ROI Is An Equation Not A Theory

I like the ABC show Shark Tank. If you aren't familiar with the concept, entrepreneurs walk into a room of venture capitalists and try to convince them to invest money into their idea/business. Most of these entrepreneurs seem to have never watched the show before coming on it as they consistently don't have the answers to some of the more common questions. One of those… “What is your customer acquisition cost?”

As marketing channels become diverse and difficult to track, the business world is screaming for transparency, reporting, and return on investment. All to often us digital marketing folk have to go into meetings with top decision makers and tell them that while we can't tell them what the bottom line value of a Facebook like or a Retweet really is; we are sure it is helping the business grow in consumer engagement, loyalty, and brand value. It sounds like a load of crap to be honest but sometimes its just the best we can do.

As marketers we have to remember that ROI is not a theory to be preached as an intangible. Its a formula. If I invest X dollars into a project or initiative how will it increase Gross revenue? The formula isn't complicated and it always exists. As businesses grow and invest resources into multiple strategies and initiatives it becomes more difficult for them to track the return on any one of those programs. This is where some of those challenges exist.

As you move forward to grow the business stop and ask yourself, how am I going to measure this? How can I isolate the revenue growth I will achieve from this plan from other things I have in the works?

Oh, and in case you are curious, customer acquisition cost is exactly what it sounds like. If I have to spend $1000 on advertising to get 300 people to go to my website and I know that my standard conversion rate on that type of web traffic is 10%, than I will get 30 new customers. That is a customer acquisition cost of $33.33. If my average ticket size is $50 then my ROI is $1500 making for a net profit of $500. If this could be scaled it would be a profitable business model.

What is your formula?

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