After working in the digital marketing industry for over a decade, I've come to learn the key barrier to success when it comes to CEOs and digital marketing; measuring a return on investment.
Setting campaign goals involves having measurable targets, however, most executives struggle with the concept of digital marketing metrics. As SEO requires investment, not only of direct funds, but also of time, skill and staff training, it is critical that we are able to measure the returns on that investment.
Let's consider how digital marketing works and explore the best means for measuring its success:
1. Remember the overall goal
The purpose of SEO is to attract customers. It’s only about calling for attention above the white noise of the virtual world, it’s also about making sure that your marketing efforts reach the right target audience.
2. The digital buying cycle
SEO enables you to target potential customers, and helps those customers to move through the buying cycle in a controlled and informative way.
The buying cycle for your product or service follows these steps:
1. Awareness: The customer will become aware of your product or service because they have found your website during a suitable time.
2. Research: The customer will try to find information on your product or service. At this point, they may be directed to affiliate links to ensure that you have a good external reputation.
3. Preference: The customer will search for information about products and services and determine their preference for purchase.
4. Purchase: This is the point of conversion from a browser to a buyer.
5. Loyalty/advocacy: Returning to your website for a secondary purchase would mean that the customer has developed a loyalty to your brand. Suggesting your product or service to others is a further step that illustrates brand advocacy. Once you have brand advocates, new potential customers may be driven to your website through social channels rather than virtual channels.
3. Calculating customer lifetime value
In order to calculate the ROI on digital marketing, you must first have an understanding of average customer lifetime value (CLV).
This is a simple equation that is integral to your understanding of ROI.
To work out the CLV, you need to understand the average amount of times a customer will purchase annually, their average spend per purchase, the total number of years in the customer's ‘life cycle' as your customer, and the gross profit margin on their purchases. Here is an example of how to work out the CLV with this data:
Average purchase = $60
Purchase per year = 4
Life expectancy = 5 years
Gross profit margin = 10%
If you multiply this out, you get $60 x 4 x 5 x .10 = $120
Therefore, the CLV of a customer for this company is $120.
4. Cost per acquisition calculation
Once you have calculated LTV, you also need to calculate the total cost per acquisition. This calculation is also simple, and is basically just a matter of adding the fixed and variable SEO costs.
First you need to work out the SEO cost per acquisition. You do this by taking the total SEO campaign's spend and dividing it by the total acquisitions. Take this figure and add it to the Base Cost per acquisition, which is the total fixed costs for SEO – including staff, website maintenance and development – and dividing it by the total amount of acquisitions.
This will give you the total cost per acquisition.
5. Targeted SEO costs
This is where things get a little bit more complicated. Previously we calculated the CLV of the average customer, however, average customers don’t return as much as great customers.
With digital marketing, you have the ability to increase the average CLV of a customer by specifically targeting better customers.
Consider increasing the variable component of your cost per acquisition. You take the SEO cost per acquisition in this example, and you double it.
The math shows that doubling this component will actually triple your ROI. This is because the average customer becomes a great customer when digital marketing increases. There is a rise in the customer’s average quantity of purchases, average purchase price, and ‘life cycle’ as a customer.
6. Measurable and immeasurable value
Once you can measure the returns provided by an above average customer, you will still have one further element of return that is not considered in this equation; the advocacy value.
When advocacy takes place in a real – as opposed to virtual – environment, then it’s not possible to measure these returns as part of the ROI on your digital campaign.
The bottom line is that investing in SEO changes the game on how you calculate returns from your average customer by lifting the key components of how we calculate the average customer.