In the third episode of The Bell Bytes Value Equation series,Bell Media CEO Scott Bell walks you through how to quantify your results for using the Value Equation. Video transcription can be read below.
Hey folks! Welcome to Bell Bytes. This is the third session in a three-part series that we’re calling Understanding the Value Equation. In the last two sessions, the first one we went over was establishing your customer acquisition cost (CAC), a critical component of the value equation. The second is understanding the lifetime value (LTV) of a typical customer.
This time, no offense to any accountants out there, but we’re going to use a fictitious company called The Bean Counter Firm. What we’re going to go through today is an actual example of running a campaign, understanding baselines and benchmarks, and then quantifying the results and asking ourselves, “do the results warrant or justify our investment or does it justify or warrant a change?”
We’re going to spend a few minutes going through some baseline metrics, what the campaign has produced, and then quantification. So, stick with me. We’re going to go through a lot of numbers and, of course, everything is documented on this page underneath the video. So here are the metrics…
The Bean Counter Firm has been established for years. They understand their business. They’ve run campaigns before. What they understand is that their average customer spends $14,500 in the course of a year. That’s their average customer spend over the course of a year. They also understand their churn rate. They know that their average customer lifetime, or the term that they spend with them, is 5 years. That’s about a 20% churn rate every single year.
Next, if you know your customer life and the average spend, you understand by multiplying these two together, the average dollar LTV of a customer is $72,500. That’s how much they would hope, on average, to get or generate from every customer that walks through their door. They’ve also established through the years that their average CAC is $12,800.
So, then the next component, which is a foundational component that helps you to track trends is the Lifetime Value to Customer Acquisition Cost Ratio. The higher this number, the better off you’re going to be. It means that your LTV coverage is greater when comparing it to the CAC.
So, in this case, it’s very simple. We know our LTV of our customer ($72,500) and we know our CAC ($12,800). The LTV CAC ratio comes out to 5.66 times.
Digital Marketing Campaign
So, let’s just say that this customer wants to run a digital marketing campaign. Here are the metrics to that campaign. They invested $4500 per month in those campaigns. Think about as their ad spend plus maybe a management fee. So, $4500 per month and they ran the campaign for six months. They know that their average sales cycle is typically 90-120 days, so they wanted to make sure that they gave it enough runway to actually produce results.
They also had an HR investment. What does that mean? Well, if we’re going to bring leads into an organization, someone has to field those leads, someone has to sell the product. They’ve invested over the course of the campaign on average $3,000 per month to the actual people that are going to intake the leads and take them from start to finish. That’s not all these people do in the organization. This is about the amount that they’ve invested in their HR efforts on a monthly basis.
If they look at the six month period, they’ve invested in a total of $45,000. That’s the baseline that they’ve established for their investment.
The Campaign Results
After six months they looked at it. 642 clicks. 51 leads. 4 closed deals. They’re out having a party! Excited about those 4 deals, but what does that mean? How do they actually use that to establish success benchmarks? That’s what we’re about to go to.
The question that we ask is “does it actually add up?” Do these customers secured add up to make sense from a return on ad spend component when you factor in the $45,000 that they’ve already invested? So let’s look at that:
The first step is establishing a CAC for this campaign. If you can look at the numbers, you can tell that they closed 4 deals, they spent $45,000 and therefore their CAC is $11,250. Now, compare that $11,250 with their baseline CAC number of $12,800. So, on the surface, it looks like a good thing.
The next step is what is the customer LTV created from this campaign? Here’s an overgeneralization and a simplification just for the purpose of this session today. Let’s just say that the customers that they closed fit the profile of their average customer. We can say that they’ve closed 4 deals. Their average customer LTV is $72,5000. Remember, we’re using the same baseline from over here ($72,500). That generated $290,000 in LTV from the campaign.
So, the real question is, “what’s the LTV to CAC ratio for this campaign?” It’s 6.44 times.
So, what does that tell us? That tells us that they’re happy! They’re going to continue to invest in digital marketing because they’ve improved their LTV to CAC ratio with their campaigns. Again, this is a very simplified model. There are generalizations made. You can get really granular with how you understand the Value Equation and how it can benefit your business. For this particular case, maybe they decided to invest MORE in online marketing. Maybe they see that the 4 closes that they generated only came from a small subset of ad groups or keywords that they were focusing on.
So there’s so much that you can do once you understand the components that go into generating the Value Equation for your business. I hope this was helpful, and until next time, thank y’all.
I know we’ve gone over a lot of data and a lot of equations, but when you really look at it, you really just have to boil it down to a few main critical components that you can track every month or every quarter or every year, so you can establish what the average lifetime value of a customer is, which is really how we need to be thinking in our investment about what we expect out of it when we talk about digital marketing.
So the next topic that we’ll approach is understanding and bringing all of this together to go through an example of the quantification of a customer’s ad spend. Until next time, thank y’all.
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