Do You Know What Numbers to Show Your Boss?
Regardless of your business, whether or not you are for-profit or not-for-profit, at the end of the day every company has to be focused on the financials. As much as we all hate to admit it, finance drive our many of our decisions. Money allows us to maximize our services, and grow our business as quickly as possible. Management faces many decisions that shape their company and that ultimately determines the successes and failures of their organization.
One of the more important metrics is ROI – Return on Investment. As an executive you are continually challenged with determining where to invest your capital. You capital is the life blood of your company, and without it there is no company. You can choose to invest in your employees, your tools and resources, your sales efforts, or your marketing efforts and ultimately retain capital for future growth and profitability.
Tracking your return on investment on most of the above items can be somewhat challenging, but none more so than your marketing efforts. Until the last several years it was next to impossible to track your marketing ROI. There were tricks of the trade to try to track successful campaigns by setting up unique phone numbers tied to billboard ads, television commercials and radio ads.
Inbound Marketing Analytics
When HubSpot created the concept of Inbound Marketing in 2006, they created a new way to track the ROI of your marketing efforts. Suddenly, we had a way to use analytics to tell us exactly what we needed to know. Knowing how many visitors, leads and ultimately customers are coming through a website became the key to ultimately knowing our ROI. For your inbound marketing efforts, the return on investment is based on several other metrics, including your customer acquisition costs and your Lifetime Value.
1. Cost of Customer Acquisition
This figure would include all of your sales and marketing costs, including fully-loaded salaries, expenses and marketing spend for a given time period. Take these total costs and divide them by the number of new customers over the same time period. The equation will looks like this:
Sales & Marketing Costs
Total New Customers
2. Customer Lifetime Value
You likely know the size of your customer base, and you know their annual spend. No one knows your business better than you, so use that knowledge to come up with the average annual spend of your customers. Once you know the annual spend, just multiply it over the expected life of your customer to derive the lifetime value. The equation would look like this:
(Annual spend on your product or service by given customer * Expected life of the customer.)
You may not be able to calculate expected life perfectly, as you may sell a product that they only use once or you may sell a product that they will use over and over again for the foreseeable future. Again, looking at your historical data can give you an idea of the average lifetime of your existing clients.
Customers can churn for a variety of reasons including exiting their business, your service levels not meeting their expectations, your competition offering better pricing, and a whole host of other issues. While all of these numbers can vary drastically, a reasonably accurate understanding of your customer lifetime value is critical to ROI.
3. Calculating ROI
The return on the investment is simply the lifetime value - customer acquisition costs divided by the lifetime value. This equation looks like this:
Lifetime Value - Customer Acquisition Costs
You can calculate your payback period in the following way:
Customer Acquisition Costs
The payback in this case is the annual payback. You could just as easily calculate the monthly payback if your return cycles are short enough.
Once you know the payback period and the return on investment, you have the primary information that your boss needs to make the decision as to whether or not this is the best use of the companies’ money. Executives are continually balancing where to best put the funds of their organization so that they can continue to grow the organization. The higher the Return on Investment and the lower of number of months that the money
will be awaiting its payback, the more likely your boss is willing to embrace your idea. While these numbers are important in the decision making process, just remember that there are also intangibles that can help make decisions if the numbers are marginal. It is important that your boss be aware of all of the factors to make an informed decision.
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