How I Answer the Return on Investment (ROI) Question
One of the many challenges we face as digital marketers is the (Return On Investment) ROI question, when a potential client comes to us with a project, some of them demand to know the return on their marketing investment. It becomes more overwhelming with clients that require you to prove you will meet a set target in terms of their financial returns before giving you the job.
I am usually faced with the temptation of replying such prospects(clients) by asking if they make such demands when they patronise traditional advertising outfits like Television, Radio, Newspapers, Billboards the same ROI question before patronising them? Why is it mostly digital marketers that are subjected to this ?
However, with the understanding that people want proof of value for their money (bottom note: money is not easy to come by these days) and some marketers have wasted people’s money with little or no measureable results, I usually give a more professional answer which will sound reasonable only to an understanding and reasonable client.
Below is one of the many Scenarios I use to answer the ROI question
Firstly, your ROI is dependent on a number of factors like user behaviours which cannot be ‘precisely’ forecasted, probably because the result of your marketing is based on their perception of your brand, it also depends on the price of the products, competitions, incentives, the effectiveness of the campaign and the strategies deployed etc.
We (Gavaar) can guarantee that our proposed marketing strategies are proven ways to increase your bottom-line and we will continue refining them as time goes by. However, in the third to fourth month of activities we will be able to provide an estimate of your ROI based on past experiences and improve on it going forward.
We would expect an increase in sales when you proceed with your online marketing project. This increase will start in the first month and increase over the next 12 months. Digital Marketing ROI is going to increase with time, as we will be building a community, a community of customers and prospects that we will constantly sell the benefits of using your products, and they will be the first to know when you have any new products or package to push out. This customers will also serve as brand ambassadors to sell your products
BENCHMARKED ROI Projection:
Assuming your average sale value is N500.
And a New customer typically buy 20 times over 10 years during their lifetime, which works out to a N10,000 lifetime revenue.
Your profit margin is 30%, meaning that each new customer is worth N3,000 profit over their lifetime.
Let’s be cautious business people, and say that we are willing to spend N500 to acquire a new customer (acquisition cost). This gives us lots of room to mitigate risk, should something happen.
We also need to remember that new customers can lead to more referrals, but that’s beyond the scope of this equation. Let’s keep that potential new revenue out of the equation for now.
OTHER ASSUMPTIONS & PREDICTIONS:
Assuming your goal is to acquire 5400 new customers in the year, or 450 per month.
The breakdown below are the various planned marketing activities:
- Email and Marketing Automation: N200,000 per month
- Pay-per-click advertising: N400,000 per month
Total Monthly Spend: N600,000
Annual Spend: N7,200,000 (N600,000 x 12 months)
That seems like a lot!
Keep in mind, You have a total of 5400 new customers that year. Are you profitable in your efforts? Let’s do the math.
New customers = 5400
Lifetime value per customer = N10,000
Total Lifetime Value = 5400 x N10,000 = N54,000,000
Acquisition Cost (price paid to market + find new customers)= N600,000 x 12 = N7,200,000
Grand Total: N54,000,000 – N7,200,000 = N46,800,000
Return on Investment (ROI) = N46,800,000/ N7,200,000 = 6.5 times, or 65%
Let’s say it takes them 10 years to get their lifetime value of a client back, that works out to 65% return on investment per year (non-compounded).
That means, for every N1 invested in your marketing, you will get N6.5 back.
Also note that the 5400 customers is for the first year only. You would be having 5400 x 10 =54,000 by the end of the 10th year. However, the above projection is for the lifetime value of your customer in a year.
Sometimes, it’s not the immediate ROI that counts, it’s the lifetime value. Once you have a solid understanding of how much a customer is worth to you, you can really start marketing. If you have no idea, you’re likely to lose money. Guesswork rarely gets results.
NOTE: The above example is only applicable to a business with a similar model and/or parameters.
Digital marketing campaign is accumulative. What we do the first week and the first month, increases the benefit and the value of what we do the next month and the next year.
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