As marketing dollars have become more scarce, the importance of measuring ROI and building a business case to support investment has become paramount. For those seeking to better understand this subject, here’s a “simple” methodology for quantifying value. In this case, we’ll look at ROS (return on spend = expected revenue divided by cost of online media) and ROI (expected net present value divided by total investment) from online campaigns. If you find it to be of value, or if you have additional questions, please comment below.
Steps to Calculating Value
1. Determine the Value metric (Revenue, Margin, NPV) of a customer.
Some companies look at value of a transaction, annual revenue per customer or lifetime value (profit) of a customer. Some assign higher values for new customers vs. a new sale to an existing customer. You need to determine what is best for your organization (hint: choose the metric that is most used by your executives). For this example, let’s assume your average sale is $1,000 and that the lifetime value of a customer is $5,000.
2. Assign conversion rates to approximate close rates.
Let’s assume 3% of site visitors request more information (inquiries) and that 30% of inquiries complete a purchase. If you’ve done online campaigns before, you should have a basis for inquiry rates. Hopefully your VP-Sales know how many leads convert to a transaction. If 3% of visitors become leads, and 30% of leads are closed, 0.9% of visitors will become customers.
3. Determine what your cost or investment will be.
Let’s assume you will spend $10,000 in online advertising (display, search, email, etc.) this month.
4. Do the math to calculate ROS and ROI:
Assuming your efforts drive 2,000 incremental visitors to your site (cost: $5 each) you should see 60 new leads (3% conversion rate) and 18 new customers (30% close rate) worth $18,000 in revenue or $1.80 direct ROS ($1.80 in revenue for every $1 spent).
The Net Present Value of the 18 customers is $90,000 ($5,000 each) yielding a Return On Investment of 900%.
If you present these types of results to your CFO, you’ll quickly find a lot of interest (and dollars) in online marketing.
Another Metric: Value per Engagement
Another way to measure results is calculating value per engagement (visit, inquiry, etc.). In the example above, each visit is worth $9 in revenue ($18,000 divided by 2,000 visits), whereas each inquiry is worth $300 ($18k divided by 60), compared to a cost per visit of $5 and a cost per inquiry of $166.67.
Remember Your Margins
While revenue is an easy metric to measure, margins are much more important. Assuming your gross margin is 60%, you are making profit as long as your cost per visit is less than $5.40 or cost per inquiry is less than $180.
Caveat Emptor!
Please use good judgment when applying these methodologies to your own business. Again, these are not a panacea for every situation. But hopefully, they will give you some building blocks for quantifying the impact of your interactive marketing program. If you have specific questions, please leave them here. I can’t promise I’ll know the answer, but I’ll do my best to help you figure it out. Happy number crunching!
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Steve Latham, founder and ceo
