How To Effectively Measure Your Marketing ROI
Many companies use a shotgun approach to marketing, hoping it will pay off along the way. While experimenting with different channels is often necessary, it’s best to be aware of their effectiveness from the start.
Calculating the return on investment (ROI), for each marketing campaign will provide valuable intelligence and help you effectively allocate your marketing spend. Every business is different, and not all of metrics are relevant to every business – but the more data that can be collected, the better.
Here’s a list of the essential metrics you’ll need to know as you run your marketing campaigns moving forward:
Marketing Return on Investment (MROI)
For an idea of the overall ROI for your marketing efforts, you can calculate the growth in sales as a percentage of the marketing spend using the following formula:
MROI (%) = ((Growth in Sales – Marketing Cost)/Marketing Cost) * 100
Let’s say an ad campaign costs you $1,000, and revenue grows by $3,000. The MROI is (($3,000- $1,000)/$1,000) * 100 = 200%
That means for every $1 you spend you are earning $2 in additional revenue.
Note that residual sales and organic growth need to be excluded for this metric to be a true reflection.
Some people prefer to express the MROI as a ratio by simply dividing the increase in revenue by the marketing spend. In the above example the MROI ratio would be $3,000/$1,000 = 3.
The rule of thumb is that the MROI ratio should be at least 5 to allow for a profit to be earned after the cost of goods sold and all other business expenses are taken into account. Of course, this depends on the type of business and the gross margin. A business with a very high margin might still be profitable with a MROI ratio of 2, while a business with very low margin may need a MROI of more than 5 to be profitable.
The two versions of the MROI mentioned above can give you a good overall idea of marketing effectiveness. To really understand what’s working and what isn’t, more specific metrics are useful. This is one of the advantages of using marketing channels where you can get direct feedback like PPC ads, paid email advertising and various forms of social media marketing.
Cost Per Lead (CPL)
Cost Per Lead is a standard metric by which all marketers should know. The CPL is calculated by dividing the total cost of your advertising by the amount of leads it generates. Most ad platforms, including Google and Facebook, will readily report this metric on your dashboard.
If you find that a lot of leads are not worth pursuing, you can break that down further to find your Cost Per Opportunity (CPO). This is calculated by dividing the total cost of your ad campaigns by the amount of actual sales opportunities it has created.
Customer Acquisition Cost (CAC)
The CAC is the amount you have to spend on a campaign to win each new customer. This can be derived by dividing your cost per lead, or cost per opportunity, by the rate at which you convert leads to sales. Or, you can simply divide the total spend by the number of actual customers generated.
Customer Lifetime Value (LTV)
Ultimately the goal of marketing is to generate profitable sales. If a campaign increases sales, but costs more than value of the sales it generates, it’s ROI is negative. However, if a campaign wins you new customers who will make repeat purchases, the campaign may be profitable in the long run.
Customer lifetime value (LTV) is the average revenue you expect to earn from a customer over their entire lifetime. It can be calculated with the following formula:
LTV= Average Order Value * Purchase Frequency per Year * Average Years Customer Remains Active
The last number is usually an estimate of between 1 and 3 years, depending on the type of business. When you have enough data, you may actually know the average period a customer will remain active, but if you don’t, its best to be conservative.
If the average purchase value is $50, customers buy from you every two months and your average years active is 2, then your LTV is $50 * 6 * 2 = $600.
This is one of the most important metrics for a businesses. Dividing the LTV of each customer by your CAC tells you how much revenue you can earn for each dollar you invest in marketing.
In the previous example, the lifetime value was $600. Even if the cost of acquiring a customer was $300, every dollar spent on marketing would return 2x as much in revenue.
For any business looking for outside investment, this is an important number because investors will use it to estimate the return they can make on their investment, and how quickly retained earnings can be compounded.
To account for costs of running a business, you should look for a LTV:CAC multiple of 3:1 or more.
Website Traffic and Brand Search Lift
While marketing campaigns usually have specific sales goals, it’s worth monitoring your website traffic and relevant search data. For instance, if your campaign drives significant website traffic without any sales, the campaign may be generating interest, but ultimately not converting.
Brand search lift occurs when a marketing campaign leads to an increase in searches that include your brand name. That means the campaign may be creating interest without actually generating clicks or engagement.
These metrics can help you fine tune the campaign and work out which aspects are working, and which aspects are not.
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