Introduction: Economic Value, Incrementality and Returns
Marketers, agencies and analytics companies dedicate significant effort to understanding and maximizing returns from marketing investments. All approaches to evaluating impact of marketing share a similar structure whether based on Marketing Mix Modeling (MMM), Multi-Touch Attribution (MTA), Experiments or other approaches:
(Outcome from Marketing × Economic Value of Outcome) ÷ Investment
Most of the industry discussion, methodology debate and marketer attention to date is dedicated to the first half of this equation: how to measure incremental marketing outcome. Countless discussions revolve around which approach to MMM is better, what are appropriate ways to treat special cases and how to improve attribution accuracy. These are all worthwhile efforts but focusing only on this ignores the other large driver of returns: defining the economic value of outcome. Ignoring this side can lead to over investment, under investment, and significant misallocation, ultimately undermining the value of even the most sophisticated measurement frameworks.
Marketers often evaluate performance and make decisions using financial metrics that are poorly defined, inconsistently applied, or incorrectly calculated, leading to misinterpretation and misguided investment choices.
This article explores common pitfalls, explains how to define economic value, and shows how to extend ROI analysis to long-term customer value, helping marketing and finance speak a shared language.
I. Foundational Pitfalls in Marketing Returns
While the focus of this article is on theoretical and practical considerations in calculating marketing returns, it is worth noting that there are no absolute standards for what constitutes a strong return on invested capital. Rather, these are dependent on operating model, life cycle of the company and industry, access to capital markets and nature of the business. As an example, an online gaming operator investing into a new expansion State might accept a very different level of return than a mature consumer product brand running a trade promotion.
Before diving into a more technical financial discussion of returns, it is worth underscoring some of the fundamental pitfalls in understanding the returns of marketing.
Pitfall 1: ROAS vs ROI
Marketers often evaluate marketing returns by looking at the relationship between spend and total sales or profit i.e. Return On Ad Spend (ROAS). This method is inherently flawed since there are many other assets and expenses that drove the overall sales and profit. The more correct way is to compare spend to the incremental sales or profit generated by the spend i.e. Return On Investment (ROI). There are many techniques to establish incrementality such as MMM, MTA, Experiments etc. A deeper discussion of these is beyond the scope of this article but more resources can be found in the linked references.
Pitfall 2: The incrementality challenge
Even the best of techniques to estimate incrementality of marketing can fall victim to pitfalls of misestimating incrementality. These misestimations often stem from issues of endogeneity and causality or capturing the full scope of how marketing creates value. Causality and endogeneity issues are common. As more marketing is programmatically served and there is a rise in demand media, these issues are exasperated. Results are often misstated, leading to overstated estimates of incrementality and ROI for tactics like retargeting, branded search and affiliate channels. Conversely, marketing is often designed to drive other impacts than short term temporary volume gains. Examples are changes in brand equity that result in baseline shifts, driving brand extension opportunities, reducing churn and reducing price elasticity.
Pitfall 3: The potential fallacy of maximizing ROI
Many marketers become fixated on maximizing ROI. While being mindful of making positive ROI decisions is an important financial discipline, maximizing ROI by itself is not necessarily value creating behavior. As spend scales, there are generally lower marginal returns which means maximizing ROI is easily achieved by cutting spend, which is counter to growth and profitable value creation.
Rather, the goal should generally be to spend until returns on invested capital equal the cost of capital, or hurdle rate, to maximize value creation.
II. How to Calculate the Economic Value of Marketing Outcomes
The most basic view often applied to ROI math is the economics of the product or service being sold. Many marketers look at a sales-based marketing ROI view. As an example, spending 100 dollars on marketing and selling an incremental 10 units priced at 20 dollars might look like an ROI of (10x20) - 100 / 100 = 1 or 100%. But taking the cost structure into consideration in this example, the actual profit per unit may only be $3 leading to total profits of $30 and a negative ROI. This type of revenue return is misleading and will in most cases lead to an overstatement of returns. Selling units at $20 does not generate economic value of $20. Most products have material and labor costs associated with their production or wholesale acquisition, and in most instances have a variety of selling, general and administrative (SG&A) overhead costs associated with them. Understanding this cost structure is therefore essential to accurately assess and optimize marketing-driven profitability and true ROI.
