Measuring online lead generation: CPA, LTV, ROI, OMG
In a recent post, I told the story of a client that enjoyed $550,000 in new revenue from online lead generation during the first 7 months of 2017. In actuality, the total is significantly higher, since that only includes form fills, and not web-generated phone calls. For the purpose of this discussion, form-fill data works just fine. Let me provide some context and break that down a bit. Prior to the start of our campaign, this company was averaging $5.5M annual revenue. $0.00 of that was generated by attracting new business online. I should mention that our efforts began a few months prior to January 1st., so we had a bit of runway leading up to FY17. Monthly, $550K breaks down to $78,571.43. Annualized, that’s a pace of just over 17.1% year over year. To understand what that means in terms of ROI (return on investment), we’ll need to dig a little deeper. Two key metrics are (1) the number of customers making up that revenue; and (2) how many times each customer will purchase over a lifetime. We know the cost of the contract, so we can calculate the cost per acquisition (CPA), as well as the lifetime value (LTV) for every new customer attracted through SEO. The formula is simple: ROI = LTV – CPA Determining the cost per acquisition is also simple. Just add up all the promotional costs and divide by the number of new customers generated from those efforts. Lifetime value is the amount each of those customers spends. If you are calculating the total return for a given effort, count all of the customers attracted by the campaign. For the above campaign, monthly sales of $78,571.43 represents 3.4 customers. So the average revenue per sale is $23,109.24. Most customers spend that annually and stick around for at least 3 years. Lifetime value (LTV), then, is $23,109.24 X 3, or $69,327.73. Still with me? The entire cost is the amount spent on SEO, which happens to be $5,500 per month. We just divide that by 3.4, the average number of customers acquired through online search in a given month. $5,500 ÷ 3.4 = $1,617.65. Now we can calculate the actual ROI using the formula. ROI = $69,327.73(LTV) – $1,617.65(CPA) ROI = $67,710.08 per month. ($812,520.96 per year) As a side note, that’s a CPA of about 2.4% of revenue. Most industries establish their marketing budgets around 4% to 6%, so 2.4% is very low. Obviously, not every business sells $23,000+ items, but the ratios are the same for every business. It is the relationship between CPA and LTV that determines the success of any marketing effort. It’s what our clients are really interested in, even if they’re not used to thinking in those terms. So, as you put together a plan leading into next year, using hard data in your lead generation planning will keep your forecasts as accurate as possible. Maintaining the relationship between revenue from each generated lead, relative to the cost of acquiring it, will also help you scale your plan.