ROI of CRM
What is CRM’s return on investment?
By managing each stage of the sales lifecycle more efficiently, a typical CRM system provides a high return on investment. Of course, you can get by without making that investment. You may be able to cobble together a CRM customer data repository using spreadsheets and email. It’s a safe guess that anywhere between 30 to 40 percent of marketers do. But as you grow, you’ll quickly discover the law of diminishing returns and realize that you need a CRM system.
In 2011, Nucleus Research found that the average ROI of CRM was $5.60—meaning that for every dollar spent on a CRM solution, on average, companies earned back $5.60.
In 2014, Nucleus Research found that the return rose to $8.71—a 38 percent increase. A fully integrated CRM can drive even more profitability. Nucleus also found that CRM integration with other internal applications brought "productivity increases across sales, service, and operations and a 20 to 30 percent growth in business."
So how do you calculate that dollar amount? ROI is a little different from the payback period—the amount of time it takes to recover the cost of your CRM investment. It has also been called the "break-even point". The more you sell, the quicker your payback period. If you don't sell more, your payback period will be much longer.
ROI measures the efficiency of an investment. Even though it can be expressed in dollars, it’s a ratio—a ratio of income earned to the cost to finance the CRM investment. The goal is to have the ratio be more than 100% to avoid losing money. ROI figures can be calculated for nearly anything into which you can make an investment and measure an outcome. The outcome of your ROI calculation will vary depending on which figures are included as revenue and costs. If you don’t sell more, your return will be much lower. To calculate your ROI, you first need to determine what incremental revenue your new CRM system will bring in. And to do that, you need metrics.
What metrics should be used to measure ROI?
There are several metrics that you can use to determine incremental revenue and, therefore, if your CRM is effective:
Sales volume
Have the number of sales you closed a month/quarter/year and the dollar amount of each sale increased since you began working with the CRM system?
Time per sale
Are opportunities converting into sales quicker since you implemented the CRM system? If so, you should be able to get more into your sales pipeline, boosting sales volume.
Number of deals closed
Are more of the leads passed over from marketing being converted into customers and then closing since your CRM was implemented? If so, your sales volume should go up.
Sales administrative time
Is your sales team spending more time selling and interacting with prospects and less time on administrative tasks? If so, then your costs of sales should go down, making each sale more profitable.
Lead source
Can you track where your leads are coming from to see if you have any underperforming channels? If you can maximize each sales channel’s performance, then your pipeline should fill, deals should close, and sales volume will go up.
Net new revenue
Are you identifying and selling to new customers since implementing your CRM system? If so, those sales are incremental revenue. In addition, have you been able to support new pricing models and delivery channels, such as subscription pricing? If so, then you will have tapped into a part of your market that you previously were not able to reach.
Upsell rate
Are you able to sell more add-on or supplemental products/services to your current customer base? It’s true that selling to an existing customer is much less expensive than selling to a new customer. Customer loyalty does provide value.
Customer acquisition cost and customer value
Knowing what it costs to acquire a new customer is important. The higher the cost, the less profit you make. But that metric doesn’t quite provide the whole picture. To get the whole picture, you need to determine the value of an individual customer and an average customer. Calculating customer value will help you prioritize your sales teams' time, and guide decision-making about customer incentives and decisions.
Customer loyalty and CRM
Loyalty is critical because in most industries, customer acquisition costs can be prohibitively high. Most businesses need to retain new customers for at least 12 to 18 months to break even on the costs to acquire them, and a CRM system can help with that.
How to measure CRM performance
The benefits of CRM are clear. But ROI isn't the only way to measure those benefits. CRM systems are designed for one purpose—to help you sell. So tracking metrics that highlight sales growth are important, and there are several you can use to measure CRM performance.
Net promoter score (NPS)
The NPS survey is an objective measurement of how your customers view you, by determining how willing they are to recommend your business to others. NPS leaders can expect an average growth of more than two times faster than competitors.
Time to recoup customer acquisition costs (months to recover CAC)
This metric tracks the number of months to earn back the money spent to acquire customers. Some refer to it as your customer break-even point. It indicates how efficiently you are spending money to attract new customers and how well it can sustain these acquisition strategies over the long term.
Marketing campaign effectiveness
There is not necessarily one metric to track marketing campaign effectiveness. It can include the following:
- Cost per lead, which focuses entirely on the leads your campaign generated, but not necessarily the quality of those leads.
- Incremental sales, which measures how your marketing efforts contributed to sales numbers.
- Campaign conversion rate, which measures which marketing efforts generated your best customers.
- Customer lifetime value, which is tangibly linked to revenue and is the total worth customers bring to your business during the entire time they are customers. This metric does not focus on a single purchase, but rather all the purchases made during the entire customer relationship.
Customer retention rates
In many ways, customer retention is more important than new revenue. The longer you retain customers, the more profitable they become. They are cheaper to sell to, and they tend to buy more.
Email distribution growth
This metric focuses on the top of the sales funnel and tracks the rate at which your email list is growing. A growing email list means that you are filling the top part of your sales funnel with interested customers who are just not ready to buy.
Please note that this is not a definitive list. You should use metrics to provide insight into your business processes and performance, customer perception and satisfaction, and tactical implementation. Ultimately, the metrics you choose should be grounded in your strategic goals and objectives.
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