December 12, 2014

Use This Calculation To Find Your CRM ROI

Implementing a customer relationship management (CRM) product can be a precarious undertaking. Estimated failure rates for CRM implementation (defined as not meeting the business objectives of the project) are typically high. Which brings us to the first step in calculating the return on this software investment: set measurable, attainable business goals.

Without clear goals, it’s difficult to get a clear perspective on whether your making real progress or just substituting inefficiencies.

The CRM ROI Calculation

In the broadest sense, measuring return on investment can be boiled down to:

measuring roi with this equationWhile simplistic, this calculation can work. The trouble is accurately measuring what constitutes a “gain from investment.” We’ll examine in the following paragraphs.

The cost of your investment can also be somewhat opaque. Subtracting the cost of the actual software is a natural starting place. In today’s market, cost can refer to monthly subscription fees or one-time licensing fees. When these pricing models, measuring the total cost of ownership can often provide a clearer picture than looking at just upfront expenses. In addition to capital costs, you’ll also want to factor in training and any expected productivity loss during the implementation period.

Often, this number will be a rough estimate and you’ll have to update it as you go along. The amount of training and length of implementation will certainly vary between products, which should also factor into any purchasing decision you make.

To recap how to measure cost of investment:

  • Measure total cost of ownership rather than just subscription versus licensing fees
  • This includes hardware fees, maintenance fees, and upgrade fees for corresponding software
  • Factor in productivity loss for training and implementation
  • Set a consistent timespan to compare your estimate to actual expenses, such as 6 or 12 months.

Measuring Gain

Gain Sign

In order to measure gain, you’ll need to compare post-CRM metrics with pre-CRM metrics. In other words, you need to develop a baseline. This means you should be measuring how your business is performing before you implement a CRM. If you’re not doing that, you can still start now. Even though the sample size will be small, you’ll have context against which to measure your team’s post-implementation performance.

And now for the metrics. These are the factors you’ll want to consider when determining gain. To give all of these a common denominator, we have to view them in terms of revenue — which is where we’ll start. 

#1 Overall Revenue               

This is the simplest and most important metric to measure. Compare your overall revenue from your measurement period before the CRM to the period when you’re using the CRM. Depending on the complexity of your product (which will control training costs) the first month with your new software may be best attributed as a sunk cost.

But hopefully not. Many cloud vendors are making training and implementation easier with every release.

#2 Revenue per Lead

A more granular measurement, tracking the revenue generated per lead can give you a great understanding of the lifetime value of your customer, as well as the efficiency of your marketing and sales tactics. It’s important to segment leads by their source so you can record all the details of your marketing efforts.

“Granular data equals contextual selling”For example, perhaps your email marketing campaign generates a great deal of leads, but the revenue you gain from these customers pales in comparison to what you gain from face-to-face personal selling.

Ideally, implementing a CRM will increase your revenue per lead, because your sales team will have more granular data, which translates into more contextual selling, which leads to a higher close rate.

Even if your organization doesn’t produce a ton of leads, but instead focuses on fewer customers with greater lifetime value, this measurement still holds up. You can tweak it slightly by measuring the success of your upselling attempts, and whether having a CRM increases the lifetime value of your customers.

#3 Cost per Lead

The most detailed metric yet, cost per lead assesses how much money you spend on acquiring new customers. This calculation takes into account the amount of hours spent acquiring a lead by both sales and marketing (and any other departments that contributed to the sale).

You’ll need to calculate the amount of time you spend creating the asset that converted a lead, such as a blog post, video, or social media. The source should determine the cost that you ascribe to the lead, but the work that went in beforehand must be accounted for too.

Having a CRM can help reduce your cost per lead because these systems draw features from other software, like social media and email marketing, that can help sales teams convert more prospects with less effort (and therefore expense).

Compare your numbers from the pre-CRM age to the post-CRM time and look for a decrease in cost. Even if you don’t actually see a decrease, simply stabilizing your cost per lead can be seen as a victory.

Cost per lead doesn’t fit nicely in to the classic ROI calculation, because the money you save per lead is already built into your overall revenue. However, calculating cost per lead can be one of the most effective ways of measuring if you’re getting good value from your CRM.

On the Subject of Productivity

In this context, productivity refers to your internal KPIs. These could be the number of phone calls made, number of appointments set, and whatever other metrics you use to measure productivity on a day-to-day basis.

Productivity is notoriously hard to accurately calculate, because it’s difficult to prove what affects the quickness with which someone accomplishes a task. Additionally, CRMs may actually create more tasks for sales reps because of the increased amount of data entry. This might not necessarily translate into an increase in productivity.

Therefore, we don’t count productivity in the ROI calculation, but it is something you should be developing an objective measurement for. Whether that measurement is task oriented or time-based is up to you and your specific business goals.

In the End, It’s About Cost

Graph With Stacks Of CoinsProductivity and efficiency are important, but the real measure of whether a tool such as CRM software succeeds or fails should be your company’s bottom line. Qualitative features like productivity and even employee satisfaction can be tied to CRM usage, but not in an overtly quantitative fashion.

Your CRM should benefit your customers by giving them better service and communication. In turn, this should benefit your organization through increased revenue, sustained customer loyalty (if your business model prioritizes that), and reduced costs for generating new customers.

Decide a reasonable time period for recouping your initial investment, and measure before and after. There will always be externalities related to adopting new software, but focusing on revenue remains a sound business practice. 

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photo credit 1:kenteegardin via photopin cc 

photo credit 2: : photo credit: fabbio via photopin cc

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