Measuring your return on investment in marketing isn’t always easy, particularly if you use marketing strategies that do not make it easy to track direct effectiveness. That is, it’s tougher to decide how good your ROI is on sponsoring the local footy club than it is buying an ad on Google.
If you struggle to measure your ROI on marketing, it can be difficult to figure out exactly how much you need to spend to get the cash that you need to be profitable.
One nice tool I came across recently was from ActionCOACH chief Brad Sugars, who believes it’s a good idea to measure the total lifetime value of a customer when you’re thinking about marketing.
To work out the lifetime value of a customer, he provides this equation: (Average Value of a Sale) X (Number of Repeat Transactions) X (Average Retention Time in Months or Years for a Typical Customer).
Think of a customer who signs a two-year phone contract at $50 a month. The equation would be $50 x 12 months x 2 years = $1,200 in total revenue or $600 per year. Now, if you are a phone company, you would be able to work out that as long as your total costs are under $600 a year including marketing, that customer should be profitable over the life of your relationship.
It’s a rough guide, but a handy one I reckon.
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