Dollarizing Effectiveness in Sales & Marketing

by Tim Smith, PhD, 8 June 2005

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Every investment has its own risk and reward profile. While this cautionary statement usually refers to investments between different businesses and asset allocations, it also holds for executives making budgetary decisions within their own business. Investments in production capability verses sales and marketing productivity have very different risk profiles.

The high uncertainty and variability of sales and marketing has made this field one of the last to be conquered with quantitative evaluations of its value. However, a skilled marketer with a modicum of facility in numbers can provide meaningful evaluations of the dollar effectiveness of his/her efforts.

In a direct approach to dollarizing the effectiveness of a sales and marketing effort for executive decision making, there are three simple requirements to fulfill.

1. Full cost accounting
2. Measurable objectives
3. Comparable objectives

(1) There must be full cost accounting of all relevant expenditures applied to accomplish the effort.

Sales and marketing efforts utilize a number of internal and external resources. Internally, a sales or marketing effort may require staff, office space, office equipment, and supplies to name a few of the major categories. Externally, a sales and marketing effort may require the contribution of specialized contractors, transportation, lodging, exhibit space rental, or any of a number of other line item expenses directly attributable to the effort.

Full cost accounting of the effort is required to enable managers to make informed decisions. When making tradeoffs between different sales and marketing programs, or tradeoffs between approaches to performing the same sales and marketing effort, full cost accounting approaches enable executives to compare apples to apples, rather than apples to oranges.

The most controversial aspect of performing full cost accounting of a sales and marketing efforts is related to the cost of labor. Errant executives neglect to include these costs, or neglect to include the anticipated bonuses and commissions that these people receive, when calculating the cost of a sales and marketing effort. The full anticipated wage of staff members, as well as their fully loaded overhead, is required in order to properly evaluate the effectiveness of using direct labor over other methods of accomplishing the same goal.

(2) The effort must have measurable outcomes, preferably ones that lead to the creation of revenue.

Sales and marketing efforts are undertaken in order to accomplish a business objective. Usually, the business objective of a sales and marketing effort is to positively influence the ability to generate revenue, but not always. At times, such as during a corporate scandal or public relations disaster, sales and marketing will be required to address the public relations challenge.

In both cases, the objective must be measurable. Measuring an objective could entail little more than counting the number of prospects contacted during a campaign, or could require conducting market research to ascertain the perception of your business in the minds of prospective customers. Many sales and marketing efforts will have multiple objectives. Each of these objectives should be measured.

(3) The measurable outcomes must be comparable to alternative routes of achieving the same objective.

Knowing the expenditures required to accomplish an objective and that an objective was achieved is insufficient for executive decision making. Executives must also be able to compare different approaches to accomplishing the same objective.

For instance, in creating market awareness and detecting prospect interest, sales and marketing departments can place advertisements in trade magazines, exhibit at trade shows, send direct mail, or place telephone calls. Many times, they will do all of the above and more. When making budgetary decisions, executives must determine which of the above methods is most effective. Those which are less effective deserve less investment and those which are more effective deserve more investment.

For most businesses, closing sales is not the only measurable objective. In route to closing a sale with a prospect, many other objectives will have to be met. The prospect must be aware of the offering, must be qualified, must be informed of its benefits, and must be satisfied that all their decision making criteria will be met. Often, the prospect isn’t a single individual but rather a group of executives and influencers that make the final decision. In these cases, each member of the group must be contacted.

Breaking down the overall objective of closing a sale into smaller steps allows for greater ease in measuring outcomes and comparing the effectiveness of a specific sales and marketing effort to alternative efforts.

Calculating the Dollar Effectiveness

With comparable objectives measured and costs accounted, executives are in a position to evaluate the return on a sales and marketing investment. Simply dividing the costs by the objectives delivers the relevant metric of Dollar Effectiveness.

The most well known objectives measured are customer acquisition costs and customer retention costs. Sales and marketing executives have learned that customer retention costs much less than customer acquisition, and hence they have increased the attention they pay to improving customer satisfaction and loyalty metrics.

Other objectives that can be meaningfully examined include awareness generated, qualified prospects generated, proposals tendered, contracts won, and deliveries completed. Evaluating the dollar effectiveness of meeting these objectives has a high value to managerial decision making because (1) there are multiple means to accomplishing each of these objectives and (2) each of these objectives are individual steps in the process of generating revenue.

The dollar effectiveness of a sales and marketing effort is calculated on both a historical and pro forma basis. Looking back, executives will evaluate an effort to determine the worthiness of repeating that effort. For instance, a trade show that generated only few prospects for the dollars expended will be sacrificed to make room for other conferences with greater promise. Looking forward, the anticipated dollar effectiveness of an effort can be calculated based upon the expectation of generating interest and moving prospects through the sales process or improving customer relations.

Calculating the dollar effectiveness of a sales and marketing effort is a relatively straightforward exercise. The challenge is not in the calculation, but in the need to define which data should be collected and the means to collecting the data. For some efforts, the dollar effectiveness of a sales and marketing effort can be made routine within any department given a little training. For other efforts, it may be best to call in outside support so as to not divert the attention of the sales and marketing team towards measuring and away from accomplishing.

The value of knowing the dollar effectiveness of a sales and marketing program is in making decisions about which program should be executed. As new channels for contacting prospects and managing clients are developed, skilled executives must be able to wisely choose between being an early adaptor or a late majority. Knowing the dollar effectiveness of the sales and marketing effort enables executives to choose when to alter course.

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Author
Tim Smith, PhD, Directorial Editor of The Wiglaf Journal and Adjunct Professor of Marketing at DePaul University.

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