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Digital marketing, Digital Strategy

Is marketing worth it?- How to calculate if you are getting a return on investment for your marketing

Is marketing worth it?- How to calculate if you are getting a return on investment for your marketing

We have all heard the age-old phrase that “you have to spend money to make money” but how can you determine if the money that’s being spent is generating a sufficient return on investment? The answer is simple, by putting effective tracking in place and by knowing what to look for. This article will help you begin to understand if your marketing efforts are delivering a return on investment and consequently support you in making more informed investment decisions within your business.

The first step is understanding the lifetime value of your customers, this does not refer to how much profit you make per sale but how much net profit you may expect to generate from a customer throughout their life. This changes based on every company and will often fluctuate, so keep a close eye on it and don’t use other organisations data.

To calculate the lifetime value of a customer you will be working with averages and it’s better to under estimate than over estimate. You need to calculate how much profit you are making per sale, then using experience and any other existing data, estimate how many times a customer will buy from you in their lives. This seems intimidating at first but when you begin to break it down it’s fairly simple. Speaking theoretically if you make £100 profit per transaction and a customer is likely to buy from you twice a year for the next 3 years, their lifetime value is £600.

By understanding how much profit the average customer generates your business over the course of their life, you can begin setting goals for the acquisition costs of these customers. Customer acquisition cost is defined as “the cost incurred by an organisation while convincing a customer to buy a service or a product.” In other words, it is the cost of resources for the business in order to acquire a new customer. This can be calculated by dividing your sales and marketing costs by the number of new customers generated.

Customer acquisition cost = sales and marketing costs/ number of new customers.

In practice, if on a monthly basis you are spending £2,000 on marketing and generating 10 new customers, your customer acquisition cost is £200.

Best practice suggests that the lifetime value of a customer should be three times more than the cost of acquiring them and you should also get your cost for acquiring them back within the first year.  

So using our theoretical example, if your cost per acquisition is £200 you are exactly where you need to be. The customer is worth £600 to you over 3 years which hits the best practice guidelines of 1:3.

So what happens if my customer acquisition cost is too high?

You run the long-term risk of not being profitable. If you want to address this you should consider optimising your marketing campaigns through things such as more effective SEO and conversion rate optimisation. In addition, ensure that you are squeezing the most out of your marketing campaigns by lowering your cost-per-click on things such as Google and Facebook advertising. Be aware that it’s possible you may have saturated your existing market which is why it’s become so expensive to acquire new customers. This is a decision that should not be used as an excuse for a high acquisition cost but must be debated. In this instance, consider changing your campaigns or moving into a different sector/ promoting a different product.

What about if my customer acquisition cost is lower than 1:3?

First of all, congratulations. Secondly, INVEST IN YOUR MARKETING MORE. If you customer acquisition cost is low it means that there is more room to grow into your existing market. When your customer acquisition cost moves above that 1:3 ratio then you are ahead of the game and so it’s time to push and invest. 

Conclusion

Go away and start figuring out your average customer acquisition cost and your average customer lifetime value. By beginning to understand the relationship between how much money a customer makes you and how much it costs you to get them in the first place, you are able to determine if your existing marketing efforts are actually delivering you a good return on investment. If you are spending more on acquiring them than they are generating for your business, it’s time to reconsider your options and look into changing your marketing strategy.

However, if you are spending very little and getting a lot back, it gives you a good platform and plenty of reason to invest more and analyse results and potentially even seek professional help as to how best to invest in your marketing. The main thing is to start thinking about how you can refine your customer acquisition process to make it as effective as possible, allowing your business to continually grow both in market share and profits.


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Jack Kennedy

Jack is the founder of Invanity marketing and has worked in digital marketing since the age of 17. Having been involved in both the client-side and the agency side of the process he is building Invanity with a vision of creating a marketing agency that truly delivers on the results it has promised.

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