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I hope you enjoy this month's topic. This is your newsletter, so if you like or don't like something about it, please email us at newsletter@bullmoosemarketing.com and we will adapt. Like everything on the Web, we too at Bull Moose Marketing need to be flexible... Thanks for reading, Nick Ellinger CEO, Bull Moose Marketing, LLC. |
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Best Practices: Find Your Return from E-marketing We apologize, but in order to quantify your e-marketing investment, you will have to do math. We'll try to make it as painless as possible. First, determine how much you are willing to spend. Let's say you have a product that sells for $100. Once someone buys this product, they have a 30% chance of buying an additional $500 product. Each of these products have a margin of 25%. Additionally, 1.7% of visitors to your site buy the first product. Confused yet? We'll see how all of these fit together to create a close-enough- for-government-work estimate of the value of a customer. The first calculation to make is to find the value of an average customer. In this case, all customers will give you $25 in margin ($100 times 25%) and 30% will give you an additional $125 in margin. Simply multiply the margin you will get (not revenue, or you will be strongly overvaluing your customers) times the chance that you will get it. Thus, the value of a customer is 100% times $25 plus 30% times $125 or $25 plus $37.50 or $62.50. That's how much you will get over and above your costs from an average customer. There is a more accurate and complicated formula for this called lifetime value, which we can discuss if you wish. Email us if you would like this explanation. Now, you have to calculate the value of a visitor to your site. Simply multiple the value of a customer times the chance that someone will become a customer. In this case, it is $62.50 times .017 or $1.06. That's the maximum you should pay to get someone to your site. Now you can set the value of e-marketing initiatives. There are three basic types: those that increase the number of visitors, those that increase the value of a customer, and those that increase the likelihood of purchase. For those that increase the number of visitors, the calculation is simplicity itself. Don't spend more per click that you make per visitor. Let's say this same company did an email campaign that went out to 100,000 people for only $400 and garnered 100 clicks (a .1% click-through, which would indicate a bad campaign, a bad list, or both--a cheap plug for investing in your emails and lists). The clicks would only be worth $106, a loss of $294. Those that directly impact the value of a customer are also easy to calculate. Simply multiply the number of customers you'll get by the amount of the increase. Let's say that this company had 5,000 customers added an email newsletter, which increased the percentage of those who bought the $500 product from 30% to 50%. The value of the customer would increase from $62.50 to $87.50 (100% times $25 plus 50% times $125 or $25 plus $62.50), an increase of $25. An extra $25 per customer would garner this company $125,000 ($25 times 5,000 customers). For those that increase the likelihood of purchase, the calculation is a little more tricky. Let's say you have 100,000 visitors in a year. What would be the value of an initiative that could improve your site so that visitors bought 2.1% of the time instead of 1.7% of the time? Simply take the additional percentage (.4%) and multiply times the number of visitors you have (which works out to 400 new customers). Then, find the value of those customers by multiplying times the value of a customer, which works out to $25,000 (400 * $62.50). For those of you that want that extra gold star, these formula will help you find the return on investment. Simply take the margin you get (additional margin from all customers minus the cost of the campaign) and divide it by the cost of the campaign. Let's say from the example above that it cost $21,000 to improve your site so that visitors bought 2.1% of the time instead of 1.7% of the time. Take the margin of $4,000 (the $25,000 you gain minus the $21,000 you spent) and divide by $21,000. Your ROI or return on investment is 19%. Do you have any hints for our readers? Any questions, comments, or death threats? Please send them to newsletter@bullmoosemarketing.com. |
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