Understanding profit associated with a particular product or service can be complex, particularly when disaggregated from overall enterprise results. For this exercise, it is critical for marketing and finance teams to align on both the analytical approach and the decision objectives it supports. While overall net income and profit margins are relatively trivial to observe from published financials, the following will need to be considered.
a. Profit vs. Cashflow
It is widely accepted that financial analysis and return calculations are best evaluated on a free cash flow basis which can differ substantially from accounting net income. The differences arise from factors such as depreciation vs. capital expenditures, capital structure elements like interest expense, as well as various deferrals, accruals, and non-operating or one-time items. For this reason, many analysts look at EBITDA as a profit measure vs. traditional accounting profit or net income margin. It can however be challenging to establish fully loaded EBITDA margins across various products or services as financial reporting is rarely tracked and allocated down to that level. This often requires the finance organization to manually create product or segment level views of EBITDA to support meaningful ROI analysis. Additionally, EBITDA is only part of the cash flow story. Incremental marketing-driven volume may require significant additional working capital or capital expenditure, causing cash flow to differ materially from EBITDA and net income.
b. Costs and Margins
Additionally, this ROI approach may underestimate the returns from marketing-driven marginal units. As marketing drives additional sales on top of already existing baseline level sales, costs will scale but at a different marginal EBITDA margin. The reason being that incremental units will carry incremental variable costs such as costs of goods sold etc. but may not trigger incremental fixed costs in the short run, such as general and administrative expenses, R&D and other overhead. It is therefore necessary to distinguish between variable and fixed costs and to determine the volume thresholds at which fixed costs begin to scale in support of additional production.
If we examine our chart on Figure 3. and assume that the marketing investment from earlier of $100 will generate 10 incremental units, it’s reasonable to expect that the cost of goods sold (COGS) and distribution costs are likely to increase proportionally, whereas SG&A expenses are likely to remain relatively fixed. This means that our return from marketing is not as good as the 100% as measured by revenue returns but is likely on the margin better than the negative ROI we saw above. Using a cost structure that considers only the variable costs (COGS and distribution) that scale with incremental volume, the ROI from our $100 marketing investment turns positive at 20%, because the gross profit after variable costs exceeds the marketing investment: ((20x10) – 60-20-100)/ 100. See Figure 4.
How these are defined and calculated will have profound impact on average and marginal returns calculations and recommendations for investment allocation. Creating a rock-solid joint set of assumptions for how this is done is foundational in the use of marketing ROI models and requires finance and marketing collaboration.
III. When Marketing Creates Long-Term Economic Value
The discussion above establishes considerations to understanding in-period economic value associated with a product or one time service. In reality, however, marketing often creates actions that drive economic value not just in the period they occur, but that accrete value over time. Examples include:
- Selling a communication service subscription plan
- Acquiring a new insurance customer
- Building loyalty to a favorite beverage brand
- Driving a signup to an online sports booking service with a betting promo
All of these scenarios represent a marketing action that drives economic value that may extent over a period of time. The correct way to value financial impact over time is through discounted cash flow analysis or Net Present Value (NPV), expressed as: 
Understanding marketing ROI in situations where value unfolds over time requires using these methods. While they enable more nuanced and powerful insights, they also introduce complexity in how value is estimated and attributed. While Marketers do not need to calculate the Weighted Average Cost of Capital (WACC) themselves, they should partner with Finance on the hurdle rate to ensure ROI estimates reflect the true opportunity cost of capital.
Technical Toolkit: Estimating cost of capital and discount rates
While it is beyond the scope of this article to discuss discount rates and cost of capital in extensive depth, it is worth noting that they all have their foundation in the Weighted Average Cost of Capital (WACC).
