While old-school budgeting practices viewed marketing as advertising and advertising as an expense, savvy marketers today are tracking and watching the return each marketing dollar earns.
Sadly, a lot of digital marketing runs in the negative. I’m referring to marketing ROI. Run a PPC campaign, track it, and often the marketing customer acquisition cost (M-CAC) will be more than the value of the actual customers who convert.
Although huge companies will want to keep up with the Joneses, SMBs can’t afford too much negative marketing ROI and stay afloat. Of course, if you and all of your competition are running negative ROI-producing campaigns then nothing lost, nothing gained. It’s like if you and everyone else jumps out of an airplane without a parachute; the results all would be the same.
Can I Afford Inbound?
Companies who are unaware of the value of inbound marketing are often cautious about what to expect. Fortunately, there are several ways to calculate ROI for inbound marketing for construction companies that will give you the assurance you need before you sign.
Since inbound normally produces significant positive ROI, we like to think of inbound as an investment, not as a marketing or advertising expense.
Using LTV to Assess Value
Lifetime customer value or LTV, is a marketing metric used to describe the total value in dollars each new customer is worth. In marketing, LTV is one of several very important metrics to know and track.
The LTV formula
LTV = Average Order Value X Number of Repeat Sales over Time * Gross Margin as a percentage.
For example, "Customer A" buys a $1,000 widget each month, stays a customer for 5 years, and your gross margin (profit) is 30%. LTV is calculated: $1,000 X 60 (12 months X 5 years) = $60,000 * 30% = $18,000.
Using LTV to assess ROI from Inbound Marketing
Sticking with the above example, the LTV of "Customer A" is $18,000. The all-important question you first must answer relates to your marketing goals: How many new customers do you want?
Say you decide to invest in inbound, and through inbound marketing, your goal is to attract and convert 4 new customers per month. That’s 4 X $18,000 = $72,000 of LTV. How much would you spend to achieve that goal? Let’s say your spend on inbound marketing was $18,000, the value of just one, not four customers. Since we’ve already factored in gross margin to arrive at a net LTV, your ROI would be calculated as $72,000 (LTV of new customers) / $18,000 (marketing cost of customer acquisition or M-CAC) = 4. Expressed as a percentage, your marketing ROI would be 400%. Not bad, right?
The Importance in Assessing Marketing ROI
Using LTV to assess marketing value is just one way, albeit a safe way, to forecast ROI. By analyzing ROI before you launch a campaign, you have more assurance of results without gambling. Inbound marketing for construction companies is a drastic contract to traditional marketing where often you can’t track results, let alone forecast them. And worse, as I mentioned above, when you can track them, often the outlook is dismal.
If you’d like a more visual look at LTV, Kissmetrics has posted a great infographic. Even though it’s a deeper dive than my example above, the principles are the same.
Armed with this simple metric, you now can both forecast the profitability of new marketing campaigns and monitor the ROI of existing ones. Inbound is still a new strategy, but it will always produce by far the highest ROI for your marketing dollars.
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