPV dashboard connects project budgets to estimated impact. The result is a breakdown of total NPV to the selected regions and business units, enabling companies to see which parts of the organization benefit most from a marketing operations project.
The interesting side-effect was that even when we did not have all the numbers yet, having the right conversations already caused the mind shift required for business transformation.
The MarTech Net Present Value topic has my highest interest.
If you have ideas you’d like to share or calculations you need to validate, I would be happy to get in touch.
September 11