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Best Ways to Calculate Marketing Return on Investment Including LTV

Calculating revenue generated for all your marketing activity is not an easy task. Certain tactics such as social media, video, display ads, and content marketing target users long before purchases take place.

Some marketing software platforms such as Marketo, Pardot, and Hubspot do a great job of connecting early engagement to final sales, but they are not perfect.

However, just because a certain marketing activity cannot be accurately measured does not mean that it should not be considered.

That being said, you should always try to connect the dots between marketing activity and revenue. Fortunately, advances in web analytics methodology and software provide better insight for measuring marketing activity over time and across several devices.

Calculating Marketing ROI

Calculating your marketing ROI and how much it contributed to your company’s sales and profit is essentially the backbone of marketing. But, many marketers will confess that it’s one of the biggest challenges they face.

According to a Hubspot report, marketers who successfully calculate ROI of their marketing activities are 1.6 times more likely to receive a higher marketing budget. This is because if you can quantitatively show your bosses the impact of your marketing activities, it will increase their confidence in you work.

  1. Measuring Your True ROI

A common mistake that many marketers make is using gross profit alone to calculate ROI instead of including the cost of goods sold (COGS). An example of a simple ROI calculation is:

ROI = (Total Revenue – Marketing Investment) / Marketing Investment × 100

Though simple, the above formula is not an accurate representation of true ROI since it does not account for your profit margin. Hence, a better way to calculate ROI is using COGS. The formula is:

True ROI = (Total Revenue – Total COGS – Marketing Investment) / Marketing Investment × 100

  1. Cost Per Lead (CPL)

If you are running a paid traffic campaign (like PPC) or an email marketing campaign, you should calculate the cost per lead (or cost per conversion) to measure your ROI. The formula is:

Cost per lead = Cost of Campaign / Number of leads generated

A high cost per head compared to your product’s cost means that your campaign underperformed.

  1. Customer Acquisition Cost (CAC)

CAC is a popular ROI metric used to measure the cost of acquiring a new client/customer instead of a lead. It is the sum total of all the marketing investment you require to bring a new customer onboard. To calculate CAC, you have to divide all the costs you incurred on acquiring a new customer by the number of customers acquired throughout the period that the money was spent.

CAC = Total Cost of Sales and Marketing / Number of Customers Acquired

CAC presents a more comprehensive and representative metric compared to CPL since it clearly shows the cost of acquiring new customers who actually pay your business.

  1. The Ratio of Customer Lifetime Value (LTV)

CAC is a powerful ROI metric but it is not useful if you do not track the lifetime value (LTV) of your customers. LTV refers to the profit that your business will derive from the future relationships with customers. Simply put, it’s the total revenue you will gain from a customer from his or her first purchase to their last.

Therefore, it is essential to track how much you spend to acquire a new customer as well as how much they will pay you in their lifetime. Here is how to calculate this ratio:

Ratio of Customer Lifetime Value = Lifetime Value (LTV) / Customer Acquisition Cost (CAC)

Calculating LTV is challenging because you require complex predictive analysis. Below is a simple formula:

Customer Lifetime Value (LTV) = Customer Value (CV) × Customer Average Lifespan (CAL)

You will need the following metric data:

  • Average Order Value (AOV): It is how much an average customer spends in one visit.
  • Purchase Frequency (PF): It is how often customers purchase from your business.
  • Customer Value (CV): It’s the average value of a customer. To get this number, multiply your AOV by your PF (see above).
  • Customer Average Lifespan (CAL): It is how long your customer stays a customer:

A well performing business has its CAC lower than its LTV.

Large corporations typically include more metric data into their LTV calculations including marginal profit, overhead, segmentation, discount rate, and more.

The Bottom Line

So what is the best metric to measure your marketing ROI? The truth is that no single metric can truly capture your marketing ROI. Ergo, you should use multiple metrics relevant to your campaign’s goals to justify your marketing budget. Other useful metrics include brand search lift, website traffic, leads, Return on Ad Spend (ROAS), among others.