How To Predict Digital Marketing ROI With ConfidenceWednesday November 6th, 2019
It’s completely normal to have anxiety about pouring thousands into marketing agency fees and ad spend for the promise of growth. This article lays out ways to predict marketing ROI and derisk an increased marketing investment.
What we will cover in this article…
- The fundamentals elements for understanding and predicting marketing ROI
- How to predict cost per click (CPC), cost per lead (CPL) and cost per acquisition (CPA)
- The main factors that impact marketing ROI
- How to lay out possible scenarios and predict marketing ROI [Helpful Tool]
I checked my inbox recently to find a candid email response from a prospect that I had been talking to. The CEO of this particular small home services business was brief in his message– he asked me what it would take [in terms of dollars and time] to double their revenue. He was looking at the proposal I sent him and the sheer cost was causing him to hesitate.
He certainly had the desire to grow, or he wouldn’t have been talking to me in the first place about digital marketing, but felt uncomfortable taking the leap. Instead of getting defensive, I sided with him.
I understood the CEO’s hesitation.
I faced this dilemma with my own agency recently and it wasn’t a cut and dry decision, even for a team of marketing professionals to make.
Let’s look at a real world example…
I was pretty confident that we needed to accelerate our marketing spend, but I wasn’t completely sure what the results would look like, or how quickly we would find success. Furthermore, I was struggling to present my case to the rest of my team.
After a few weeks of contemplation, I decided to take the blame of a bad decision over endless indecision. I pulled together some historical data on conversion rate, first contract value and lifetime revenue of all inbound leads, and it was enough to get everyone on board, albeit skeptically.
So, we took the leap. We increased our monthly marketing and advertising spend by 120%. We committed team members to our own agency account the same way we do our clients.
While the chart looks generally positive and the investment looks like it was a smart one, you’ll notice that the October-December time frame wasn’t a home run. This is normal… whether it’s two months or four, or even longer, there’s usually a window of doubt, where an increase in marketing spend is not met with immediate results and revenue. And… this leads me to the first tip for preparing to increase your marketing budget.
Tips for Increasing Your Marketing Budget
Tip #1: Be Ready for the Window of Doubt
For some time after you increase your marketing budget, people on your team will question the decision to spend more on marketing and will challenge the ROI, and that’s to be expected. Do not be caught off guard when this happens, just be prepared. Being prepared relates to you and your team of decision makers. And that brings me to my second tip.
Tip #2: Make Sure All Stakeholders Understand The Primary Factors That Impact The Marketing ROI Equation
|ROI Factors||How it Can Impact ROI|
|Total Ad Spend or Ad Spend Per Month||Increasing ad spend allows for more reach, faster iteration, and quicker decision making when testing. It also can shorten your window to generate a positive return on investment. On the flip side, a low ad spend can make it difficult to gather information quickly and lead to a slower road to positive ROI.|
|CPC (Cost per Click on Paid Ads)||Lowering your cost per click adds more potential traffic, and therefore potential leads, to your marketing funnel. This can increase volume without increasing spend.|
|Conversion Rate||Improving conversion rate can have the greatest impact on your bottom line, as optimization is happening at the closest point to a transaction. Improve conversion rate and your whole ROI equation can brighten up dramatically, without increasing spend or reach.|
|Growth Goal (Total Revenue Over a Time Period, New Customers, etc)||If you have aggressive growth goals, like double or triple digit increases over the coming year or two, expect your spend to match your appetite for growth. More reasonable growth goals can be managed with a lower spend and optimization across the entire marketing funnel.|
|Fees For In House Talent, Agencies & Consultants||Don’t forget to factor in the costs for your in house marketing teams, and any agencies or consultants. While internal and external team members may bring value outside of the direct ROI, don’t forget to weigh that as part of the budget and make sure you aren’t overpaying for talent compared to your level of advertising spend and performance you are getting in return.|
Tip #3: Figure Out Your Average Cost Per Click (CPC)
For many early-stage companies, especially those that haven’t done any professional digital marketing in the past, figuring out what your target CPC will be is more of a guess than a science. Depending on your service/product, price point, the advertising channel and level of competition out there, CPC can vary greatly.
