One of the biggest challenges for a small business is getting a handle on business finances. While "we're making more than we're spending" may be sufficient for a business that's just getting on its feet, at some point, you need to start looking for more detailed information on just what your expenditures are buying you.
Marketing has traditionally created a problem for calculating returns, because many traditional forms of advertising are "fire and forget" strategies. If you put up a string of billboards, you'll never definitively know whether those billboards are creating sales.
However, with inbound marketing, the calculations become a lot easier. Once you've been running an online campaign for a few months, or a year, you'll have the data to start really figuring out the Return on Investment (ROI) of your marketing spends!
The Five Crucial Elements For Calculating Inbound Marketing Success
1 - Raw Inbound Marketing Costs
Add up what your online expenditures cost. These shouldn't vary significantly from month-to-month, but take an average to get a monthly figure. At the least, it should include.
Website hosting and bandwidth expenses.
Technical support expenses.
Costs for producing your online content.
Sales team expenditures.
Add it all up, and you'll have an idea what you're spending each month on your online marketing.
2 - Cost Per Lead
First, you need some numbers on what your website is actually accomplishing. Start with the cost per lead. This can be more granular if you want, but for a quick and dirty calculation, just take your average online marketing expenditures for a month and divide by your average leads garnered in a month.
So, if a company is spending $1,000/mo on their inbound marketing, and getting ten leads, their cost per lead is 1000/10 = $100.
3 - Customer Acquisition Cost
That's all well and good, but how much does it cost to actually turn a lead into a client? After all, this is a process that may take months of effort on the part of your content marketers and sale team.
If you lack better data, you can estimate this the same way you got the cost per lead. However, a better technique is to review your customer records directly.
Figure out how many "touches" or interactions it takes an average customer to convert, and look at the cost of those individual touches. If you find the costs for several actual customers, and take the average, you'll have a better idea what the realistic costs are.
Don't forget to include real-world interactions, like expense-account lunches, when figuring this. Your online marketing costs will still sometimes cross into real-world budgeting.
4 - Customer Lifetime Value
This is the hard one to calculate, especially if you haven't been in business long, but the CLV is necessary to get a good handle on your inbound marketing's ROI.
The short version is, you take an average customer, figure out the average amount he spends per week/month/year, and then take a guess as to how many years he'll remain a customer, all other things being equal. There's your CLV.
For a more detailed breakdown, Kissmetrics has an excellent infographic detailing how to get accurate numbers, if you've got a few years of sales data to pull from.
5 - Marketing ROI
From here, you've got everything you need to calculate your marketing ROI. As a formula, it simply looks like (Revenues - Costs) / Costs.
Add up your costs per customer, subtract your costs, and then divide by your costs. If you come up with a number that's above zero, congratulations! Your marketing is profitable. The number you get is simply the percentage of profitability. ".25" means you got a 25% return, "1" is a 100% return, and soforth.