You’re absolutely sure that your inbound marketing efforts are paying off. There is an evident increase in the lead count, there have been significant conversions from lead nurturing workflows and leads are more sales-ready than ever before. However, just having immeasurable insights isn’t good enough for the top tier executives. They thrive on figures and hard facts. However, inbound marketing consists of several interconnected activities, and the metrics for most of these activities are soft. Consequently, it can be tricky to calculate the value in numbers.
But, if you can’t measure inbound marketing Return On Investment (ROI), you’re going to have a major issue convincing management for a higher budget and in revealing the invaluable contribution that inbound marketing makes towards increasing sales. Obviously, the importance of calculating the ROI for inbound marketing cannot be overstated.
Here are 4 ways to objectively calculate the ROI for your inbound marketing strategy.
Define & analyze the right metrics
The first and foremost rule of calculating the ROI for inbound marketing is to consistently keep track of the right metrics.
Inbound marketing comes with great analytics and can virtually tell you everything you wish to know about your users, leads, prospects and customers. But, only if you use them well. To get the most out of your analytics, it is important to prioritize your goals and identify the numbers that matter to you the most. These can vary based on your goals and priorities.
For example: If you spend a lot of time and resources on nurturing existing leads, then you might want to look at metrics related to that front of your inbound marketing strategy:
- Email open rates
- Click Through Rate (CTR)
- Spam reports
If content marketing is at the crux of your inbound campaign, track metrics such as:
Calculate Your Total Cost of Customer Acquisition (CAC)
As the name suggests, CAC is the total sales and marketing cost incurred for acquiring a new customer over a specific time period. This cost involves all expenses related to marketing including but not restricted to remunerations, commissions, bonuses and other overhead spent attracting new leads and converting them into customers. It is not just a measure of the recuperated revenue but also an indicator of the effectiveness of your sales and marketing efforts.
To calculate the Cost of Customer Acquisition, you will need the following data –
- Specific period for the calculation
- Total marketing & sales spend
- Total number of new customers acquired during that specific time period
CAC= Total Marketing & Sales Cost / Total number of new Customers acquired during that period
Another metric that is crucial to calculate the success of inbound marketing is LTV or Customer Lifetime Value
- Estimate Customer Lifetime Value
Once you convert a lead into a customer, the next obvious step is to calculate the Customer Lifetime Value (LTV). The LTV is a projected total revenue that a customer will generate over the duration of their relationship with that company. LTV basically helps you predict how long it would take to replace every investment made to acquire customers. Better yet, it helps you plan your acquisition investments.
To calculate the LTV, you’ll first need to gather the following variables:
- Average Purchase Value:
Total revenue of the company between the specific time period (usually 1 yr) / Number of purchases made between the same specific time period
- Average Purchase Frequency:
Number of purchases over the course of the time period / Unique customers who made a purchase during that time period
- Customer Value:
Average purchase value X Average purchase frequency.
- Average Customer Lifespan
Average number of years that a customer purchases from your company
Once you have these values, simply apply this formula:
LTV = Customer Value X Average Customer Lifespan
The ratio LTV:CAC will help you quickly understand a customer’s value in relation to how much it cost to win them over. Ideally, the LTV: CAC ratio should be 3:1 which means that to recoup the CAC and truly earn aROI, the value of your customers should at least be 3:1. In other words, the value of your customers should be three times the cost of acquiring them.
Calculate Inbound Marketing ROI
Once you identify the right metrics and have calculated your CAC & LTV, you have all of the information that you need to calculate the return on investment and the payback period of your inbound marketing efforts.
ROI = LTV – CAC / LTV
This information will not just help you in planning your efforts but also help upper management make informed budgetary decisions and get your CEO onboard with inbound marketing.