Sinking money into your marketing every year and not understanding the return you’re getting from it is something we hear from new clients all the time at Intrigue. Either you start out marketing with a partner and they never communicate the ROI of their marketing efforts OR you take it on internally and don’t have the time or clarity on how to make the calculations.
Well, it’s 2020, and if we have learned anything it is that we need to run businesses efficiently. We realized this year, perhaps more than ever before, the importance of cash flow. Understanding what your marketing is doing for you is one of the many parts worth looking into to ensure that you have a strong cash flow moving forward. So let’s get started!
The first step is to fill out your Business Chassis. The business chassis will help you determine the value of a single lead, which in turn will help you understand what return you can expect to receive. This will help you get a clear picture of the value of a lead for your business.
At Intrigue, we define a lead as a phone call, contact form submission, or a walk-in visitor. In the business chassis, if you do not have all of these numbers, it could be a good goal to work towards tracking your sales data in the new year.
Here is the formula that Intrigue uses:
# of Clients
Avg. Gross Margin %
Average Gross Margin in $
Average Frequency of Purchase/Year
Average Lifetime of Customer
Average Lifetime Value of a Customer in Gross Margin $$
Now that you know what a lead is worth to you, the next step is to figure out how much you’re spending on your marketing.
With many mediums of marketing, it is my suggestion to calculate online investment and traditional marketing separately. If you have systems set up to track how your incoming leads are hearing about you that will make things easier. If you do not have this information, you may choose to use your all-encompassing marketing costs, but, without tracking leads you may be missing out on key pieces of information.
For the purpose of this example, let’s say the total marketing expense for a company during their fiscal year is $100,000.
Now that we know what we’re spending on marketing and how many leads are being generated from our efforts we can calculate the cost per lead.
Cost per Lead = Investment
Number of Leads Generated
If a company has generated 3,000 leads in a year on $100,000 of marketing spend, they would be looking at a cost per lead of $33.33!
Most people will focus on that number alone to understand the value of a marketing campaign. However, if you want to take this one step further, to truly calculate a return on investment (that your CFO will love), you can do this by referring back to the Business Chassis.
When you know the average Gross Margin $ of a client and their purchase frequency in a year, then you can understand how much time it will take to see your marketing investment begin to deliver a positive ROI.
In this example, we will say that each new client generates an average of $300 in gross margin dollars on an annual basis.
We know at a cost per lead of $33.33, and taking 3 leads to close 1 sale, that we have made a profit in the first year with a new customer in this campaign. To put it simply, we paid $100 to acquire a new customer through the marketing campaign while we earned $300 in gross margin dollars on the sale.
To calculate ROI we need to add up revenue, subtract marketing investment, and divide that number by the investment.
ROI = (Revenue – Investment)
In this example, the new revenue generated is equal to the 3,000 new leads X $300 in gross margin dollars = $900,000.
ROI = ($900,000 – $100,000)
ROI = 8:1
With results like that, you can move from working ‘in the business’ to focusing ‘on your business’! This calculation will help you see the value of the marketing investment that you’re putting into generating new business each year.
If you’re looking for a marketing partner who understands that your marketing investment needs to deliver a positive return and you want to see how Intrigue may be able to help, explore our Marketing Action Plan process to see how we uncover these numbers for our clients.