Calculating Your Marketing ROI
One of things I do with my clients is help them understand how much they can afford to spend on marketing per client, and per lead. As a small business owner, having these key metrics will make you more confident in your decisions to spend money on marketing, and help you accurately assess the effectiveness of your marketing activities.
6 Questions To Track Marketing ROI
Here are some questions I send to every new business I engage with:
- Generally, what can you tell me about your current prospect and sales metrics?
- How many leads and customers do you average per month?
- How much revenue do you see per month?
- What is your average sale per customer?
- What is the average lifetime value of your customers? (Average revenue per customer.)
- What is your prospect to sale close ratio?
Not all businesses think about the above questions or have the same approach, and some clients often come back to me and ask, what do you mean by customer? What do you mean by lifetime value? Some clients have never taken the time to think about their business in this way! Here are some additional clarifying thoughts:
- What is a customer? A customer is a customer period. Whether they buy a $1 product and never come back, or buy $10K in one transaction. What’s important is to track your averages. Track mean and mode, and the average of those 2 numbers becomes your average sale per customer.
- What’s lifetime value of a customer? This can get pretty complex. Is it just the value of business the customer brings you? What if they refer you to someone else? What if you upsell them later with another promotion? I’ll suggest a simple approach, because when it becomes a headache to track, and you don’t end up tracking it at all.
- If you’re service based, I’d track the mean and mode for how long a client stays with you. This average is your lifetime of customer. Then figure out the average revenue per customer by looking at all the transactions over that time period.
- If you’re transactional, I would figure out the average # of transactions per customer and use that as a metric. Take that and multiply it by your average sale and you now have the lifetime value.
- What is a prospect? Any person that you have an email, phone or address by which you have permission to use for outbound marketing. If you seem to get tons of email leads, I would qualify this further by limiting it to only those who are double opted in. “Likes” on Facebook or increased Twitter followers are nice to track as a separate metric.
Establish a Baseline and Monitor Your ROI
Once you have accurate insight into your current sales and marketing metrics, then it is easy to establish a baseline by which you can measure the success of new marketing endeavors.
Let’s say you figure out that you average $1,800 in lifetime value for each new customer. And historically you know that for every lead you get, you convert 1 in 5 into clients. We can use these two simple metrics to establish how much you can spend per lead.
And let’s say ideally, you’d like an 6 to 1 return on your marketing dollars. We’d take $1,800 and divide that by 5, and divide that by 6, which gives us $60. This means you can spend up to $60 per lead in order to achieve and maintain an 6 to 1 ratio. Now you have more confidence to try new things, and pit different opportunities against each other. Of course, tracking the source of those leads and the new clients is also important in order for you to accurately track your return on investment. I’ll talk about what formal and informal things you can do to track the sources of your leads in another post.
I wrote a post a while back about the Importance of Lifetime Value, and in this post reference a pretty cool LTV calculcator from Harvard Business School: http://www.pearanalytics.com/blog/2009/importance-of-lifetime-value-in-marketing/. It points out that there is really a “net contribution margin” per customer that should be considered, because there are obviously real costs associated with carrying a customer. This is why it might be a good idea for a company with multiple product lines to segment their customers (i.e. the “headache” because most companies are not even tracking this well enough), because you likely have different LTV’s per product line, or maybe even customer persona.
Totally agree with you. I’d add that there’s also the value of “brand building” and name recognition that can’t be calculated accurately. We don’t know what is a result of SEO & marketing and what is a result of their offline efforts. I hesitate to include anything that isn’t clear. When the internet marketing landscape gets more saturated and competitive, and the average ROI goes down, there will be more incentive to track LTV and other metrics more accurately.