Measuring ROI

Let’s assume that after you analyze the results of your marketing campaign, your lead generation program generated 100 sales at a total cost of $5,000. And let’s also assume that the price for your product is $100.
That means your total cost per sale was $50 ($5,000/100 sales) and you generated $10,000 in sales ($100 x 100 sales).
This scenario shows that you generated $10,000 in sales for a marketing expenditure of $5,000. You conclude that for each $1 you spent on marketing, you generated $2 in sales ($10,000 in sales/$5,000 in marketing expenses) – or a 100% return on your marketing investment.
But that’s deceiving because it only takes revenues into account, not profits.
If each sale is only worth $50 in gross profit, then you only generated $5,000 in profits for your company for a $5,000 marketing expenditure. That means each $1 you spend on marketing generated only $1 in profits ($5,000 in profits/$5,000 in marketing expenses) – resulting a true ROI of 0%.
However, let’s consider the total value of your investment over a longer timeframe.

Lifetime value of a customer

The hypothetical example above shows that your ROI was 0%. But let’s say that a significant number of these customers regularly buy from you again and again. Now you can calculate your total ROI in another way – measuring ROI against the lifetime value of a customer.
Here’s an example of how that works:
  • You initially spent $5,000 on marketing to generate $5,000 in profits from 100 customers.
  • Let’s assume that you follow up with these 100 customers on a regular basis – and that these follow-up activities costs $50 per customer or $5,000 ($50 x 100 customers).
  • Now your marketing costs total $10,000 ($5,000 initially plus $5,000 in follow-up).
  • After measuring future purchases, you note that half of these customers, 50 of them, make a similar purchase 10 times over the next two years for a total of 500 sales (50 customers x 10 sales).
  • Assuming a similar gross profit of $50 per sale, you’ve now generated $25,000 (50 customers x 10 sales x $50 gross profit per sale) in gross profits for a total marketing budget of $10,000.
  • That means your ROI is now 250% ($25,000 in profits / $10,000 spent on marketing. In other words, for each $1 you spent on marketing, you’ve generated $2.50 in gross profits.
That presents quite a different picture doesn’t it? And it certainly illustrates the importance of measuring the lifetime value of a customer. True, this ROI isn’t immediate, but it does show that follow-up activities with new customers can dramatically boost your ROI over time.

Game Plan

  • Be sure to calculate ROI based on your profits, not total revenue.
  • Set up mechanisms to track future sales from a customer against the initial marketing program that generated that customer.
  • From time to time, track the overall expenditures and profits from each customer.
  • Measure how long customers keep ordering to determine the lifetime value of that customer and calculate your overall ROI across that time period.
  • Test a variety of marketing techniques to keep each customer buying from you as long as possible.
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