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.)