One of the biggest challenges marketers face is how to calculate the ROI of a mobile marketing campaign. If you’re going to take this challenge on, the key formula you’ll need to know is the customer lifetime value formula (CLV). CLV, in its most fundamental sense, is the amount of revenue the average customer generates for your company during the time he or she remains a customer.
Let’s say you own a pest control company and you know that your average customer spends $100 per month for your services. If your typical customer stays with you for three years before he or she stops using your service, to calculate this metric, you’d take your monthly revenue per customer of $100 and multiply that by 36 months (3 years): $100 x 36 months, to arrive at a CLV of $3,600.
It’s important to note that the formula we’re using here is a very basic version of CLV. When you go deeper into the world of CLV, you start factoring in information like labor costs for servicing that customer, or the time value of money during that three-year period. But for our purposes, this formula is all we need to begin calculating the ROI from a mobile marketing campaign.
Here’s a simple way to calculate your customer lifetime value:
Average Revenue per Customer $__________
Average Number of Repeat Visits per Customer _________
CLV = _________
Once you’ve calculated your CLV, you’ll want to figure out how much you’d have to spend to acquire a new customer. This is called your cost of customer acquisition (COCA). It’s essentially the amount of money you’re willing to spend to “capture” a new customer.
Many businesses allocate about 10 percent of their customer lifetime value for their cost of customer acquisition. Going back to the pest control example, we’ve established that its CLV is $100 per month x 12 months x 3 years = $3,600. If the firm allocated 10 percent of that as its allowable cost of customer acquisition, it’d have $360 to spend on advertising and marketing for every new customer acquired. That includes direct mail costs, paid search costs, banner ad costs—whatever. But as long as the firm could capture a new customer for every $360 spent, it would be meeting its COCA goal of $360 per customer.
The 10 percent figure for cost of customer acquisition is a rule of thumb. Some industries allocate only 5 percent as a COCA; other industries allocate 15 percent. But generally speaking, as a starting point, you should budget about 10 percent of your customer lifetime value as your cost of customer acquisition.
Now that you know how to calculate your customer lifetime value and your allowable cost of customer acquisition, how do you use those figures to calculate the ROI from your mobile marketing campaign?
The best way is to slice off part of your existing marketing budget and allocate it to mobile. Let’s say the pest control company traditionally uses direct mail and direct response television (DRTV) to acquire new customers. If it spends $2 million a year on a direct mail and DRTV, and its cost of customer acquisition is $360, then it should generate 5,555 new customers a year from its efforts. This would be pretty easy to track, because direct mail and DRTV can have tracking codes tied to them, as follows:
Budget for direct mail and DRTV = $2,000,000
CLV = $3,600
Allowable COCA= $360
New customer acquisitions based on marketing spend ($2M/$360) = 5,555
How do we take these figures and use them to track and calculate the ROI from your mobile marketing campaign? It’s easy; just slice off a segment of your current budget and use it for your mobile marketing campaign.
As an example, let’s take 20 percent of the pest control company’s $2 million direct mail and DRTV budget. That amount would be $400,000. We know from previous experience that spending $400,000 in direct mail and DRTV will generate 1,111 new customers for the company. If we were to allocate $400,000 to a mobile marketing campaign for the pest control company, we’d expect to acquire the same number of new customers (1,111) as a result of a mobile marketing campaign. Think about it: If it costs $360 for the pest control company to acquire a new customer, then in an ideal world it shouldn’t matter whether that $360 was spent in direct mail, DRTV, or mobile marketing.
Let’s take another look at the facts and figures around the pest control example before we move on:
Budget for direct mail and DRTV = $2,000,000
Customers acquired from direct mail and DRTV ($2M/$360) = 5,555
20 percent of overall budget redirected to mobile = $400,000
New customer acquisitions from mobile marketing spend = 1,111
Of course, there’s always the chance that if you spend $400,000 on your mobile marketing campaign, it would exceed expectations. Instead of generating 1,111 new customers, it might generate 1,500 new customers. But the odds of that happening are not likely. After all, this is your first mobile marketing campaign and the chances of you hitting a grand slam home run right out of the box are pretty slim. A more likely scenario is that your mobile marketing campaign would generate fewer than 1,111 new customers—say, somewhere around 900 new customers.
Should you cancel your mobile marketing campaign because it only generated 900 new customers, instead of the 1,111 you could have acquired using direct mail and DRTV? Nope. As we mentioned, you won’t hit a grand slam the first time at bat. You’ll be lucky to hit a double. But if the campaign looks like it might have some viability, then you’ll be able to test your way into success. You’ll be able to eliminate the aspects of the campaign that underperformed and transfer that budget to aspects of the campaign that met expectations or over-performed.
We’ve covered a lot of concepts over the last few pages, so let’s recap by walking through a step-by-step guide on how to calculate the ROI from your mobile marketing campaign.
Step 1: Calculate your CLV. Take your average revenue per customer and multiply it by the number of times your average customer comes back for repeat visits. (For example: $50 per customer x average of 18 visits = $900)
Step 2: Calculate your allowable COCA. Next take your CLV and allocate 10 percent of that figure as your allowable cost of customer acquisition. Some companies may allocate 5 percent, others 15 percent, but a good starting point is 10 percent. (For the example in step 1, you’d take $900 and allocate 10 percent of that, or $90, as your allowable COCA.)
Step 3: Reallocate part of your marketing budget to mobile. Decide what percentage of your overall marketing budget you want to allocate to your mobile marketing campaign.
Step 4: Calculate the estimated number of customers you expect to generate from your new mobile marketing campaign. If the direct response budget referenced in step 3 is, say, $500,000 annually, and it generates 5,000 new customers a year for you, then you know your cost of customer acquisition is $100 ($500,000/5,000 new customers = $100 per new customer). Take 10 percent of that $500,000 budget (i.e., $50,000) and allocate it to your mobile marketing budget. All things being equal, that $50,000 should generate 500 new customers for you.
Step 5: Create a mobile marketing plan that has tracking mechanisms. Now that you have a $50,000 budget for your mobile marketing campaign, you can start allocating money to various mobile marketing efforts. For our purposes here, you’ll want to make sure that 100 percent of your budget is allocated to factors that are trackable. Use the $50,000 to create 2D code promotions (trackable), SMS/MMS campaigns (trackable), mobile display ads (trackable), mobile paid search ads (trackable), and location-based marketing campaigns (trackable).
Step 6: Launch the campaign and monitor your results. Once you’ve planned your campaign and confirmed that it’s 100 percent trackable, it’s time to flip the switch. Be sure to monitor your results closely, and after you’ve given your campaign a few months to run, don’t hesitate to move your dollars away from features that aren’t working and toward those that are.
Step 7: Don’t expect miracles. This may be your first mobile marketing campaign; and even if it’s not, don’t expect it to run smoothly the first time around. You’ll have campaigns that fail completely, and you’ll have others that underperform. But your goal is to determine which campaigns are working, figure out how to replicate what’s working in those campaigns, and, finally, apply that knowledge to your other efforts.
This article by Jamie Turner was originally posted on the 60 Second Marketer blog.