How To Calculate Your Clients’ Full ROI
The No. 1 buzzword (okay, buzz phrase) for retailers is “return on investment.” Media salespeople are discovering that one way to quantify and qualify their clients' objectives is to use the ROI formula. Here are a few reasons you should use ROI calculations with your client:
• Managing expectations.
• Upselling current schedule.
• Generating long-term business.
• Overcoming media’s biggest objection, which is “it costs too much.”
• Validating your customer’s decision to buy your media company for advertising their product.
In most cases in our fact-finding calls, we fail to dig deep enough to determine the prospects’ problems, challenges, or opportunities. Three questions we need to ask the prospect in order to make the ROI work are:
• What is your gross profit margin (on your profit centers)?
• What is the average sale/ticket (on your profit centers)?
• What is your average closing ratio?
Now let's work on the “initial sale.” When we figure the ROI for a prospect’s business, when a new sale comes through the door we tend not to get full credit for that sale or for the new customer’s value to the prospect’s business beyond the initial sale. The initial sale is the starting point, but it’s not the end of the sales if we bring a new customer into the business. Here are two essential extensions to the current ROI formula:
• ICV (incremental value)
• CLV (customer lifetime value)
From our initial fact-finding call, we learned that a new health-club customer must pony up a $300 initial fee and sign at least a one-year contract with the club. Monthly dues are $35. Therefore, the initial sale is:
• 12 months X $35, or $420
• Initiation fee of $300
• Initial sales would be $720 ($420 +$300)
This is where we typically would stop. However, when a customer signs for a year, there are incremental sales involved, and they should be figured into the ROI calculation. You should ask your prospect: 1) “What else does the customer purchase during this initial 12-month phase?” and 2) If business is generated from referrals, “What percentage of your business comes from referrals?” (For instance, the health club could generate money from selling protein drinks and apparel sales.)
In this case, the health club generates 30 percent of its business from referrals from current clientele. This new clientele would include new people we bring in to the business. The ICV would be calculated as $720 X 30% [.30] = $216. The rule of thumb here is that ICV is figured only on the initial sales and not the CLV or customer lifetime value.
Next, ask the prospect -- in this case the health club decision-maker -- “On average, how long does a person continue to use the club before quitting or letting the membership expire?” In this example, it’s 32 months. So you would figure the ICV as 20 months (we already used 12 months in the initial sale) X $35 =$700.
In reality -- and you need to deal in realities -- the average sale or initial sale is really $1,636 and not the original $720. It’s important that we get credit for a customer’s real initial value and any revenue that is associated with that person over the customer’s lifetime. In reality, we bring more business to the client than initially meets the eye or the cash register. The health club is a real-world example. For the electronic version of the ROI calculator or the ROII (return on interactive investment) calculator, go to www.luceperformancegroup.com. It’s easy to use. You just have to do a great CMP call.
Sean Luce is the Head International Instructor for the Luce Performance Group and can be reached at firstname.lastname@example.org.
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