It’s the age old question when it comes to any business endeavor: "how much should I invest?" And specifically, for the purposes of this article, "how do I determine how much to invest in inbound marketing?"
Before I answer that, we should recognize a dirty little secret in our industry: the marketing industry has the broadest range of pricing for given work out of almost any industry I’ve seen. There are a number of reasons for this that I won’t get into here, but the net result is that we (the marketing industry) often don’t articulate our value and differentiation well and, consequently, we end up confusing the CMOs and VPs of Marketing that we so desperately want to serve. It’s no wonder that inbound marketing, with its wide range of expertise, tools, and approaches is only exacerbating this problem.
Because of this frustration, I want to help clear things up. Specifically, I want to help CMOs and VPs of Marketing figure out how much to invest in inbound marketing. In my opinion, inbound marketing has one of the greatest opportunities to tie investment to results—all the way from content generation and promotion, and through the funnel, from top to bottom.
The methodology we’re going to use to answer this question is to examine the inbound marketing funnel and assign value at each level. By doing this, we can come up with an investment range that will ensure that your decision is based on profitability, not how an agency’s price makes you feel.
One last note before we dive into the formula: we’re going to work backwards. That is, we’re going to go up the funnel, not down the funnel. As we go through this, you’ll understand why, so hold on a moment, we’ll get there.
The first thing we want to do to figure out our inbound marketing investment is to reframe the question. Instead of asking “How much we should be investing?”, we should be asking, “How much would we be willing to spend to acquire ideal customers?” In other words, if I were to hand deliver your ideal customer to you, what kind of check would you write to acquire said customer? This is your Cost of Customer Acquisition, or COCA.
In my experience, the answer to this one simple question is rarely known within marketing departments. That’s not to knock anyone—I’m just being honest. It’s the result of the decades of “marketing” not being held to results within organizations all around the world. Today, that doesn’t fly. In fact, “sales” and “marketing” are converging in many organizations as a result of the power of aligning these two teams through digital marketing. Together, “smarketing” easily outperforms traditional sales and marketing departments.
Before you answer this question, you’re probably thinking, “But, Frank, I have lots of different customer types with lots of different valuations based on what they are buying from us!” I hear you loud and clear, but for the purposes of what we’re driving at, the key thing to focus on is your ideal customer. As an aside, now would be a good time to develop your buyer personas—this will help you better understand who you want to be connecting with first. Once you have this customer in mind, it’s time to understand what they’re worth to your organization as a first step in getting to COCA. In doing so, we don’t want to focus on only their first transaction with you. Instead, we want to consider lifetime value (LTV). LTV takes the entire customer history into account—how long they are with you and how often they buy during the course of the relationship.
How COCA COLA can do a lot in helping you determine your budget
With average LTV in hand, you can now figure out your COCA. Simply multiply your LTV by an acceptable margin that you are willing to give up towards acquisition costs. For some organizations, this is 5%, for others it’s 20%, and for others it's anything in-between. If your department has not been privy to this level of business data, then drop what you’re doing, walk yourself down to the CFO’s office, and find out!
As a CMO or VP of Marketing, you have to ensure that this level of business data is shared with you—it’s the only way you’re going to be successful in our new world of inbound marketing!
OK, so, that’s job #1: know your COCA cold! For the purposes of this article, let’s use $5,000 as our COCA, which assumes a 5% acceptable cost of customer acquisition on $100,000 of LTV. What we’re saying with this COCA is that we would, in essence, be willing to write a $5,000 check to acquire our ideal customer.
The next thing we need to do is break down our COCA to COLA. Yes, you heard that right—COCA COLA is the secret to helping you figure out how to budget for an inbound marketing program! ;-)
COLA (Cost of Lead Acquisition) is necessary because leads are what’s directly linked to customers—they’re the next stage up in the funnel (remember, we’re working up the funnel). To determine COLA, take your sales closing rate and multiply it by your COCA. For this example, let’s assume you have a 25% sales closing rate. That is, you end up closing one out of every four leads. Not bad. Not great. A middle of the road type of number and “safe” for this example. That means that our COLA is $1,250 ($5,000 x .25).
OK, so now we know COCA and COLA. Just a few more simple calculations and you’ll have a solid range of what you should be investing in your inbound marketing program.
Above leads, we have contacts, as in contacts in your inbound marketing database. I won’t hit you with another acronym, but know that what we’re after is the breakdown of how many targeted contacts you need to result in one lead. This will help us define an acceptable cost per contact. Generally speaking, a proper inbound marketing program generates about five sales leads for every 100 contacts generated from an inbound marketing program, a 5% contact to lead rate. Now, multiply your COLA by .05. In this example, $1,250 x .05, totaling $62.50 cost per contact.
Finally, let’s extrapolate this one more level and determine our acceptable cost per visit, the next level up in the funnel. Here, we’ll also use an industry “safe” number of 2% for visits to leads. Take your cost per contact and multiply that by .02. In our example we have $62.50 x .02, totaling $1.25 cost per visit.
For programs where the primary focus is to generate more traffic, use your cost per visit number and use that as your max CPC. In our example, the max CPC is $1.25. If your traffic advertising option is presented to you as a CPM (that is, you are paying per 1,000 impressions of an ad as opposed to paying for clicks from an ad), then you will need to take the estimated click-through percentage times 1,000 and then take that result and multiply times your max CPC—this would be your max CPM. For example, if the estimated click-through percentage is .5%, multiply .5% (.005) times 1,000, which would equal 5. Then, multiply 5 times the max CPC of $1.25, for a max CPM of $6.25.
For programs where the primary focus is to generate more contacts in your database, use your cost per contact. If the program suggests that you’re contacts will increase by 300 per month, then you know that the program is worth 300 x cost per contact, and not a penny more. In our example, 300 x $62.50, totaling $18,750 per month.
For programs where the primary focus is to generate more leads, use your COLA. If the program suggests that your leads will increase by 10 per month, then you know that the program is worth 10 x COLA, and not a penny more. In our example, 10 x $1,250, totaling $12,250 per month.
Lastly, for programs where the primary focus is to generate more customers, use your COCA. If the program suggests that your customers will increase by 4 per month, then you know that the program is worth 4 x COCA, and not a penny more. In our example, 4 x $5,000, totaling $20,000 per month.
Of course, these estimates are the upper end of what you should be spending, but as long as your program comes within those numbers AND you hold the program accountable to those metrics regularly, you’ll be on your way to profitably driving more leads and customers into your organization. You’ll also be able to cut through the B.S. and talk with agencies and media companies about what matters most—results!
I cannot stress enough how important these metrics are—it's critical that you know these numbers before architecting your marketing program. This will set you up for success when you later start to engage in conversion rate optimization (CRO).