In a recent report, the average CPC on Google Ads across the entire search network was $2.69. Meanwhile, industries like legal and consumer services see average CPCs of over $6, but, these are averages. For highly valuable, and therefore, competitive keyword combinations that include terms like “auto insurance,” “attorney,” and “mortgage,” the cost can be in the $50-$150 range per click.
If you want a better idea of what you can expect to spend on CPC for your business, I suggest installing the Keywords Everywhere browser plugin. Then, type some of the most valuable keywords/phrases into Google that your prospective customers would search for to find you.
Along the right side of the SERP, you’ll see suggestions for popular keywords, volume, CPC, and competition that will help you gauge what you might expect your CPC to be for Google Ads.
Tip #4: Understand Cost Per Acquisition (CPA) and Customer Acquisition Cost (CAC)
Wait, what is cost per acquisition?
Cost per acquisition or “CPA” is the average cost it requires to bring in a new lead, however it is that your business defines what a lead is. In the most basic advertising terms, CPA is a factor of cost per click and conversion rate.
$2 CPC / 4% Conversion Rate = $50 CPA
(2 / .04 = 50)
What is CAC, then?
Taking the CPA of a lead for your business a step further, customer acquisition cost is the cost of acquiring an actual customer. To calculate your CAC, take your CPA and divide by your sales close rate. Let’s say you convert 5% of the leads that come in into paying customers.
(50 / .05 = 1,000)
Tip #5: Figure Out Your Target CAC and Maximum Allowable CAC
To understand your target CAC and maximum allowable CAC, you need to know how the economics of your business work – or how much you make on each individual sale and on each customer over their lifespan. To know that, you need to understand your cost of goods, which then allows you to calculate your gross margin.
Depending on what type of growth rate you’re after, or what growth stage you’re in, you may be willing to acquire customers at a loss, but let’s say you aren’t Fitbit or Shopify.
Let’s say your average first transaction is $1,000 for a first year subscription to your service and the average customer lifespan is 3 years. Your CLV, or customer lifetime value, is $3,000. Now let’s say your cost to service/support that customer account is $50/year or $150 total. Your gross margin then, is $2,850.
If you’re very focused on user growth, your Maximum Allowable CAC might be $2,850, but should probably be more like $1,000-$2,000 if you are interested in running a profitable venture.
Your target CAC is more of a rough goal than a math calculation, but let’s say that’s $600, or 20% of your lifetime gross revenue per customer. At your target CPA, your gross margin is $1,900 per new customer acquired. If you can scale it, then you have a strong and sustainable business on your hands.
Tip #6: Understand How CAC Can Be Manipulated
When I talk about levers or factors, what I mean is that there are a few different key opportunities to optimize the marketing funnel to improve your marketing ROI:
- Lowering your CPC… results in… getting more people to your website/content for cheaper
- Improving your lead conversion rate… results in… more leads without having to generate more traffic to your website
- Improving your close rate… results in… more customers without having to generate more leads
- Increasing your ad budget… can result in… a shorter window to achieve positive ROI
Successfully manipulating any of the levers above will help to optimize your marketing funnel for either a higher volume of inbound leads or a lower overall CPA. And when you are acquiring more customers or bringing them in for a lower cost, you’ll have that additional money to invest back into marketing and advertising. Success begets success.
It’s worth mentioning that there are a few levers that get into product, pricing and sales strategy, that can be manipulated outside of the usual marketing realm:
- Increasing your fees or margin on each sale… results in… making more money with fewer customers
- Improving your close rate on leads/deals
- Increasing your CLV (customer lifetime value)… results in… making more money with the same customers by retaining them longer or offering return opportunities and essentially increasing the amount they spend with you in their lifetime.
- Increasing referrals… results in… generating more customers using your current customers, and without the need for additional ad dollars.
And then there are things like refining your ad targeting or improving positioning and messaging of your product or service, which can ultimately lead to a lower CPC and conversion rate, and a lower CPA. A bit less tangible and direct, but extremely important nonetheless.
Bottom line… there are many ways to skin a cat.
Now that you understand the fundamentals that impact your marketing ROI equation, and know exactly what these numbers look like for your business, it’s time to build out some models so you’ll be ready to approach the ROI conversation with your team.
“If everyone in the room understands the factors that impact their marketing ROI, we’re headed in the right direction.”
Tip #7: Establish Marketing ROI Projections
It is my belief that an experienced marketer or agency partner should be able to show you what a realistic path to success might look like, based on past experience and available data. They should be able to layout a range of possible scenarios based on a sliding scale of success.
