In consulting with new clients, I often hear them ask me what the return on investment will be for my recommended marketing approach.
Of course, this is a reasonable question, but I like to ask them how they calculate the return on investment for other activities like hiring a new salesperson, adding a supervisor in the warehouse or how they measure the benefit of that fancy new phone system they installed at everyone’s desk. I like to understand how they measure ROI for other activities so that marketing isn’t singled out with a different standard.
Marketing ROI or return on investment often starts by asking a simple math question: if I spend X what will I get in return for that investment? If I spend $10,000 on sponsorship, advertising or attending a trade show, how will I know that the investment is worthwhile?
For marketing, I like to begin by understanding the lifetime value of a customer.
If someone buys from me once and never buys again, their value to the company is fleeting and transactional. But if someone purchases from me year after year, you can begin to calculate the return on spending.
Last year, one of my B2B clients was stumped when I asked them what the lifetime value of their customer is and how they calculate it.
“We never calculated it,” they told me. “We don’t think about it that way.”
We did a little exercise where we looked at ten years of data and found that on average, a customer was worth $250,000 over a five-year period. They had 443 customers.
How much would you pay for one customer if over five years you got $250,000?
They didn’t know because they hadn’t been asked the question this way. When we played around with some numbers, they realized that if they spend $25,000 to get a typical customer who will purchase $250,000 over five years, that investment provides a solid return for them.
Marketing and Life Time Value
- If a marketing campaign can get you, one typical client, then spending $25,000 makes sense. If you think you can get four from the activity, spending $100,000 is a wise choice.
- However, if you have strong brand awareness, your marketing challenge is converting leads into customers. But if you are entering new geography or even a new vertical market, you might need to spend more to get awareness.
- $25,000 might make sense as a marketing investment in a marketplace where there is awareness of your product or brand. But if this is virgin territory, the investment may need to be more than $25,000 because your initial challenge is awareness not the conversion of leads. Will someone buy from you if they don’t know who you are?
- When you think of sales over many years, not just quarters, your willingness to invest shifts into a different calculation.
Beyond ROI
An important factor gets overlooked in measuring the lifetime value of a customer or determine how to measure ROI? How will a customer become more valuable over time? It isn’t just in what they buy, but it is how they engage with the company and how they help market for you.
Will customers:
- Bring your new ideas and insights?
- Promote you to their friends?
- Do testimonials for your company?
- Share news about your company?
- Allow you to see data to help you understand the value?
- Speak at conferences you sponsor?
- Give you access to non-proprietary research?
Lifetime value is both a simple and complicated topic. Most companies need to put some rigor around knowing how to segment and value each customer so that it is clear how much should be spent to acquire new customers. Not all customers are equal so your ROI might be calculated differently depending on what the customer might return beyond revenue.
Start with the simple math of understanding how much a customer might buy over time, but beyond those purchases, the right customers can add enormous value to your business if they are helping you grow, collaborate and innovate for tomorrow.
Want to review the LTV of your customers? You can set up a time to chat with me about your marketing challenges using my calendar. Email me jeffslater@themarketingsage.com Call me. 919 720 0995. The conversation is free and we can explore if working together makes sense. Try my new chat feature on my site if you have a quick question.
Photo by Christian Dubovan on Unsplash
Marketing Cartoon Courtesy of Tom Fishburne. If you are a marketers, you’ll love Tom’s work. Sign up here for free.
