By Samuel Thimothy, VP at OneIMS.com
Return on investment is one of the most important metrics for any business. As an entrepreneur, you’ve probably heard or used this term dozens (if not hundreds) of times.
After all, it is the metric that measures your progress. It lets you know whether you’re making the right investments or paying attention to the correct things. However, some ROIs are easier to measure than others.
One of the more difficult ROIs to measure is marketing. Usually, your marketing investments don’t turn an immediate profit. They’re ongoing and build off one another. It can be hard to set time limits to measure your ROI because the results could be ongoing.
I run into this problem all the time with my marketing agency. Clients want to know their ROI of a specific campaign -- which I understand. They want to know their money is being put to good use.
I often have to explain to them that measuring marketing ROI takes time. But how do you measure a metric that is constantly changing with various factors at play? Here’s how.
1. Measure conversions per campaign.
We like to think of ROI as a monetary return, but that isn’t always the case when it comes to marketing. While we ultimately want our connections to purchase, we can’t expect prospects to buy after their first encounter with your brand. For that reason, you need to measure per-campaign ROI in specific goal-oriented conversions, not just dollars.
There are many different conversions you can measure when it comes to your marketing campaign. While sales might be the most obvious, you also want to look at other behaviors that bring the customer closer to the end of the sales funnel. This might be signing up for a newsletter, getting a free trial, or even just following your brand on Facebook.
Each of these conversions are a return on your investment -- even if it doesn’t mean money directly in your pocket. If your marketing campaigns are set up appropriately, that will come.
2. Know your customer acquisition cost (CAC).
It often takes multiple little conversions (like the ones I just mentioned) to get your prospects to finally buy, making it difficult to see how much you spent investing in that one customer. This is where customer acquisition cost (CAC) comes in.
CAC considers the amount of money you’ve spent on marketing over a specific period of time and how many customers you’ve acquired during that same period. This metric allows you to account for the money spent to get new leads to sign up for your newsletter or try out a free trial.
Total Marketing Cost / Total Customers Acquired = CAC
Here’s an example. Let’s say that over the course of a year, your entire marketing budget was $300,000, including everything from Facebook Ads to content creation. During that year, you acquired 1,000 new customers. Your CAC would be $300.
CAC is a great way to measure your long-term marketing ROI. You can get more detailed with CAC to measure on specific platforms or in shorter periods of times, such as quarters or months.
3. Measure customer lifetime value (CLV).
If you’re investing in marketing correctly, you’ll see returns on your investments through long-term buyers for years and years to come. This is measured through your customer lifetime value (CLV).
Customer lifetime value tells you how much money a customer is expected to spend during their relationship with you. Because it is often less expensive to retain a repeat customer than it is to convert a new customer, you want to have high lifetime values for your customers.
Total Customer Spend Per Year x Length of Customer Relationship by Years - Customer Acquisition Cost = Customer Lifetime Value
Let’s say you spent $1,000 to acquire a new customer. That customer stays with your business for five years and spends $2,000 a year. Your CLV for that customer would be $2,000 multiplied by five, minus the original $1000, which equals $9000.
CLV allows you to see the long-term impacts of your marketing investments and adjust your spend according to the return you can expect.
Marketing ROI often involves more than just looking at what you get for what you give. However, when you look at your marketing results holistically through measuring conversions per campaign, customer acquisition cost and customer lifetime value, you can find your marketing ROI over time.
Samuel Thimothy is the VP at OneIMS.com, an inbound marketing agency, and co-founded Clickx.io, the digital marketing intelligence platform.