Are your marketing campaigns profitable? In this post I’m going to show you a simple and reliable way to calculate marketing campaign profitability. This will allow you to crank up your spending on profitable campaigns and kill the poor performers.
Calculate your LifeTime Value
The first thing you need to do is figure out the average amount of revenue that your customers pay you over their entire lifetime. You can do these calculations in a simple Google Spreadsheet, any database or Excel.
- Assign each customer a unique ID. This could be their email address or a unique integer.
- Each time a customer pays you, attach the payment to their unique ID.
- The customer’s Life Time Value or LTV is a simple calculation: Add up all their purchases with you. It’s easy to do this because you’ve associated each purchase with a unique Customer ID.
- Calculate the average LTV for all your customers.
Record your campaign data
You’ve got to keep careful records on your marketing spending in order to determine profitability. Initially this can be done in a spreadsheet but I’d highly recommend that you build an automatic system that records all of this data automatically to a database and crunches and reports all the data.
- Assign each campaign a unique ID.
- Record the amount you spent on the campaign.
- Use a unique URL for the landing page, so the unique clicks from each campaign can be recorded in Google Analytics. Here’s a quick tutorial on how to create advanced segments in Google Analytics. For example, just attach the campaign ID to the URL like this: http://teamtreehouse.com/?cid=188. See the screenshot below for how I’d capture the number of unique clicks for that campaign.
- Record the number of conversions (new customers) who came from each campaign. You can also do this in Google Analytics with Goals. Here’s a tutorial on how to setup Goals in Google Analytics.
- You can then view the Goal report in Google Analytics and use the Advanced Segment you created, to see the number of conversions on a specific campaign.
The above process will be time consuming if you are doing this manually. This is why you should invest the money and time, at some point, to build a system that records all of this data automatically for you. Collecting it manually at first will help you understand the data, but it will become too time consuming long term.
Calculate your Cost per Acquisition (CPA) and Profitability
- Once you know the number of clicks and conversions for each campaign, you can calculate the Cost per Acquisition or CPA. To calculate a campaign’s CPA, just divide the total cost of the campaign by the number of conversions.
- Determine the profitability of each campaign by comparing the CPA to the average Lifetime Value or LTV. If it’s profitable, then you should consider increasing your budget. If it’s not, then you should consider discontinuing the campaign.
Be warned: just because a campaign is profitable now doesn’t mean it’ll always be profitable. There will be a point where you’ve saturated a channel and you either need to refresh your ads or find a new market/channel to advertise to.
We’ve created an in-depth workshop at Treehouse called Measuring Company Performance with MRR, Churn and Lifetime Values that should also be very helpful.
Please share your tips on measuring campaign profitability below in the comments. I’d love to hear from you!