As a small business owner, scaling your business through effective marketing might seem like a complex task. But what if I told you that, at its core, it's just simple math?
In fact, this fundamental marketing approach, surprisingly, is not just the domain of small businesses but is also the cornerstone behind the strategies of many large corporations. While they may deal with more intricate systems and broader markets, the basic principles remain the same.
This blog post is designed to demystify the process of calculating the Return on Investment (ROI) on your marketing spend. Whether you're running a local startup or a major enterprise, these foundational concepts are universally applicable and are pivotal in driving business growth at any scale.
If You're Not Growing, You're Likely Dying: The Growth Ceiling Dilemma
Even seven-figure businesses can hit a surprising growth ceiling, often because they rely solely on word-of-mouth and referrals. This limited approach misses broader market opportunities and inevitably leads to growth stagnation.
Such businesses become vulnerable as competitors employing structured marketing strategies gain significant market share. The reality is harsh: without adopting strategic marketing and scaling tactics, businesses don't just plateau—they risk losing out to more aggressive, marketing-driven competitors.
Long-term, sustainable growth demands more than a strong client base. It requires a commitment to strategic marketing. Failing to adapt means even the most successful businesses can hit a ceiling and see their market share decline.
Understanding the Customer Journey: From Awareness to Conversion
Before diving into calculations and the formula, it's essential to grasp the customer journey's basic stages. These are the stages that EVERY customer moves through before becoming a customer.
Awareness: Potential customers learn about your product or service.
Interest: They show interest in what you offer.
Decision: They consider purchasing.
Action: They become your customer, leading to conversion.
Understanding this journey is the bedrock of your marketing strategy, laying the foundation for calculating ROI.
The Magic Formula: Average Value Per Customer and Close Rate
The key to unlocking your marketing ROI lies in two vital metrics: your average value per customer and your close rate from leads.
Once you have these, forecasting ROI becomes straightforward.
Average Value Per Customer (AVC):
This is the average amount a customer spends over their relationship with your business. (This can be the average of a customers one-time purchase or the sum of many purchases over a period - which would be LTV (Lifetime Value))
Close Rate (CR):
This is the percentage of leads that turn into paying customers. (Obviously, if 100 people contact your business, not all 100 will buy. Knowing what percentage of these "leads" will close on average is key to growth.)
Sample Calculation: Simple Math, Big Insights
Let's break it down with an example. Imagine you run a service business where:
Cost Per Lead (CPL): $50
Average Value Per Customer (AVC): $2,500
Close Rate (CR): 15%
Calculation:
For every 100 leads, you spend $5,000 (100 leads x $50 CPL).
With a 15% CR, you'll gain 15 new customers (15% of 100 leads).
These 15 customers bring a total value of $37,500 (15 customers x $2,500 AVC).
Subtract the initial $5,000, and your ROI is $32,500.
Maximizing ROI: The Impact of Refining Your Numbers
After understanding the basic calculation of ROI in marketing, it's important to recognize that one of the most effective ways to boost this ROI is by refining your key metrics. Small improvements in these areas can lead to dramatic increases in your return on investment.
Reducing Cost Per Lead (CPL)
Reducing the CPL, even marginally, can significantly amplify your ROI. For instance:
The Power of Effective Landing Pages: Incorporating a compelling landing page video can increase lead conversion rates by an astonishing 86% on average. In some cases, this figure can soar to 200-300%. This means more leads for the same or even lower marketing spend, effectively reducing your CPL.
Read more in our post about "How to Maximize Website Conversions: The Power of Landing Page Videos"
Increasing Close Rate (CR)
Improving your CR directly translates into higher revenue. This involves refining your lead follow-up and sales processes.
The Follow-Up Factor: Most businesses miss out on potential sales by not following up effectively with their leads. Statistics show that it often takes about 5-6 follow-ups before some leads engage meaningfully and convert. However, many brands give up after just 1 or 2 attempts, leaving a significant amount of revenue on the table.
Real-World Impact
Let’s revisit our previous example with these improvements in mind:
Original Scenario: With a CPL of $50 and a CR of 15%, your ROI from 100 leads was $32,500.
Improved Scenario: By adding an effective video to your landing page, let’s say your CPL reduces to $45, and by refining your follow-up process, your CR increases to 20%.
New Calculation
For every 100 leads, you now spend $4,500 (100 leads x $45 CPL).
With a 20% CR, you gain 20 new customers (20% of 100 leads).
These 20 customers bring a total value of $50,000 (20 customers x $2,500 AVC).
Subtract the initial $4,500, and your new ROI is $45,500. Congratulations, you've generated an additional $13,000 in revenue through two relatively small improvements.
By focusing on improving your CPL and CR, even by small percentages, you can significantly increase your ROI. This approach is not just about spending less or selling more; it's about optimizing every stage of your marketing and sales funnel to ensure maximum efficiency and profitability. Remember, in the world of business, it's the small tweaks that often lead to the biggest gains.
Scaling and Diminishing Returns: The Balancing Act
Understanding your numbers means you can play with the scales. Increase your ad spend, and, theoretically, your returns increase. But here's the catch: the law of diminishing returns.
As you increase your spending, you'll initially see growth, but you can't expect an indefinite increase. Why? Because:
Market Saturation: Eventually, you'll reach most of your target audience.
Increased Costs Per Lead: More competition for the same audience means higher costs per lead.
Exhaustion of Available Leads: There are only so many potential customers in your market, once you reach the majority of them, it's more difficult to attract new customers.
Beyond the Ceiling: Expanding Your Horizons
Once you hit the ceiling of diminishing returns, consider:
Expanding into New Markets: Tap into new customer bases.
Increasing Average Customer Value: Adjust your pricing strategy.
Boosting Repeat Business: Encourage existing customers to purchase more frequently.
Wrapping It Up: Scaling Simplified
In conclusion, scaling your business through marketing is indeed a blend of art and math. By mastering your cost per lead, average value per customer, and close rate, you position yourself to make well-informed decisions about your marketing investments.
This is where Intrigue Studios usually steps in. As a video production company committed to creating better videos for brands that crave bigger results, we focus on maximizing the performance of your marketing collateral. In the quest to reduce cost per lead and boost conversion and close rates, the compelling and high-quality videos produced by Intrigue Studios stand as one of the most powerful tools in your arsenal. In fact, most of our clients will see increases of at least 30% in the first 30 days the videos are distributed!
Our expertise in crafting visually stunning and engaging videos can dramatically enhance your landing pages, social media campaigns, and overall marketing strategies. By integrating these videos, you're not just telling your brand's story; you're significantly improving your lead generation and conversion processes, which is essential for scaling your business effectively.
By partnering with Intrigue Studios, you harness the power of exceptional video content to elevate your marketing efforts, ensuring that your journey toward growth is not just strategic but also sustainable and impactful. Embrace these principles, and witness your small business expand its horizons like never before.
