Calculating Return on Investment (‘ROI’) is not reserved solely for large transformation projects and management consulting firms. It’s actually a handy data point to use to understand the core value creation of a customer experience or marketing automation initiative. In this post, I’ve tried to break down the determination of ROI into an actionable framework for marketing automation, CRM and lifecycle marketing professionals.
Return on Investment
To make it really simple, let’s define ROI as:
Value Created by an Initiative / Investment
‘Value’ = incremental gross profit margin [revenue less directly attributable costs]; and
Investment = incremental cost of the new initiative
Start with your revenue funnel
OK, before we calculate a return on investment for our customer experience led initiative we need to first start with a baseline. Your revenue funnel is the place to start for one critical component of your baseline value. Your revenue funnel might look a bit like this:
Step one is to determine how many customers (or potential customers) you have at each stage of the funnel. Key questions include:
- How many do you have at each stage of the revenue funnel?
- What are your conversion rates from stage to stage (e.g. what percentage of your SQLs convert to New Customers)
- What is your funnel velocity? (i.e. how long does it take to go from a suspect to a New Customer)
Feed all of these into your revenue funnel calculator.
Don’t have a revenue funnel calculator? We do. Drop me an email and I will send you a copy.
What is your customer lifetime value?
Next step is to determine the lifetime value of a customer. For example, you might be selling a subscription service with the following financial attributes:
Average Revenue per Subscriber: $15,000 per year
Average Direct Cost per Subscriber: $3,000 per year
Average Tenure per Subscriber: 4 years.
Now with some simple mathematics we can put all of that together to determine that each subscriber is worth $48,000 over their lifetime (being $15,000 less $3,000 = $12,000 of gross profit per year, times 4 years).
ROI Determination Example
In this example, we are running a marketing automation campaign initiative that is targeting 50,000 suspects which will result in 9 new sales.
From our revenue funnel mapping exercise, we know that 4% of suspects will respond to the campaign, of which 6% of respondents will be deemed to be marketing qualified based on their behavior. From MQL 60% will be accepted by sales (SAL) and of those leads, 50% will be qualified. Of SQL’s we know we convert 25% into customers.
From our customer lifetime value calculation, we know that each new customer acquired is worth $48,000 of gross profit margin; or $432,000 in total for the campaign.
We have estimated that the initiative will cost $100,000 to deliver.
Therefore, this campaign will return 4.3x its upfront investment in gross profit margin.
Please note that in the example below, all funnel numbers have been rounded to the nearest whole digit.
Now your initiative may not be focused on direct acquisition of net new customers and may be focused on increasing funnel conversion for a particular stage (e.g. MQL to SAL). In this instance, you’ll need to model your existing funnel conversion rates as a baseline and separately model the improved conversion rates expected from your initiative. The sales volume difference between the two is what you’d apply your CLV to, when determining your ROI.
ROI: Quantifying value creation
I hope you’ve found some or all of this post useful and start to put it into action within your company. If you have any questions about ROI or would like a copy of our revenue funnel calculator, please reach out to me.