You may have read our blog post on how much to spend on advertising in order to convert a customer here. We concluded there is in fact a fairly simple formula to figure out how much to spend. Now that this is settled, the question becomes - when do you know you have spent enough? Or put differently, when do you know the investment is worth it?
What is my ROI?
The simple answer is 'it depends'. It depends on how you define return-on-investment (ROI). Do you look at revenue, profit or net present value (NPV)? Do you define ROI as 'conversions'? If so, do you mean number of sales, email addresses obtained, open rates or brand loyalty? Your ROI is a result of your strategy. When you know how you are going to win you start tracking with whatever metrics makes sense. Thankfully, there is a simple rule of thumb.
Spend less than a customers' average worth
A good approach is to work out the average lifetime value of your customer. Next, decide how much you are willing to spend in order to convert. The average lifetime value means the average net profit a customer will generate over their time as your customer. It can get less complicated and more complicated, this gives you a relatively simple explanation.
The punch line is, if you know the average lifetime value of your customer is $200, you can spend up to this amount in order to convert and still make a profit.
Let your strategy guide you
- If your strategy is to grow on business-as-usual, simply make sure you spend less to convert than the customer will be worth to you over the short term.
- If you strategy is to invest in the future, accept a loss upfront because you know the customer will repay you over time.
How to increase conversions
- Test what works (A/B testing)
- Incorporate social proof
- Enhance your customer journey (avoid unnecessary steps online, be clear about what makes you different and act on it)
- Provide a guarantee to your customer so they see the investment as lower risk
- Have a clear strategy and execute like crazy!
Thank you for following me to this point, well done - you are already on your way!
To watch an abbreviated version of marketing ROI how to, watch the video below: