What’s the key to measuring your online marketing success? It’s ROI (Return on Investment). Now ROI isn’t anything new, but most small businesses still make the mistake of looking short term when measuring the ROI of their marketing campaigns.
Search engine marketing (and online marketing in general) for most small businesses is an acquisition tool. Put simply, it’s about delivering new customers to the business via online sales or leads.
Most small businesses use the first order value as the determinant of ROI. They fall into the trap of using the initial revenue generated from search engine and online marketing as the basis of “return on investment” measurements.
It’s an easy trap to fall into, as most SMEs are focused on very short break-even time frames. Let’s face it, with the high level of small business failure in tough financial times – it’s “almost” understandable.
But small businesses need to learn from their bigger counterparts. Many larger firms measure their advertising and marketing ROI based on the value of the customer (lifetime value or LTV). This is can be a more relevant measure of your online marketing campaigns.
ROI = Expected LTV / Marketing Investment
Lifetime Value as defined by Wikipedia is
“…the present value (usually expressed in currency) of future profits that can be derived from a customer based on the profits that have been received from that customer in the past.”
While a new customer has no historic buying behavior to base the LTV on, small businesses can use the average behavior of their other customers to work out Expected LTV.
Every small business should aim to get more than one sale out of a customer during the lifetime of their business relationship. As they say – it’s cheaper to keep a customer than acquire a new one.
Whether you are a financial services provider or a local hairdresser each customer has value beyond their initial purchase – and it’s the expected profit from the lifetime of this customer that should be used to calculate your ROI.
So how do you work out ROI using Expected Customer Value?
Start by working out the average value of your existing customers. At the most basic level – work out how much each of your customers spend in 12 months and calculate the average profit you make from each.
if you don’t know how much you make from your customers – that’s a whole different challenge. Call your accountant now and read this post later.
For those of you who can calculate the average profit you make from a customer in 12 months – now you have a benchmark for your ROI.
Let’s do some basic sums based on a hairdresser’s online marketing campaign:
Assuming the online marketing campaign costs you $150 per month and generates 4 customers with an initial order value of $30 with 66% margin (total profit $80).
Most businesses would work out their ROI by $80/$150 = 53% – and cancel the campaign and potentially forgo those 4 new customers per month.
Now let’s re-look at this campaign using the 12 month value of those customers. Assuming most customers get 4 haircuts a year – then their 12 month value is actually $80.
The ROI on those campaigns is $320/$150 = 213%
It’s a very different scenario when you understand that your campaign is actually generating a return of 213%. Suddenly your increasing your marketing budget and making a profit.
Now it’s important to understand a few of the assumptions I’ve made in the above calculations:
1. Your campaigns actually convert.
If your not converting traffic into sales, you need to look at your conversion strategies such as website/landing pages (and can include your online marketing campaigns)
2. You are actually managing the LTV of your customers
There’s no point saying your average customer is worth “x” amount if you don’t have strategies in place to ensure this happens – retention strategies.
Understanding and accurately measuring your online marketing ROI is important always, but especially so when you are facing tough economic times.
Don’t get drawn into looking too short term when calculating ROI – or could be missing out on valuable customers.