How to Calculate Your Marketing ROI

Let me tell you a REAL story about the most inept group of marketers I’ve ever met.

Couple of years ago, I was down to my pennies. Actually.. less than pennis. -$12,860 to be exact. Yes, I owed money to the bank.

At that point, I really didn’t know what I was going to do.

Keep going, start another business or get a job?

With no cash to pay for rent, food, and basic necessities of life, keeping on didn’t seem very wise.

Starting another business? Same problem. Basic needs are not met.

Getting a job didn’t sound TOO interesting… yet at the same time, having stable cashflow sounded interesting.

So I approached a business with my proposal to do sort of a hybrid consulting / employee thing (actually you can read that story of how I started a zero risk business).

Of course, they wanted to meet.. so I went.

On the day that I went, I met a BUNCH of marketers that were actually looking for jobs.

I mean, the room was PACKED.. as in 30-40 people dressed in sharp business suits.

It looked like one of those MBA meet & greet events I used to go to when I thought about going to business school.

It was quite impossible to schmooze with their 2 decision makers, but i kept trying.

Of course, the minute that I get the chance to talk to them… someone would be a total jackass and interrupt. I would wait.. then continue where I left off. Then another jackass would interrupt.

All in all, i ended up having probably 1 minute of conversation while I stood there 20 minutes. Ugh.

At one point, I thought this was completely useles… so I said “screw it.. the destiny is telling me a message”. So I just sat down on one of the round desks with some food and some drinks (hell, I drove 30 minutes, i might as well get SOMETHING out of it.)

Eventually, more and more people got tired and sat down at the table with me.

I know they’re competition, but there’s no hurt in getting to know people. So I started talking to them.

One gentleman was this older dude who used worked at the local CBS (or NBC, i forget), doing in-house marketing for their ad sales.

He told me that the KEY to any business success is advertising.

Of course, i just smiled.

He was older so he must know everything and must be wiser than me .

So I asked him how he calculated the ROI for his clients’ campaigns, and his response?

“Oh, we don’t need to do that. They were ALL great.”

which was apparently why he got fired in the first place.

Here’s the kicker… after everyone left, and I was getting formally interviewed by that company, I gave them a 45 minute presentation on how lead generation works and how to calculate their online marketing ROI on an interview that was supposed to last 15 minutes long.

Don’t want to brag, but while the others got a rejection email 2 weeks later (according to the HR manager), I got a phone call within 30 minutes of me leaving the office, asking me when I can start.

So if you do ANY marketing, this is how you calculate it.

(BTW, these examples do NOT take into account time.. that’s a whole another matter that needs a separate post).

1) Understand LTV

LTV = Life Time Value

This is what your company gets in exchange for work delivered for that duration of time that your customer is a customer.

For example,

• if you sell solar panels for homes, your LTV is your total gross revenue MINUS the cost of hardware (because that money goes to your hardware vendors).


• if you sell software as a service, your LTV is your total gross revenue TIMES the number of months he/she subscribes

Now, these numbers must be calculated in AGGREGATE.

If you have one customer buying 1 $50k solar system at 30% margin does NOT mean you have a $15k LTV.

What if your other 99 customers are buying $10k solar systems at 10% margin?

In another words, like A/B testing, you have statistically significant enough data to paint an accurate picture what you’re really getting per customer.

This is true for any relationship / long term business services, such as SaaS, gym memberships, dental/health services, leases, rentals, etc. where the transaction is often repeated.

You must take into account time in aggregate to get fair picture of what you’re LTV is.

2) Understand CAC

CAC = Customer Acquisition Cost

Quite simply: Other than “fixed” costs, how much did you spend to get this customer to say “ok, i’ll buy”.

There are really only 2 that you need to worry about

• cost of distribution


• cost of media

Cost of Distribution:

• Viral: it costs you NOTHING because people are telling each other FOR you.


• Organic: You do content marketing, email marketing, you do public speaking, you’re in trade organizations, etc. In another words, it’s not viral and you had to do some work to get these leads / customers.


• Affiliate: You PAY someone to bring you the customer. Example, realtors sell houses for the owners. Insurance brokers sell insurance for the insurance companies. Any time you hear the word “agent”, they’re affiliates.


• Paid: search engine marketing (PPC), banner ads, radio/TV/newspaper advertising, yellow pages, etc etc.


• Cost of Media Cost of creating this media that you are using to do your marketing, such as graphics, design, copywriting, office stationary (envelopes, stamps, etc.), freebies (if included), etc etc.

Remember that your cost of distribution & media, like your LTV, must be calculated in AGGREGATE.

If you don’t like this aggregate stuff, then calculate both LTV in gross with respect to CAC as gross as well.

(In another words, don’t mix aggregate with gross when dividing).

Note: This is straight forward if you outsource your content, but if you do this in-house, i recommend taking a fair cost assessment of how much time your media person’s time is worth and by how long. The argument gets a bit fuzzy, so I’ll just assume for now that your content has been acquired by you giving cash to someone.

3) Understanding the ROI

The math is VERY simple.

ROI = (LTV – CAC) / CAC

Going back to the example of solar (since that’s where I had a ton of experience)…

• US average for solar CAC is $5k


• average solar system (that I’ve seen) was about $25k, at 35% margin (i.e. 65% goes to hardware costs, including panels, mounting rack, inverter, etc etc).

So… ROI = ( 35% x 25k – $5k ) / $5k = 75%.

So you’re thinking “holy hell, 75% ROI? I’m gonna sell solar!!!!”

Except.. this doesn’t take into account all the labor involved: permitting, analysis, getting up on the roof (try going up 40 ft high up, climbing a ladder with 40 lb panels 20 times, with no real protection)…. PLUS you gotta deal with insane number of government organizations, utilities, insurances, bonds, etc etc.

4) Understand the ROI metric with respect to your leads

Remember it’s one thing to understand the ROI overall, but you have to understand the tiny details that gets you to the big number, mainly your cost of leads.

Suppose in that solar example, their closing rate was 1%. Suppose out of 100 Facebook leads, 1 became a customer.

So to achieve 75% ROI, they spent $5k. IN another words, that had to receive the leads at $50/lead.

Some companies are in “growth” mode where profit is not really an issue to them because they’re trying to optimize for market share. (Usually these companies are investor funded.)

So in those cases, their “net revenue” of 35% x 25k = $8,750 doesn’t have to show profit.

Instead of spending $5k, they can get more aggressive and spend $8,750 (or more) to get that customer.

Even at 1% conversion rate, that means they can up to $87.50 per lead.

Side note: If you’re trying to land marketing customers or if you’re trying to work with an advertiser to figure out your commission per conversion, explaining this to them will make you 1000% more intelligent.

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