How Do I Work Out the ROI on My Digital Marketing Spend?

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How do I work out the ROI on my Digital Marketing spend?

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Digital Marketing funnel math, the cost part of the equation.

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Digital Marketing Funnel Math

Lead Acquisition Costs

Return on Investment (ROI)

Breaking Through The Blindness

Supporting Information

Digital Marketing Funnel Math

Funnel math is a term used in digital marketing to describe the process of analysing the performance of a digital marketing funnel. It involves analysing the conversion rates and cost per lead to your business.

A Typical Digital Marketing Funnel

Start With the Lifetime Value of Your Customer

It’s most important to work out the lifetime value of a customer. If all you do is calculate the profit on a single job the cost of advertising may exceed the cost of acquiring that customer.

So, what is a new loyal customer worth to your business?

$500, $5,000, $50,000?

What if that person becomes a regular customer? and purchases over and over again? and does so for 5 or more years?

What if you do such a good job that once someone becomes a customer there is a chance they’ll tell there friends and neighbours and one of them will also become a regular customer?

That makes each new customer even more valuable because they become your engine of growth.

With a product or a service a customer might have a lifetime value of $50,000 thousand or more. The first 100 customers if they are the right people are practically priceless.

Lead Acquisition Costs

So if you have worked out the lifetime value what’s the funnel look like? Below is a breakdown of the cost part of the equation.

If a lead costs $10 how many leads do you need to get one customer?

If you need 10 leads to get 1 customer your lead acquisition cost is $100. If your lifetime value of a customer is $10,000 you should buy as many customers as you can afford.

The formula for calculating Lead Acquisition Cost (LAC) is:

The internet makes it faster than ever to attract new customers and to do this you buy clicks from Meta or Google.

Clicks go to your website, that website click goes to another part of your website or an enquiry, that leads to the next thing until you’ve turned that interest into a paying customer.

However, every click between the first and the last makes your funnel more expensive, get rid of too many clicks and customers won’t trust you enough to buy from you.

Getting the funnel right is the most important part of digital marketing.

Return on Investment (ROI)

The truth about a digital marketing funnel is it’s not going to be a magical fountain of results.

You must know how much you’re willing to pay for a customer.

If you can’t work out the funnel maths, don’t buy the ads.

If you can measure the funnel and it costs too much for you to afford ads, don’t buy the ads.

If the cost of marketing to acquire a customer is more than the lifetime value of that customer you need to get the cost of advertising down.

Breaking Through The Blindness

People are so used to seeing ads and the platforms are so cluttered that the ads won’t have enough power to pay for themselves.

So many people see so many ads that the cost of engagement has gone through the roof.

Advertising is the primer, marketing is the growth mechanism.

Build trust with frequency, generate word of mouth build a network of people who need your business or product or service.

You grow because customers talk about your business and recommend you.

You will grow because you offer ever more value to the customers you serve.

Aim your ads at people looking to find your business or service.

Supporting Information

Lifetime Customer Value (LTV) is a critical metric in digital marketing and business that represents the total revenue or profit a customer is expected to generate over their entire relationship with a business. It helps businesses understand the long-term financial impact of acquiring and retaining customers. Here’s how LTV is typically calculated and why it’s important:

Calculation of Lifetime Customer Value (LTV)

The calculation of LTV can vary depending on the business model and industry, but it generally involves the following components:

Average Purchase Value: The average amount of revenue or profit generated from each customer transaction.
Purchase Frequency: How often, on average, customers make purchases within a given time frame (e.g., per month or per year).
Customer Lifespan: The average length of time a customer continues to purchase from the business.

The formula for calculating LTV is:

Factors Affecting Profitability for Advertisers

Several factors influence how much advertisers can profit from paid ads:

Effectiveness of Campaigns: The ability of ads to attract clicks, conversions, and sales.
Conversion Rate: The percentage of users who take the desired action (e.g., make a purchase, sign up) after clicking an ad.
Cost of Goods Sold (COGS): The cost to produce or deliver the product or service being advertised.
Average Order Value (AOV): The average amount spent by customers per transaction.
Lifetime Value (LTV) of Customers: The total revenue expected from a customer over their entire relationship with the business.