Is your marketing team keeping track of your Cost Per Lead, Conversion Rate, and Cost Per Sale at every step of your sales funnel? Does everyone know those numbers by marketing effort?
Understanding the value of every lead and sale can help you decide whether to continue particular marketing programs — and how to plan next year’s marketing budget.
When you can prove to your boss (and CFO) how cost-effectively you’re investing your marketing budget, you may be able to get budget increases approved more easily.
You’ll also help prove your value (and the value of marketing) to your company.
Lead Analysis by Source
It’s extremely valuable to know the Dollar Value of each Lead Response.
You can compare the Dollar Value of each Response to your Cost Per Lead (how much it costs you to generate each Lead). That will help you evaluate the cost-effectiveness of each Lead Generation channel.
Cost Per Lead =
Total Cost of Marketing Effort / number of Leads Generated
What’s the Dollar Value of each Lead?
If your average sale is $500:
- If 2% of leads convert to sales, then each lead is “worth” at least $10.
- $500 x .02 Conversion = $10
- If 3% of those who download a white paper convert to a sale, each white paper download is “worth” at least $15
- $500 x 03 = $15
- If 10% of those who request a product sample end up purchasing, then each sample request is “worth” at least $50
- $500 x 10 = $50
By knowing the value of every response, you will cost-effectively allocate your marketing dollars – and prove your logic to your boss.
In the example above, a white paper download is worth at least $15.
If you spent $1,000 on an advertising test on a particular website, and generated 20 white paper downloads, you got white paper downloads at $50 Cost Per Lead ($1000 / 20).
- In this case, that’s probably not a cost-effective marketing option for you.
If 20% of those who attended webinars consistently converted to customers, then each webinar attendee is worth $100:
- $500 x 20 = $100
If you tested a promotion to CTOs to pitch a webinar for a total cost of $2,000 and got 50 attendees, it cost you $40 per webinar attendee. You should expand your webinar efforts to this audience, because each webinar attendee is worth $100 to you.
When your average purchase is higher, then additional options become profitable. What if your average sale is $5,000?
- If 90% of the prospects who visit your plant to check out your equipment buy, then each plant visit is worth $4500 ($5000 x 90).
If you offer to pay travel expenses to bring prospects to your plant, it’s highly likely that expense would be a cost-effective way to spend your marketing dollars.
Is this how you analyze your lead generation funnel and offers?
Analyzing Cost-Effectiveness of Sales Results
Cost Per Order
One of the most useful equations is Cost Per Order (or CPO), also called Cost Per Sale. (If you’re prospecting, it can be Cost Per Acquisition or CPA.) Cost Per Order tells you how much you spent to bring in each order.
Cost Per Order =
Total Cost of your marketing effort / # of sales (or orders) that resulted from the effort
If a $12,000 marketing campaign resulted in 60 orders,
$12,000 / 60 = $200 Cost Per Sale
If you spent $200 to bring in each order, and your Gross Profit Per Sale is $100, that may or may not be a good thing.
You lost $100 on every order you brought in.
But what if you know that on average, each customer orders about 3 times per year from you:
$100 Gross Profit Per Order @ 3 orders per year = $300 gross profit/year/customer
Perhaps your average customer continues to order from you for 2 years. Now you have $300 gross profit/customer @ 2 years = $600 gross profit/customer (or $600 Lifetime Value).
You’ll need to factor in the cost of getting those additional orders over the 2-year period, as well as your desired profit (and overhead), to determine if spending $200 to get each initial order was a good deal.
If $200 was unacceptable, you can:
- Try a different marketing channel
- Reduce the cost of your marketing effort.
To improve Gross Profit Per Order, you could:
- Raise your sales price
- Reduce the cost of producing your product
- Test a more aggressive Offer to try and drive a higher response.
Cost Per Sale can be useful for comparing the cost-effectiveness of different list segments, audiences, Offers, media channels, and campaigns. Are you running these analyses — and having these “how can we improve” conversations with your team regularly?
Expense to Revenue
If the size of each sale varies, you’ll want to look at how much you spent to bring in each dollar of revenue.
Expense to Revenue Ratio =
Marketing Costs / Dollar Revenue
If marketing campaign costs were $5,000, and the campaign generated $27,500 in revenue, $5,000/$27,500 = 0.18 (or 18%)
Marketing expenses were 18% of the revenue generated (or it cost us $0.18 to bring in every dollar of revenue).
Revenue to Expense
You can also reverse the equation, and look at Revenue divided by Marketing Costs:
Revenue to Expense Return = Revenue / Marketing Costs
This tells you how much revenue you generated for every $1 of marketing expense.
In this example, for every $1 spent on marketing, we generated $5.50 ($27,500 / $5000) in revenue.
- You should run Revenue to Expense by Channel so you can compare each channel’s effectiveness.
Results are the key in marketing. “Does it matter if the artwork was stunning, or you thought the copy was amazing, if the effort didn’t bring in leads or sales?”
When you focus on results from every effort, you’ll find ways to make every effort more successful. And that’s the key to a better marketing plan, and proving the value of your marketing team and your entire marketing effort.
Excerpted from our new book, “The Results Obsession: ROI-Focused Digital Strategies to Transform Your Marketing” now available on Amazon!
Learn more about The Results Obsession and see the Table of Contents
The Results Obsession includes an entire chapter on marketing math.
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