The effectiveness of marketing is usually determined by evaluating the objective results of advertising: increasing profits, sales, as well as the number of new customers.
However, in order to obtain accurate information, it is necessary to focus on more specific indicators such as ROI, ROAS, ROMI. The acronym hides a lot of useful information for those who seek assess to the effectiveness of advertising, so we suggest to establish the value and role of each indicator, as well as their differences.
ROI indicator already been described earlier here.
ROAS calculation formula, income divided by expenses. If you want to get a percentage value, multiply by 100%.
At first glance, it may seem that this indicator is completely identical to the previously considered ROI, but there is a significant difference. ROI takes into account expenses incurred by the company for production, packaging, delivery, etc. in the calculations. Calculating ROAS helps to obtain information about direct profits, i.e. whether the company has made more money than it has invested in advertising. The main purpose of the calculation is to find out whether the company is making a profit from the advertising tools used.
The importance of this analysis parameter is to determine the effectiveness of advertising, namely the increase in visits, customer base and income. In other words, ROAS allows to estimate the income of business from marketing methods, and also to reveal efficiency of concrete tools, whether it is necessary to apply them further. The indicator serves to optimize advertising costs, which makes it possible to get maximum profit with minimum investment.
Calculating ROAS is very easy, you will need two types of data for this:
Profit obtained after the implementation of an advertising tool.
The cost of its introduction.
To find out ROAS, you need to apply the following Profit/Cost formula. This formula is relevant if the company knows the exact amount of profit received.
ROAS calculation is key to business growth and development because it helps to optimize advertising costs while generating more revenue.
Formula for calculating ROMI. Very similar to ROI, but only marketing costs are included.
Application of ROI calculation is possible in many areas such as online sales, direct sales of goods and services, contextual or banner advertising.
In order to calculate ROMI, several variables are required:
- Company Revenue.
- The costs associated with sales and production.
- The formula for calculating is the following sequence of arithmetic actions: Company Income – Sales and Production Costs / Investment x 100%.
Accordingly, if the amount received is equal to or greater than 100%, then the investment is profitable, if less, then advertising is unprofitable.
Differences in indicators
ROI, ROAS, ROMI – indicators that may seem identical when assessing the results of marketing activities. However, they have cardinal differences.
ROAS – allows you to find out if you managed to earn after investing in advertising, that is, determines the ratio of income to expenses.
ROI – analytical indicator, which is used in any business to assess the return on investment.
ROMI – is used exclusively for marketing investments. In fact, it is the same indicator as ROI, only in a narrower segment.
These analytical tools to assess the effectiveness of marketing tools and advertising campaigns are indispensable tools for companies to optimize costs, increase advertising revenue and ensure the prosperity of any business.
Customer Acquisition Cost (CAC) indicator
Customer Acquisition Cost (CAC) is the amount that each new client costs you. It is reasonable to consider CAC through different marketing channels in order to correctly evaluate the effectiveness of each of them.
CAC is often confused with CPA (Cost Per Action), but this is a big mistake. CAC measures the cost of attracting a buyer, and CPA measures the cost of a particular action that the user has taken.
For example, you have an online cinema that offers users a selection of films based on their interests. Subscription costs $ 10 per month – for this money the user receives a weekly list of films and can watch them without time constraints and in good quality. You can use the service and without a subscription, but then the user has access only to a limited base of free movies and he does not receive from you selections.
You are seriously engaged in promotion and have launched two advertising campaigns. The target action of the first campaign is to register with the service, and the second campaign is to buy a monthly subscription. The cost of each user attracted by the first campaign is CPA (he has done the action, but you have not received any money for it). The cost of each attracted by the second campaign is already CAC (each new client has paid for the subscription).
Simply put, CPA is about the action and CAC is about the payment.
There is a basic formula for calculating CAC, and it does a good job if you need to calculate the average.
Select a period (e.g. month). Calculate how much you spent on promotion this month and how many clients you managed to attract, and then divide the first result into the second.
Let’s say 40 new clients came to see you this month. The budget for the advertising campaign you launched was 50 000$. It turns out that each new client cost you 50,000 / 40 = 1250$. The number doesn’t say much on its own, but we’ll talk about the interpretation later.
Just in case again: this wonderful simple formula can only be used for approximate calculation. Unfortunately, it does not show the real situation.
This formula is more complex and requires knowledge of many other indicators.
So, you still have 50 000₽ and 40 new clients. Let’s calculate the CAC for targeted advertising. First, let’s list all the costs:
the salary of the marketer who set up the ads is 30 000$;
campaign budget – 50 000$;
subscription to the social networking promotion service – 2475$;
copywriter-outsourcer service – 3000$.
Obviously, now the result will be quite different:
(30000 + 50000 + 2475 + 3000) / 40 = 2136,8$
This number can already be used for analytics.
Which CAC is good?
It all depends on your average check and the size of your business. For example, if your average check is $30, then a CAC of $35 means serious problems, while an average check of $1000 means the same level of CAC is a cause for celebration.
The cost of attracting a client is linked to its Lifetime Value (LTV). It is important to know the ratio of how much you get from one client, to how much you spend on his attraction.
LTV (Lifetime Value) indicator
LTV (Lifetime Value) is the profit that a client brings to you over the course of working with them. There is marketing around this indicator, especially when it comes to e-commerce. This metric has many names, but it has one essence. You may find the designations clv or cltv (customer lifetime value) are the same.
You have to make sure that the cost of attracting a client does not exceed the income from interacting with it, otherwise, you will simply go bankrupt. For example, you sell fish tanks. Attracting each new customer costs you $200. In this case, you need to make a strategy so that the revenue from the client is 4-5 times higher, i.e. about $1000.
How to calculate LTV
There are several formulas for calculating the ltv coefficient, they should be applied depending on the peculiarities of your company and the purpose of calculations. Let us consider the basic and most common ones.
LTV formula 1
A more precise formula, but to use it, you need to know two more indicators.
Lifetime is the time that a user interacts with you. Determine the average period of inactivity after which the client will probably not come back. Then calculate the number of days from the first purchase to this period.
ARPU – income from one customer for the period. To find it, divide your regular income for the period by the number of customers for the same period.
Now you need to multiply these metrics, and you will get ltv.
LTV formula 2
Suppose you sell a service with a monthly subscription, on average it is bought for six months at once. A monthly subscription costs $30. It turns out that ltv will be 30 x 6 = $ 180.
As for calculations average indicators are taken, you cannot avoid an error. But you can easily calculate the lifetime value for any period and for any segment of users.
2 way: superpower
To calculate ltv by this formula, you need to use more indicators, but the result is obviously more accurate. You will need to know:
AOV (Average Order Value) – average order value or average check.
RPR (Repeat Purchase Rates) – frequency of repeated purchases.
Lifetime – The duration of your friendship with a customer (mentioned above).
Now multiply these figures and get your LTV.
LTV formula 3
So, you have an online cookware store. You know that your average check is 600$. You have regular customers, they come back twice a year, and you hope that your friendship will last another 5 years. We count: 600 * 2 * 5 = 6000$.
The formula is prognostic: you cannot be completely sure that the client will stay with you for these desired 5 years. It is very convenient to use in order to set a benchmark.
After you have calculated the CAC, calculate LTV, and then find out the LTV:CAC ratio.
What does that ratio mean?
1:1 It is time to change something urgently, this model is not viable.
2:1 You make very little profit, you need to adjust the strategy.
3:1 Not bad, no urgent action is required, but there is still something to strive for.
4:1 You are delightful! The perfect excuse for a corporate party.
Both metrics should be read regularly and necessarily for the same period.