Revenue and cost modeling

Marketing Analytics for Business

Sarah DeAtley

Principal Data Scientist

Marketing ROI

Return on Investment (ROI): net marketing revenue / marketing investment

Ultimate goal of marketing operational excellence is positive ROI

image showing ROI on the right equal to return minus investment divided by investment on the left

Marketing spend

Spend model varies by channel and tactic, and can be cross-channel

Channel:

Cost per click (paid search)
Cost per mille (1000) (display, TV)

Tactic:

Cost per view (video ads)

Cross-channel:

Ad production costs

¹ Pexels by Pixabay

CAC

Customer Acquisition Cost (CAC): cost of convincing a potential customer to buy a product or service

Accounts for all marketing spend and new customers per period
Used across multiple channels or individual channels
Finance partners can help identify marketing overhead costs

Total Marketing Costs / # of Acquired Customers

image showing CAC = salary plus overheads plus paid marketing plus tools divided by number of new customers

Marketing revenue

Channel impact:
- Direct channels can associate to revenue more easily
- Indirect channels are rarely directly tied to revenue
Product cost: expensive purchases (like a car) have delayed revenue impact
Product type: business models can have different revenue impact depending on goods or services offered

LTV

Lifetime Value: prediction of net profit attributed to future relationship with a customer

LTV combines net revenue, customer lifespan, and churn behavior.
- Avg. purchases per customer
- Avg. value of a purchase
- Avg. length of a customer relationship

image showing Lifetime Value equals Average Order Value plus Purchase Frequency plus Average Customer Lifetime

LTV to CAC ratio

Want to spend more on customers that have a higher LTV

LTV to CAC ratio: LTV divided by CAC

Monitoring LTV versus CAC keeps marketing accountable to positive ROI

formula showing LTV divided by CAC = Marketing ROI

LTV to CAC example

Minimum 1:1 LTV to CAC ratio to avoid negative ROI
3:1 LTV to CAC is a good starting point

Paid search formula on top showing $200 LTV over $100 CAC = 2 to 1 LTV to CAC. Integrated campaign formula on bottom showing $100 LTV over $300 CAC = 1 to 3 LTV to CAC.

Let's practice!

Marketing Analytics for Business