I believe if a marketing strategy / campaign / piece / program cannot be measured it should not be made or started. Well there are some exceptions, but like everything else in life you have to have a scorecard to see what is working and what is not.
When you are trying to measure the effectiveness of a marketing campaign there are three things you need to know. I am going to refer to our marketing strategy as a piece ( i.e. postcard, brochure, ad etc):
1) The cost of the marketing piece.
2) The revenue and profit from the piece.
3) The lifetime value of the customer.
Now let’s work backwards and compare two campaigns to see which one is actually the more effective taking into account the Lifetime Value of a Customer.
Lifetime Value of a Customer (LTV)
The LTV is the amount of gross profit generated per year by a customer multiplied by the number of years that they continue as a customer. For example if I sell business cards to a client for $250 and my gross margin is $100 and they buy business cards from me once a year for 5 years then the LTV is $500.
Cost of the Marketing Piece – A comparison of two campaigns
If I was to send out a brochure advertising my business cards to 2,000 prospects and paid $ 2.50 per brochure then my cost would be $5000.
If I placed 4 weekly ads in a business newspaper with a reach of 25,000 readers advertising my business cards and the ad cost was $250 per week then my cost would be $1000.
Revenue and Profit Per Piece
For comparison purposes the results were as follows:
- New clients from the brochure mailed out – 40 clients x $250 = $10,000 revenue with a GP of $4000
- New clients responding to newspaper ad – 15 clients x $250 = $3,750 revenue with a GP of $1500
So which campaign generated the best return in investment?
On the surface it would appear I am farther ahead with the results from my brochure as my Gross Profit is almost 3 times higher than that produced by the newspaper ad. The brochure generated gross profit of $ 4000 and we have 40 new clients with an LTV of $20,000 (40 sales per year x $100 GP x 5 years)
The newspaper ad only generated 15 clients with a gross profit $1500. The LTV is $7,500 (15 sales per year x $100 GP x 5 years)
Now we deduct the cost of the ad from the LTV it generated to determine our Return on Investment (ROI)
Brochure: $20,000 LTV – $5000 (brochure cost) = $15,000 / $5,000 (cost of brochure) = $3.00 ROI
Newspaper ad: $7,500 LTV – $1,000 (ad cost) = $6,500 / $1,000 (cost of ad) = $ 5.50 ROI
So if I spend $ 1.00 on a brochure my ROI is $ 3.00…but if I spend $ 1.00 on the newspaper ad my ROI is $ 5.50.
The newspaper ad generated a higher ROI, but does that mean I should not use a brochure? No because it created $4,000 of gross profit and making a profit is what it is all about. Calculating or estimating the ROI is effective at ensuring your marketing is going to return a profit. If you are not going to make more than you spend then don’t fall into the age old trap of thinking “I will make it up in volume” because you can’t.
Most importantly ensure all of your marketing has a purpose, results that can be measured and call me to make sure it is top notch.
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