How to determine the ROI of your your marketing budget. Part 2: Calculating Value
- March 12th, 2012
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Our last post explained how to break down your advertising channels and analyze the cost and effectiveness of each medium. Outlining all of your costs and measuring the direct response of those investments will help you determine which mediums are your most expensive, and which advertising channels are returning valuable leads to you.
Now that you have broken down the costs associated with your marketing, the next step is to look at the value of each incoming lead. These two key performance indicators will help guide you when deciding where to spend valuable budget dollars. We will follow the same steps of analysis, but instead of focusing on cost, we are going to focus on revenue.
Map out your channels
You always begin by mapping out every channel you are currently advertising through. (If you have already worked through the cost analysis of these channels, most of the first steps are done already.) Separate the channels into categories, such as online and offline mediums. Within each category, list your current mediums, including your website, Google AdWords, SEO, email marketing, online classifieds, tv, newspaper, etc.. Include your measurement of how many prospects each channel has produced.
If your organization is not effectively tracking the source of their prospects, start with the channels that you can track, and then develop plans on how to better track the rest. Digital channels are an easy place to start since digital leads almost always have a breadcrumb trail that can be followed.
When reviewing revenue, you can start with the big picture and work backwards as you implement more precise tracking mechanisms. Begin with your Profit and Loss reports to determine your total sales and the number of sales made. Work with your accounting office or the support department of your Dealer Management System to help you get the reporting you need to complete this analysis.
The math is the easy part
Begin by figuring out your value per customer. For example:
Your Profile & Loss shows you sold $2.5 million in major unit inventory with the sale of 83 units. Making your value per customer $2,500,000 / 83 = $30,120
Next we need to go back to the closing ratio we discussed in the last post, which is the percentage of leads received, compared to the number of actual sales made. Let’s say you had 100 leads last month (walk in, completed web forms and phone calls) that reduce down to 30 actual prospects that are ready to negotiate a sale, or are willing to make an offer on a unit. Of those 30 prospects, 7 actual sales are made. This means you have a lead conversion rate of 30% and a closing ratio of 23%.
To determine the value of each incoming lead using the numbers from our example:
Value per customer = $30,120
Value per lead = $30,120 x 30% x 23%
Value per lead = $2,078
You can now compare this to your cost per lead amount you figured out last week. If your per lead cost is larger than your value per lead, you have a problem.
Analyze the data and make informed decisions
You are now armed with some powerful information. You know the value of each incoming lead and how much it cost you to get that lead. By doing the same calculations per marketing channel, you will quickly be able to determine which channels have the lowest cost and highest value per lead.
By working through this analysis, you may see leads coming from your website have a much lower cost per lead than those that saw a TV commercial and came to your store. Or, you may see that leads from an RV or Boat Show have a much higher closing ratio than leads from your website, so although the show space costs more than you invest in your website, your value per lead is actually much higher at a show.
Once you are analyzing your advertising and marketing expenses at such a granular level you will make informed decisions about where your budget dollars should be invested.
What stumbling blocks have you encountered when trying to determine where to spend your advertising dollars? Leave your comments here: