Do you know how to determine your ROI on your marketing spend?
Are you truly measuring ALL of the potential income?
In this article, I will explain how to calculate your TRUE Return On Investment.
I would like to make it clear, before we get started, that the calculations I share are purely for demonstration purposes ONLY and are NOT the results and conversions you should expect from your efforts. These will vary based on the quality of your ads and to a certain extent, the industry you are in. This will, however, give you a good basis to start with. So if you have your maths head on, let’s get started.
For our example, we are going to assume that you are spending £1,000 on Facebook Advertising and you are offering a free download in exchange for email addresses, with an upsell opportunity costed at £20.00. A common approach in digital marketing.
So, let’s say you spend your £1,000 and achieve 1,000 clicks to your landing page. From those 1,000 clicks, 300 sign up for your free download (30% conversion) and only 10% of those that signed up, cannot resist the upsell upsell at £20.00, giving you an initial income of £600.00.
Now your initial thought is that you have lost £400 from your efforts as you have only achieved £600 of sales against a spend of £1,000. This is where many business owners go wrong. One key element you have missed is the lifetime value of those 30 new customers.
How To Calculate The Lifetime Value Of A Customer
To calculate the AVERAGE lifetime value of a customer is quite straightforward. First, you need to establish the monthly value.
Let’s say your average customer spends £10 per month. I know what you are going to say……Some customers might only spend £5 and others may spend £50 so I can’t calculate this’….but you can.
Take your annual revenue from sales and divide that by the number of customers you have had in that period. That will give you the average annual revenue. Then simply divide by 12 to establish the monthly value.
So if you earned £12,000 over the last 12 months and had 100 customers in that period, each customer would be worth £120 each per year, giving you a monthly average of £10.
Now establish the average length of time a customer stays with you. I appreciate if you are new business, this will be difficult to ascertain. This exercise may be quite laborious, however, it is an essential element for any marketing activity.
Once you have calculated the time in months, simply multiply however many months by the average monthly value and you have the AVERAGE lifetime value of a customer. Let’s say in this example, the average time is 18 months. That means our average customer lifetime value is £180. (remember the average monthly value was £10?)
Now let’s go back to our initial advertising results. We had 30 new customers bought the upsell at £20, giving an initial income of £600. Instead of focussing on the fact that you think you have lost £400, now think about the lifetime value of each of these at £180 and you have actually got a potential income of £5,400 from your £1,000 spend. That’s a whopping 540% return on investment, which I am sure anyone would be happy with.
Let’s not forget, you have also added a further 270 people to your mailing list that signed up for the free download but didn’t purchase the upsell at the time. With a good email marketing strategy, many of them could be potential future customers at no extra expense.
Once you know your average lifetime customer value, you can truly calculate your ROI of any marketing budget in the future.
So how do you know how much to spend? That depends on how many new customers you are looking to acquire.
How much Should I Spend On Advertising
With the knowledge of the above figures, you can calculate how much to spend on future campaigns. Please bear in mind you will not always achieve the same results, however, it will give you a good basis to start.
If your business allows for unlimited customers, then the question ‘How much Should I Spend’ will depend entirely on your current bank balance’. If however, you provide a one-to-one service and only have space for 4 new clients, then you may want to limit your spend based on the above figures. Here is how you do it.
With your £1,000 spend, you acquired 30 new customers. Therefore each customer cost approx. £34.00 in advertising costs.
If you are looking to acquire only 4 new customers, you would therefore, only look to spend approx. £136.00 (4 x £34). It’s as simple as that.
Now you can see the importance of understanding the lifetime value of your customers when determining the ROI on your marketing activities.
This is only a small part of creating an effective marketing strategy. I am currently writing a book 'The Ethical Marketer's Guide - 12 Steps BEFORE You Spend A Penny On Marketing', which covers all 12 steps you need to do before you spend your hard earned money on advertising. If you would like to be one of the first to have your very own copy, then subscribe to the list below and I promise I will let you know as soon as it is available to buy.
Have you done the calculations and realised that your marketing efforts were worth more than you thought? We would love to hear about it in the comments below.
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This is Suzii, signing out for now. Have a great day everyone!