The WACC model says that cost of capital is (% debt x cost of debt) + (% equity x cost of equity).
or, expressed more formally:
Where:
- D = market value of debt
- E = market value of equity
- R₍d₎ = cost of debt (after tax)
- R₍e₎ = cost of equity (often estimated using CAPM)
- T = corporate tax rate
The Capital Asset Pricing Model (CAPM) specifies the cost of equity as:
Where:
- Re is the cost of equity
- Rf is the risk-free rate, historically benchmarked to long-term U.S. Treasury yields as a proxy for the risk-free rate. In recent years, however, U.S. long bonds have lost their AAA rating and diverged from the global risk-free benchmark, making alternative references more appropriate in some cases.
- Beta represents the sensitivity of a company’s returns relative to the overall market; a beta of 1 indicates market-level volatility, while values above 1 reflect higher relative volatility. For public companies, beta is typically observed empirically, whereas for private firms it can be estimated by benchmarking against comparable companies or industry averages (See Damodaran Beta Dataset for industry-level beta estimates).
- ERP, or Equity Market Risk Premium, reflects the expected excess return of the market over the risk-free rate and can be derived from syndicated data sources.
- When conducting ROI analyses in foreign markets, an additional Country Risk Premium (CRP) should be included to account for political and currency risk. These country risk premiums are often inferred from sovereign bond spreads or currency forward differentials and provide a crucial adjustment when evaluating returns across geographies.
IV. Customer Lifetime Value (CLV) as the Foundation of Marketing ROI
a. Measuring customer value over time
Once we have methods to understand economic value that accretes over time, we can begin to apply them to measuring the value of customers. Customers typically engage with a company over multiple periods – they make purchases at different times, subscribe or renew, deepen their relationship, or sometimes churn and leave the company. As such, the value of a customer can be described as a series of expected economic flows over time, using the formula above:
Estimating these expected economic flows of a customer over time is a non-trivial exercise and can involve several techniques such as:
- Customer profitability and churn models and mining historical behavior
- Consumer research
- Predictive and AI / Machine learning approaches
- Competitive benchmarking
- Assumptions, scenarios and guesswork
Whichever method is used, there are two important implications for understanding marketing ROI. First, all customers do not have the same economic value. Second, not all customers respond to marketing programs in a uniform way. We therefore want to analyze ROI across different customer types or segments delineated by their economic value and behavior differences. Many industries leverage this idea by creating tiers of service and marketing propositions for different customer value tiers e.g. banking or airlines.
Having the ability to focus and optimize marketing investments toward outcomes that drive greater customer value or impact high value customers, can drive significant improvements in marketing ROI and economic value.
b. Acquisition vs. Retention
In many organizations, the functions responsible for driving new sales and customer acquisition are often siloed from those focused on CRM, servicing, and nurturing existing customers. While there is nothing inherently wrong with this split, it can create challenges from an ROI perspective. As we evaluate ROI from efforts to acquire new customers vs. nurturing existing customers, we must define the economic value of a new customer vs. an existing customer.
A critical question arises: which portion of a customer’s economic flows should be attributed to acquisition versus retention efforts? Many organizations solve this by setting an arbitrary time delineation e.g. 3 months or 1 year. Anything in the first 3 months or 1 year are new flows and anything beyond that accretes to the nurturing programs ROI. This method is flawed for a variety of reasons that we will explore below.
c. Using CLV to Improve ROI
When a new customer is acquired, they come with a baseline expected behavior: how long they are likely to stay or churn (their expected lifetime) and how they are expected to use the product or service over time. The NPV of these revenue and cost generating behaviors is the CLV of the acquired customer.
This is often expressed as:
Where:
- Rt = revenue generated from the customer in period t
- Ct = cost associated with serving the customer in period t (including marketing, service, and operational costs)
- r = discount rate, typically aligned with the company’s cost of capital
- T = expected customer lifetime (in periods)
Any enhancement to these CLV metrics, such as extending customer lifetime, increasing usage or revenue-generating behaviors, or shifting activity toward lower-cost channels, represents incremental value creation attributed to the non-acquisition side of marketing/CRM.
