1. Revenue and cost modeling
It's the final lesson of the course! Time to discuss a challenging (and rewarding) analysis: revenue and cost modeling.
2. Marketing ROI
Marketing Analysts are key to ROI analysis.
ROI is the "Return On Investment", which is calculated as, "marketing revenue minus investment divided by total marketing investment."
Marketers sometimes see us as magicians - guiding them toward positive ROI via mysterious analyses.
3. Marketing spend
Let's begin with marketing spend. Analysts decide which costs to include in marketing spend and can include any money spent with advertisers on ads.
There are some nuances with advertiser spend since spending models vary by channel and even tactic.
Paid search uses cost per click, while channels that rely on impressions, such as TV and display, use cost per mille.
Video tactics use cost per view pricing, and what constitutes a "view" varies by advertiser.
Analysts can even include operational costs like the cost of producing an ad, or the salary of marketing personnel.
4. CAC
A level above marketing spend is a concept called CAC, or Customer Acquisition Cost.
CAC is the cost of convincing a potential customer to buy.
This is along the lines of the broader spend interpretation we just reviewed, where it includes all large marketing costs, like salary, reporting tools, and even sales teams!
CAC can be calculated across channels or by channel.
If CAC is cross-channel, then Finance partners can assist in identifying sources of cost.
CAC is calculated as total marketing costs divided by the number of newly acquired customers during the same period. For example, if we spend $100 on marketing and acquire 100 new customers in the same year, that equals a $1 CAC.
5. Marketing revenue
Let's switch gears to the other side of ROI: revenue. Channel mix and business model dictate what Marketing Analysts should account for in marketing revenue.
From a channel impact perspective, analysts need to consider if channels can be tied to revenue (Direct versus Indirect impact).
Revenue can be calculated differently depending on product cost, for example, expensive items like cars take longer to purchase than other items.
Additionally, if a business has a subscription model, that can impact revenue assumptions over time. Analysts can, once again, work with finance partners to collaborate on revenue modeling assumptions.
6. LTV
Revenue impact of customers changes over a longer time period. Customer lifetime calculates the average time between acquisition and stopping business with a company (or churning).
This is where LTV, or Lifetime Value, matters; it predicts net profit attributed to the future relationship with customers.
LTV is calculated by adding average purchase value plus purchase frequency plus customer lifetime. For example, Customer #1 signs up for 1 online class and never returns, with an LTV of $50. Customer #2 signs up for an unlimited class subscription for two years with an LTV of $350. Marketers want more of Customer #2 than Customer #1.
7. LTV to CAC ratio
Mature marketing programs do not spend on all customers equally.
They spend more on customers with higher LTV, while not overspending. To monitor this balance, marketers optimize toward an LTV to CAC target.
LTV to CAC ratio just means LTV divided by CAC. This ratio ensures that ROI is always positive.
8. LTV to CAC example
2 to 1 LTV to CAC means, for every $1 marketing spends on acquiring a customer, we should earn $2 back in LTV on average.
We want a minimum of 1 to 1 to avoid overspending, but 3 to 1 is a good benchmark. Marketers select channels with the potential to acquire higher LTV customers successfully, and analysts work hand-in-hand to monitor ROI trends.
9. Let's practice!
Let's practice important factors for LTV and CAC!