ROI: 6 Steps for Determining Cost Allocation

February 7, 2017 | Drew Smith | No Comments |

Here’s why you should already be doing cost allocation.

Not many of us marketers gaze fondly at our calculators, stroking the keys lovingly and crooning, “Soon, my pet, soon we will make beautiful numbers together.” But as much as we like to pretend our world is all about exciting things like strategy and design and copy, the fact is, numbers play a big role in what we do as marketers.

You should be “mathing” even more than you already do.

I know, I know. But hear me out before you go back to Reddit or whatever else you were looking at. I want to tell you about cost allocation, and when I’m done, you’ll be glad you stuck around.

Cost allocation is methodology that empowers users to assign a period cost to a program in Marketo. Because I’m psychic (not really), I know you’re thinking, “Why should I care?” So I’ll tell you. You know how the ‘R’ in ROI is usually the biggest number you’re chasing? Well, cost allocation helps you calculate the ‘I’, which tells you which programs are worth your time and money—and which ones actually suck.

“Ok. I’m all about ROI. How do I do cost allocation in Marketo?”

Great question. The simple answer is by assigning a cost value to a project. It could be an email, social media post, digital advertising unit, or anything, really. Where most marketers go wrong is assuming a static value.

Not all projects are created equally, are they? Process might be different, the needed resources might be different, the audience size and source might be different. All of that matters. All of that influences costs. And you can’t calculate ROI without knowing the cost of the investment.

Use a cost multiplier

Again, since I’m psychic (maybe I am), you’re probably thinking something along the lines of, “I already know how to find the monthly cost for my LinkedIn spending, but how, in the name of Zeus’ beard, do I figure out the cost of an email?” When it comes to email blasts and sends, the best way to determine cost is by using a fairly simple formula.

We start with the total number of email addresses you are emailing and multiply that by a cost multiplier—a range of values you can apply depending on the complexity of a project. For instance, the cost allocation calculation for a robust email might look like this:

  • Email audience = 20,000
  • Cost multiplier = $0.02 – $0.05
  • Email cost = $800 (using $0.04 as multiplier)

“Butbutbut how…why…?”

Don’t forget that there are soft costs associated with sending emails in general. An eye-opening article in the Harvard Business Review points out the cost of reading, replying and even managing an inbox inside a company. Prospects get email fatigue from time to time which results in actual unsubscribes. This, my friends, is also a cost.

You have to consider all the factors that must go into creating the project—in this case, an email. You must ask yourself things like:

  • Did we use design resources?
  • Did we use an external source for copy?
  • How many rounds of approvals?
  • How high up the food chain did we have to go to get approval?
  • What about the soft costs?

cost allocation with a calculator watch

There’s no other way to say this. You’re going to have to math, and math well.

Your cost range goes from $0.02 for a low-complexity email up to $0.05 (or maybe higher) for something more complex or requiring extra resources you don’t normally need. Things like external agencies or a need for legal review might bump up that multiplier. But you have to know; otherwise you’ll never be able to truly know the return because you don’t know what you had to invest to get there.

Can you walk me through one more time?

You know what? This is really important stuff, so I’m happy to. Let me make it easier on you and break it down into six steps.

  1. Define all external resources used. Did you need a freelance writer or designer? Did you outsource to an agency?
  2. Determine their costs. External resources can charge by the hour, by the project or other ways. Make sure you’re factoring in the proper costs.
  3. Define all internal resources used. Everyone who touches the project has a cost for their time, so you need to know who they are.
  4. Determine their costs. Sound familiar? Add up the time for writers, designers, editors, approvers and whoever else will be involved.
  5. Define any hard costs. Display ads, events, promoted social media posts—if your project has a hard cost, make sure you include it.
  6. Report and optimize. Like everything else, you’ll need to do some reporting on the outcome of the project. Cost allocation can help you put a really accurate number on things like cost per member, cost per acquired lead, cost per influenced lead, pipeline generated by the project or program, and actual revenue generated.

And once you’ve started reporting, you can start refining the methodologies above. Does it look like your emails don’t have a high enough cost? Adjust your multiplier a bit or dig deeper to find your hard costs. All good things to know, right?

Half the battle

There. I believe I’ve successfully made the case for why a little more math—in the form of cost allocation—is good for you. Not only will you be able to completely and accurately identify the true cost of every program, but you’ll have a more complete picture of whether or not programs are performing as well as you think they are. And as they say, knowing is half the battle.

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