Example: Credit Card Company
A good example of marketing and its ability to impact multiple value drivers is the credit card industry. Card issuers derive economic value when card holders use the card and when they finance ongoing balances. The more they do this and the longer they stay, the higher the customer lifetime value (subject to credit risk management and risk capital allocation). As such, marketing has the potential to influence multiple value drivers:
- Encouraging prospects to apply for the card
- Encouraging card holders to make the card their primary card for various payment occasions
- Increasing Retail Sales Volume (RSV) by encouraging card usage
- Promoting balance transfer and financing offers to encourage credit utilization
- Reducing churn and enhancing retention by promoting card value, features and benefit
Marketers need to understand the impact on the full set of value drivers across the CLV equation to understand returns and make good allocation decisions.
To properly map the value between acquisition, retention, and deepening efforts, marketers need to establish a baseline CLV and understand how different programs influence the incrementality of CLV drivers. However, significant challenges remain in accurately allocating economic value between acquisition and retention.
These pitfalls are common in industries with high CLV and intense competition, such as wireless services or online gaming, where companies often deploy generous acquisition incentives. While these promotions are justified by the high potential lifetime value of customers, they can make it difficult to measure the true ROI of acquisition efforts.
Understanding CLV provides the foundation for connecting marketing investment to long-term enterprise value. Yet, applying CLV in practice requires careful consideration of time horizons, discount rates, and planning assumptions, which can dramatically influence how value is interpreted. These considerations are explored next.
d. Applying CLV in Practice: Time Horizons and Practical Guardrails
As discussed above, CLV represents the discounted value of future revenue and cost flows associated with a customer relationship. Applying CLV in practice requires judgment about how far into the future value should be recognized and how it should be discounted.
For organizations with extensive customer lifetimes e.g. insurance, financial services or telecom, there can be significant value accreting from outer years where there are low churn rates and long expected lifetimes. These time horizons often extend beyond typical strategic planning and budgeting time horizons, leading many companies to operate with an arbitrary NPV disconnected from the churn reality e.g. 3-year NPV. This can lead to a significant underestimation of CLV and potentially underinvestment. Conversely, an assumption that customer lifetimes will be long just because historical churn rates have been low is often a bold leap in an environment where strategic control is being reduced by competition and technology, making whole industries vulnerable to substitutes.
For those reasons, it can be a prudent or conservative assumption to heavily discount or ignore CLV accrediting from years beyond the immediate future years. Whichever path is chosen, marketers and finance must fully understand its mechanics and potential impact on performance metrics, budgeting, and planning.
Concluding Remarks: Path Forward and Bridging the Finance/Marketing Gap
ROI is far more than a measure of incremental volume, it’s a bridge between creative investment and economic value creation. To build that bridge effectively and strengthen CMO–CFO collaboration, marketers should:
- Stop using ROAS as ROI. Measure only incremental outcomes and express returns in profit or cash-flow terms.
- Collaborate with finance on cost assumptions. Ensure clarity on what’s fixed, variable, and marginal when evaluating profitability.
- Integrate cost of capital. True ROI should exceed the organization’s hurdle rate to signal value creation.
- Use CLV and NPV frameworks. For recurring or subscription businesses, long-term customer value, not immediate payback, defines success.
- Maintain shared governance. Establish consistent definitions, data sources, and review cadences between marketing and finance teams.
The promise of marketing analytics has always been to connect creativity with commerce. Delivering on that promise demands translating outcomes into economic value and embedding them in the language of finance. When marketers and finance leaders share this foundation, measurement becomes more than a reporting function, it becomes a strategic capability that guides investment, strengthens governance, and powers sustainable enterprise growth.
References:
Marketscience (August 27, 2024), Redefining Attribution in a Privacy-First World.
BCG (October 7, 2019), Marketing Measurement Done Right.
Google. (2018). Unified Marketing Measurement: The Power of Blending Methodologies. Think with Google.
Modigliani, F., & Miller, M. H. (1958). The Cost of Capital, Corporation Finance and the Theory of Investment. The American Economic Review, 48(3), 261–297.
Aswath Damodaran (Jan 2025 – latest update at the time of this publication). Beta Datasets by Sector (US). NYU Stern.
