How much does it cost?
When it comes to marketing, everyone wants to know, “how much will it cost?”.
But a better question is “how much is a customer worth?”.
Marketing can be notoriously hard to measure in terms of return on investment.
Sometimes it can be difficult to prove a direct link between marketing activities and results.
In a previous post I explained some of the ways you can monitor and evaluate your marketing success. Some of these tips included measuring enquiries, sales, social media engagement, click through rates, customer surveys and media coverage.
Today I want to talk about cost per lead and cost per conversion.
The great thing about the formulas I’m about to explain is that they enable you to allocate a dollar amount to how much it costs to get a new lead and convert a lead.
This also helps you to identify the proportion of leads you’re converting.
Once you know these figures you can easily set yourself a benchmark and then regularly monitor and measure your success against the figures.
Your overall aim is to increase the proportion of leads vs conversions, overall number of conversions and decrease the dollar figure per conversion.
Once you know what dollar figure per customer you’re targeting you can also set yourself more realistic marketing budgets.
Some software programs and analytics programs have built in functionality to measure specific campaigns and their contribution to leads and sales, but this is mainly for online marketing activities and sales.
You can manually calculate how much getting a customer costs when it comes to all of your marketing activities with the following formulas. You will need to choose a time period for calculating the following figures and apply it across all the formulas. You could choose a 12 month period, a month or the period of a specific marketing campaign.
Marketing cost per lead (for X time period) = marketing costs (for X time period) / Number of leads (for X time period).
Marketing cost per conversion or sale (for X time period) = marketing costs (for X time period) / Number of conversions or sales (for X time period).
You can take this a step further and calculate (from past sales data) the average value of each sale or new customer over the same time period and then calculate return on investment (ROI). If you have a type of business that typically holds onto customers for more than 12 months than calculate the average LIFETIME VALUE of that customer.
Your marketing ROI is the total value of your new customers or new sales over the time period or lifetime value of your customers minus the marketing costs OR
Marketing ROI = Sales revenue – Marketing costs (for X time period).
Of course the above formula only considers revenue so it doesn’t take into account other overheads that will affect overall profits but it does indicate the relationship between your marketing spend and sales. This is then another measure or benchmark you can use for future marketing campaigns and activities.
Finally you can calculate the Marketing ROI of each new customer by using the following formula:
Marketing ROI of each new customer = (Sales revenue – Marketing costs)/Number of new customers
Finally you can also express Marketing ROI as a percentage with the following calculation:
Marketing ROI % = ((Sales revenue – Marketing costs)/Marketing costs) x 100
The percentage figures can seem a little on the high side but they once again will show the correlation between marketing spend and sales.
Below you can find a sample of these calculations for a fictional business over a 12 month period.
|ANNUAL MARKETING COSTS||$10,000.00|
NUMBER OF (TARGET) LEADS IN YEAR
NUMBER OF (TARGET) CONVERSIONS IN YEAR
MARKETING COST PER LEAD
MARKETING COST PER CONVERSION (CUSTOMER)
AVERAGE VALUE OF EACH NEW CUSTOMER OVER 12 MONTHS (SALES REVENUE)
TOTAL VALUE OF NEW CUSTOMERS OVER 12 MONTHS (SALES REVENUE)
OVERALL MARKETING ROI AFTER 12 MONTHS
ROI OF EACH NEW CUSTOMER AFTER MARKETING COSTS OVER 12 MONTHS
TIP: The above formulas are great for measuring marketing activities and their success but in business you also need to take into account your overall profit margins, so you may wish to ALSO deduct other overheads (NOT just marketing costs) when calculating ROI figures. This will enable you to make sure your marketing activities are well within budget.
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