When was the last time you calculated the return on investment (ROI) of one of your lead generation campaigns? If you can’t remember when, you’re not alone. Too many marketers put off calculating this metric – not because they see it as unimportant, but because they find the process rather challenging.
At the end of the day, ROI is one of the best ways to measure the impact of your lead generation campaigns. It’s simple: if your campaign generates a positive ROI (e.g., if you spend $1000 on a campaign and generate $5000 in revenue), then that campaign is a success. While calculating the ROI of your marketing campaign can be complex, it’s doable once you get a grasp of the key formula that determines the ROI of all your marketing efforts: your Customer Lifetime Value, or CLV as it’s more commonly known.
Understanding Customer Lifetime Value
At its most fundamental, the CLV is the amount of revenue you would generate from an average customer during the time he or she remains a customer with you.
Knowing your CLV is key to your lead generation campaigns because: a) It helps you understand how much revenue you’ll generate each time you acquire a customer, and b) It helps you understand how much money you should invest to acquire this customer.
Now that you understand why it’s important you know your CLV, let’s look at a simple method to calculate it.
Say you’re a cable company and you generate $100 from each customer each month and, on average, customers stay with you for four years. You’ll calculate the CLV of your customers by taking the monthly revenue per customer then multiplying it by 48 months (4 years).
Here’s what that math looks like: $100/month x 48 months = a CLV of $4,800.
The formula above is just a basic way of calculating the CLV. That said, it’s good enough to serve as the starting point to calculate the ROI of your marketing efforts. More sophisticated CLV formulas factor in things such as the labor cost associated with serving the customer and the time value of money during the four year time period.
Digging a Little Deeper into Your Return on Investment
Now that you understand the math behind calculating your CLV, let’s dig in deeper into how to use that number to calculate the cost of customer acquisition, or COCA. The COCA is basically the amount of money you’re willing to spend to capture a new customer. You’ll use your COCA to first determine your marketing budget, and later to figure out the ROI for your lead generation campaign.
Most B2B marketers usually allocate about 10% of the CLV as the allowable cost of customer acquisition. Your mileage may vary, but 10% is a good starting point.
Let’s put this into action. Going back to the cable provider example, we established that the CLV is $4,800 ($100 per month x 48 months). 10% of $4800 is $480, which is the amount of money the cable company can reasonably spend to acquire each new customer.
The 10% number is an average, and it’s common for many companies to go up to 15% to 20% (or more) when calculating their COCA. In fact, new companies will often “investment spend” at a much higher COCA to acquire new customers before eventually dropping down to around 10%.
Now that you know your CLV and the allowable cost of customer acquisition, let’s look at how you can use these numbers to calculate the ROI of your lead generation campaign.
Let’s go back to the cable provider example. Say the company typically spends $480,000 a year on their marketing efforts, with 10% of that allocated toward lead generation efforts. This means, they would have to acquire 100 or more new customers from their lead generation efforts in order to generate a positive ROI.
A little confused? Let’s break the math down:
Since the total marketing budget is $480,000, 10% – the portion of it allotted to lead gen – is $48,000.
We know our allowable cost of acquisition per customer is $480.
So, in order to break even, the campaign should generate at least $48,000 divided by $480, which gives us 100 new customers.
If the cable company is currently acquiring more than a 100 customers through their lead generation campaign, it is producing a positive ROI (and vice versa).
We’ve covered a number of concepts above, so here’s a quick recap and a step-by-guide for you to calculate the ROI of your next lead generation campaign. (Be sure to keep this list handy the next time you meet with your boss.):
Step 1: Calculate your CLV. Do this by multiplying the average revenue a customer brings in each year by the average number of years they’re engaged with your business. (Ex. $25 per customer for 10 = $250 CLV.)
Step 2: Calculate your allowable COCA. Unless you’re investment spending, this should be 10% of the CLV. (For the number from Step 1, this would be $25.)
Step 3: Calculate lead generation budget. Calculate what percentage of your total marketing budget is allocated toward lead generation campaigns (as opposed to branding campaigns). Be sure to include the costs associated with all marketing channels used (distribution) and content created (production) for lead generation activities.
Step 4: Calculate the estimated number of customers needed to generate a positive ROI. Do this by dividing the lead generation budget by the allowable COCA. For example, if the business mentioned in Step 1 has a lead generation budget of $1,000, you would need 40 new customers in order to have a successful campaign ($1,000 divided by $25, which is 40).
Step 5: Compare results. Look at the results from your current lead generation campaign to determine whether you’re hitting the goals to generate a positive ROI. (For example, if the campaign mentioned in Step 4 generated more than 40 customers, it would be generating a rock-solid ROI.)
A Few Final Thoughts.
ROI-based marketing can take some time to perfect, so don’t expect miracles. Odds are, you won’t generate a stellar ROI on your first try. However, by applying the formulas above, you’re creating the foundation for measuring results and using them to optimize spending on an ongoing basis. This, in the end, will help get you closer to success. Now that you know how to relate your campaigns to revenue, explore Act-On’s eBook – Demand Gen 101, to learn the tools and tactics needed to create a winning demand generation strategy. You’ll learn 7 key activities every demand generation strategy should incorporate, and how marketing automation sets the stage for demand gen success.Jamie Turner is an internationally-recognized author, CNN contributor, and the CEO of 60 Second Communications. Feel free to tweet him @AskJamieTurner.