How to Prove Agile Marketing ROI Using the Power of Compound Interest
For years our customers have been telling us that using Agile marketing to learn fast, spend wisely, and optimize marketing campaigns has transformed their business. And the benefits don’t just come from our personal experience: a study conducted by MIT suggests that Agile firms grow revenue 37 percent faster and generate 30 percent higher profits than non-Agile organizations.
There are three simple metrics you could use today to measure Agile marketing success at the process level, which is a crucial step in optimizing operations. But what about all the time needed to train people and implement technology so operations can actually be optimized?
In other words, how do you prove the ROI of Agile marketing?
In this blog post, we will have some fun with basic math. Don’t worry — there’s no algebra or trig ahead. We’ll simply be using the power of compound interest to prove Agile marketing ROI to your boss.
The Mandate for Agile Marketing
“It’s not one high-level decision each year around marketing mix that makes or breaks us. It is the million little optimizations that we will make all year long that means the difference between success and failure of our marketing” – CMO of a global tech company
Let’s demonstrate the logic behind this CMO quote using something simple from your day to day life. If you do some basic money management for your household, then you’re already familiar with the concept of simple versus compound interest.
Simple interest is based on the principal amount of a deposit, while compound interest is based on the principal amount and the interest that accumulates on it in every period.
When you earn interest on savings, that interest then earns interest on itself and this amount is compounded monthly. The higher the interest, the faster your money grows!
Traditional Marketing Looks a Lot Like Simple Interest
If your team is still doing traditional marketing, where you use annual year-in-review, “hind-sighting” decks or post campaign wrap-up reports from your agency to run annual mix models to help reallocate spend, then your marketing ROI looks a lot like simple interest.
Let’s say you start with a $10 million marketing budget. You spend it, and then the next year you think, “Hey, I think we can get a little bit better” and get a little bit more budget. Then next year you review again, and so forth and so on. In this cycle you’re just getting simple interest.
However, if your marketing team can commit to the continuous course corrections that Agile marketing represents, then the benefits start building on themselves.
Agile Marketing Works Like Compound Interest
This is where you really unlock the power of compound interest. If you’re committed to ongoing agility and ongoing optimization, you can actually get much more out of your marketing dollars.
Let me explain this concept using the formula of compound interest calculation:
P = present value (the amount of money you have available)
i = interest rate (how much improvement you think you can get)
n = length of time
c = compounding interval (are you doing this once a year? multiple times per year?)
FV = future value (your outcome)
The Agile Marketing ROI Formula
Here’s the marketing parallel you should use to demonstrate the ROI on Agile marketing:
P = Present Value of Your Marketing Dollars
How much are you committing to Agile marketing? Is it your whole marketing budget, or are you just devoting a little piece of your marketing spend to the Agile experiment? Whatever the amount of your marketing spend that you’re willing to optimize is your P value.
I = The Improvement
What improvement you think you can realistically get on reach, engagement, leads conversion etc.? Here you can use an industry benchmark, or even better your own historic data, if you have it, to hypothesize.
N = Length of Agile Marketing Optimization
How long will you commit to Agile marketing optimization? If you’re just doing a three-month pilot, then you can’t expect to see much change to your budget during that time (even though you’ll likely learn a lot about your Agile process).
On the other hand, if your team is embarking on an Agile marketing transformation for the next few years, you have a much longer time horizon to enjoy the benefits of compounding optimization.
C = Frequency
The C represents the compounding interval, or how frequently you’ll act and optimize your spend each year. If you only optimize annually, then your C=1.
However, let’s say you’re running two-week marketing Sprints, which you’re then using to measure and optimize, your C=26! The higher you can push your optimization frequency, the better your Agile marketing ROI.
FV = Effective Marketing Spend
The results of this formula essentially quantify how much farther your marketing budget will go after your recurring Agile optimizations.
This is the potential value of your usual marketing spend after running Agile marketing for the allotted time period.
A Tale of Two Marketing Teams
Now that you understand how to prove Agile marketing ROI using compound interest calculation, let’s put the formula to work.
In our example below both Team A (Traditional Marketing) and Team B (Agile Marketing) have the same $1 million content marketing budget (p) and expect the same 20% lift (i) via Conversion Rate Optimization (CRO).
However, Team A is only committed to a 3 month pilot (n) while Team B is embarking on a 2 year commitment to Agile marketing.
Team A gets to optimize its content once a year (c), while Team B is running on two weeks Sprint and optimizes its copy, images, calls-to-action etc. every two weeks using Agile marketing measurement.
As you can see, Team B gets 10x the ROI (FV) on their content marketing budget using Agile marketing compared to Team A still on traditional marketing.
|P = Content Marketing Budget||$1,000,000||$1,000,000|
|I = Conversion Rate Optimization||20 (%)||20 (%)|
|N = Length of Optimization||0.25 (3mo Pilot)||2 (2yr Commitment)|
|C = Frequency of Action||1 (Annual Optimization)||26 (Bi-weekly Sprints)|
|FV = Effective Value||$1,046,635||$1,489,543|
Using Agile marketing allows you to enjoy compound interest on your marketing budget, rather than relegate your optimization efforts to an annual planning event.
If you’d like to play with the numbers yourself, here is a simple Agile Marketing ROI Calculator you can use.
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