Sean is a principal at FitzMartin, and our leading mind and voice on sales and marketing strategy. Sean is particularly adept at applying the science of behavior change to the art of sales and marketing. It’s an approach that he and FitzMartin have developed over thousands of client engagements since 1992.
“When do I get my marketing investment back?”
It’s neither an uncommon nor an unfair question. It’s one we get often in fact. It’s also a question we like. Business leadership should offer marketing ROI challenges. So where would I start? Before working on a marketing and business problem I want to start with another important number: Marketing Originated Customer %.
Isolated marketing ROI is a curious thing to figure out unless you have an ability to define what business originated through marketing efforts. Right? For some of you it’s super easy. Maybe you have an online retail store with a short sales cycle. OK, pretty straight forward. For others… wow. Hard to discern, but possible in today’s CRM and MAT (marketing automation technology) driven environment. Read more about MAT: http://blog.fitzmartin.com/a-marketing-automation-technology-primer
So what is this “Marketing Originated Customer %”?
This ratio shows what % of your new business marketing drives. To compute it, take all of the new customers you signed up in a period, and look at what % of them started with a lead that Marketing generated. This is much, much easier to do when you have a closed-loop marketing analytics system,
but you can do it manually – just know it will be time consuming. What I like about this metric is that it directly shows what portion of the overall customer acquisition originated in Marketing, and it is often higher than Sales would lead you to believe. In my experience, this % varies widely from company to company. For companies with an outside sales team supported by an inside sales team with cold callers, this percentage might be pretty small, perhaps 20-40%; for a company with an inside sales team that is supported by a lot of lead generation from Marketing, it might be 40-80%; and for a company with somewhat human less sales, it might be 70-95%. Note: You can also compute this percentage using revenue, not customers, depending on how you prefer to look at your business.
Understanding this now you can much better identify your “time to payback on customer acquisition.”
This is the number of months it takes you to earn back the marketing money you spent to get a new customer. You take the CAC (customer acquisition cost) and divide by margin-adjusted revenue per month for the average new customer you just signed up, and the resulting number is the number of months to payback. In industries where customers pay one time upfront, this metric is less relevant because the upfront payment should be greater than the CAC; otherwise you are losing money on every customer. On the other hand, in industries where customers pay a monthly or annual fee, you usually want the Payback Time to be under 12 months, meaning that you become “profitable” on a new customer in under a year, and then after that you start making money.
OK, this is a great start. When you want to know your marketing ROI and your time to payback… start here! Marketing is a lot more about math than most people realize.