Your Customer Lifetime Value (CLV) isn’t hard to calculate. And once you know what it is, you can quickly determine the profitability of each of your customers, how much you can spend on marketing and customer acquisition, and so on.
But there aren’t any companies that aren’t interested in return on investment (ROI). Whether you’re the business owner or the head of the marketing department, you want to know that your investments are contributing to business objectives and your bottom line.
So, how do you calculate ROI on CLV? Here are several ways you can go about it.
1. The Traditional Model
The traditional model for calculating marketing ROI looks like this:
ROI = (revenue / spend) – 1
Unfortunately, it’s too simplistic, as it does not account for the lifetime value of a customer. If you’re only running one campaign to drive business, this isn’t a problem. Still, most companies are using more than one method to attract customers, and this formula doesn’t let you calculate the effectiveness of each.
2. The Gross Profit Method
Another simple method that can be used to determine your marketing ROI is the following:
ROI = (gross profit – marketing investment) / marketing investment
Again, it may be insufficient in providing you with all the data you need, but at least you aren’t just dividing your raw numbers to arrive at a percentage.
3. The CLV Method
So far, CLV hasn’t factored into our equations. So here is one formula that utilizes your CLV to calculate overall ROI:
ROI = (customer lifetime value – marketing investment) / marketing investment
It is the most useful equation so far. You’re calculating your ROI based on CLV, which should offer valuable insights into the profit generated from each customer over their entire lifetime. There is a catch – you must know what your CLV is in the first place.
Here’s another way to use the same formula:
ROI = (customer lifetime value – marketing investment per acquisition) / marketing investment per acquisition.
4. The Expenses Method
You can’t know your ROI unless you include all expenses in your formula – or at least, this is how some organizations think. If you need to track the costs beyond your campaign investment, you might use this method to understand your ROI better:
ROI = (profit – marketing investment – overhead allocation – incremental expenses) / marketing investment
Some say this is a more realistic way of calculating ROI. But if you include costs that have nothing to do with acquiring and keeping a customer, this thought process is somewhat questionable.
5. The Investopedia Model
Investopedia suggests using the following formula to calculate ROI on individual marketing campaigns:
ROI = (sales growth – marketing cost) / marketing cost
It may help you evaluate the performance of individual campaigns, but it does not consider CLV. Instead, it’s a way to determine short-term ROI from a single campaign effort.
6. The 12-Month Investopedia Model
You can’t determine the overall impact of a campaign if you don’t track it for more extended periods. Here’s another Investopedia formula that can help you evaluate long-term implications:
ROI = (sales growth – marketing cost) / marketing cost – average organic sales growth
But again, it does not consider CLV.
7. The HubSpot Method
Here’s a spin on an earlier formula, which can offer some valuable insights into ROI on CLV, via HubSpot:
ROI = (customer lifetime value / ad spend) – 1
To be fair, ad spend likely isn’t your only expense. But if you’ve done your homework with your CLV, all related costs should be factored into your CLV already. So, this simple formula can work well in a lot of cases.
When it comes to calculating marketing ROI, one size does not fit all. And some of the above examples do not even factor in CLV, which is something you should be doing.
Fundamentally, the above should offer a major starting point for your company. You need to calculate ROI on CLV based on the numbers that matter to you, not based on what’s important to someone else.