Measuring ROI (2024)

Let’s assume that after you analyze the results of your marketing campaign, your lead generation program generated 100 sales at a total cost of $5,000. And let’s also assume that the price for your product is $100.

That means your total cost per sale was $50 ($5,000/100 sales) and you generated $10,000 in sales ($100 x 100 sales).

This scenario shows that you generated $10,000 in sales for a marketing expenditure of $5,000. You conclude that for each $1 you spent on marketing, you generated $2 in sales ($10,000 in sales/$5,000 in marketing expenses) – or a 100% return on your marketing investment.

But that’s deceiving because it only takes revenues into account, not profits.

If each sale is only worth $50 in gross profit, then you only generated $5,000 in profits for your company for a $5,000 marketing expenditure. That means each $1 you spend on marketing generated only $1 in profits ($5,000 in profits/$5,000 in marketing expenses) – resulting a true ROI of 0%.

However, let’s consider thetotalvalue of your investment over a longer timeframe.

Lifetime value of a customer

The hypothetical example above shows that your ROI was 0%. But let’s say that a significant number of these customers regularly buy from you again and again. Now you can calculate your total ROI in another way – measuring ROI against thelifetimevalue of a customer.

Here’s an example of how that works:

• You initially spent $5,000 on marketing to generate $5,000 in profits from 100 customers.
• Let’s assume that you follow up with these 100 customers on a regular basis – and that these follow-up activities costs $50 per customer or $5,000 ($50 x 100 customers).
• Now your marketing costs total $10,000 ($5,000 initially plus $5,000 in follow-up).
• After measuring future purchases, you note that half of these customers, 50 of them, make a similar purchase 10 times over the next two years for a total of 500 sales (50 customers x 10 sales).
• Assuming a similar gross profit of $50 per sale, you’ve now generated $25,000 (50 customers x 10 sales x $50 gross profit per sale) in gross profits for a total marketing budget of $10,000.
• That means your ROI is now 250% ($25,000 in profits / $10,000 spent on marketing. In other words, for each $1 you spent on marketing, you’ve generated $2.50 in gross profits.

That presents quite a different picture doesn’t it? And it certainly illustrates the importance of measuring the lifetime value of a customer. True, this ROI isn’t immediate, but it does show that follow-up activities with new customers can dramatically boost your ROI over time.