Caution: This does not mean we fall into the dangerous habit of making promises on performance before we have enough data to back them.
Instead of making specific promises, we create marketing ROI models, to show our clients a few versions of what success could look like with our pay-per-click campaigns before taking into account organic growth. But you don’t have to be a marketing agency veteran to do this – it’s part of de-risking any investment and can be done by anyone on the team.
The benefit of creating these marketing ROI scenarios is two-fold: It allows our clients to see what results are possible without giving them unrealistic expectations. It also highlights the main levers that can impact results (including some that are within our control and some that aren’t), helping clients to understand that performance falls on a spectrum.
Tip #8: Lay Out Hypothesis, Play With The Numbers
There will be times where you don’t know a number. Maybe you have limited data from past advertising campaigns and only a super high CPA as an anchor. Or maybe you’re a new business and haven’t had enough experience with customers to know your customer lifetime value. Don’t freak out. You’ll just have to guesstimate, and make sure that when you do, you look at both good and bad scenarios. We all have the tendency to paint a rosy picture and ignore the possible negative outcomes.
“I’ve seen .25% conversion rates. I’ve seen 20% conversion rates. You’ll probably be somewhere in between.”
Tip #9: Be Ready For Anything, And Adapt
Over a two week period, an early-stage CPG company we were working with went from $10 per email acquisition to $2.50. The CPC (cost per click) went from $1.80 to $0.60. We continued to optimize the high performing ads and either shut down or overhauled the low performing ones to replace them with fresh experiments. Nine days in, we were able to acquire 4x the emails per day than when we started. Once we hit the allowable cost-per-acquisition, we spoke with the client and he agreed to triple his budget. What started as 15 emails a day quickly jumped to over 200.
Did we promise this success? No. Before the project began, we communicated to our client that our stretch goal was $1-2 per email (CPA). As we zeroed in on that goal, we continued the conversation with the client and decided it was time to start increasing the budget.
Our assumptions were playing out as expected. The campaign performed well – ads, messaging and landing pages were converting in a healthy way.
But here’s the thing…
Another assumption we had was that the email list would convert to paying customers at a rate of 3-5%. We thought, that seems appropriate and not too aggressive. What we failed to do when planning out our projections models is consider a massive fall off from conversion A to final conversion (purchase). We converted only .5% of our email list.
When things don’t go to plan…
When things don’t go the way you plan, and they rarely do, you must be able to adapt quickly and shift your thinking. In the case of the consumer product company, their Facebook ads and remarketing funnel were converting much higher than their email list. Also, their bottom-of-the-funnel ads were outperforming the top and middle of funnel so we eliminated the top of funnel education and went for conversions.
My point in telling you this story is that no matter how much you plan, it’s always a moving target and you must always continue to observe, learn, test new hypothesis and adapt your plan based on what you are seeing and what’s working. One of your scenarios in the marketing projections model should be a “what if this doesn’t work” scenario, and you should talk about that with your client or team before investing.
Ready to Build Out Your Own Marketing ROI Scenarios?
Ok, let’s get started.
If you’re ready to start tackling the marketing ROI equation, I would suggest gathering the following information (When I’m working on the marketing ROI scenarios for a prospective client, this is what I ask for):
- Revenue per unit sold (initial purchase, MSRP)
- Margin per unit sold
- Revenue from return purchases / upsells (monthly or yearly)
- Margin on return purchases
- Customer lifetime value (projected sales revenue over customer lifespan)
- Target CPA (this is your best guess, we will come up with an appropriate number through our analysis)
- Maximum Allowable CPA (this is your best guess, we will come up with an appropriate number through our analysis)
- If we are focused on more than one product and price point, please repeat the bullets above.
- If you haven’t gathered the information I’ve listed above, I highly recommend you do. It will help you get a clearer picture of your business model and where improvements could be made.
At the end of the day, there’s no marketing model that will give a business 100% confidence in their marketing investment. At a certain point, it comes down to trust and good dialogue between brand and agency to give it a go.
If you agree to engage a marketing agency, just pay close attention to the way expectations are managed, how goals are set and what level of transparency there is around performance. If you have a good picture of what not-so-good, good, better and best scenarios look like, then you are off to a good start with your agency relationship.