How to Calculate the ROI of a Small Business Website with LTV
You’re asking yourself whether or not its worth spending $5,000 to $25,000 on a website. You’re right, you should be asking this question because all your competition likely asked this question at one point when they realized they need a website of their own. What do you do? Its time for you to understand what an investment to build your small business website could mean to your business by calculating your Return on Investment (ROI).
Your customers and the customers you want to have, use the Internet to find things and have been for the last decade and its not going to change.
Calculate Your ROI
The Standard method to calculate ROI of a Small Business Website to generate leads or acquire new customers is:
ROI = (Total Revenue or Gross Profit – Advertising Cost) / Advertising Cost
Cost of Investment: $5,000
Revenue Generated from Website in 12 months:?
To calculate your Potential ROI on this website, I’m going to use a measurement called the Average Value of a Customer (AV) and Average Lifetime Value of a Customer (LTV) I’ve created an example for you below that is based on a new Massage Therapist website:
Calculate the AV & LTV of a Customer
To start, I’ve identified there are 3 different types of customers:
- Bad Customer: Customers who came once for a massage, then didn’t return after that.
(1 Year Value of Bad Customer: $100)
- Good Customer: Customers that visits 5 times a year, given that the minimum value insurance provides is $500 for massages annually.
(1 Year Value of Good Customer: $500)
- Best Customer: Customers that visit 12 times a year or more, given that good insurance policies give out more than $1500 to $2500 for massages annually.
(1 Year Value of Best Customer: $1,200)
To keep things simple, I’m going to use the profile of a Good Customer’s Average Lifetime Value to calculate a likely ROI Scenario:
1-Year Value of a Good Customer
|Visits Per Year||5|
|Avg Visit Value||$100|
|Gross Profit Margin||25%|
Based on the fact that you have employee costs (salary or per hourly) and other overhead expenses, I’ve calculated your gross profit margin at 25%, but you can always change these numbers around to whatever you need.
$125 represents the 1-year gross profit from a “Good Customer”. The point here is to understand how much revenue a new customer means to your business.
3-Year Value of a Good Customer
|Gross Profit Margin||25%|
Once you have a customer and give them good service, they’re liking to be a loyal customer for at least 2 to 3 years. That’s advertising and marketing dollars you don’t need to spend again to acquire them.
Let’s see how many customers it takes to recover your $5,000 investment in the first year:
$5,000 (total investment) / $125 (gross profit per customer) = 40 Customers
What Happens If the Website Brings in 50 New Customers?
If your website brings in at least 50 new customers in 12 months, or 4 customers per month, you’ll add $25,000 in revenue (50 x $500) with $6,250 gross profit (50 x $125) .
+ Their 3 year LTV is $75,000 in revenue with $18,750 in gross profit.
+ Your cost to acquire 1 customer is $100.
What About 100 New Customers?
If the website brings in at least 100 new customers in 12 months, or 8 customers per month, you’ll add $50,000 in revenue (100 x $500) with $12,500 gross profit.
+ Their 3 year LTV is $150,000 in revenue with $55,710 in gross profit.
+ Your cost to acquire 1 customer is $50.
I believe a properly designed and optimized website will generate well over 100 new customers in one year. Even if your Gross Profit Margin isn’t 25%, its easy to see that if the website brings you 100 new customers, in my opinion, your ROI on investing $5,000 on it is worthwhile. In addition, you can create 3 different tables to calculate the ROI of each type of customer then mix around the numbers of each type you have in a given year to give you a more accurate value.
Calculate the ROI of Building a New Website
Based on the AV of a 100 Good Customers, your Potential ROI is:
($12,500 gross profit of 100 new customers – $5,000 new website investment cost) / $5,000 new website investment cost
= 150% Return on Investment.
The long term ROI is obvious here, so I won’t calculate that for you over 3 years.
If you see value in spending $5,000 to build your new website to add $25,000 to $50,000 in revenue, then why not? At a cost of $50 to $100 to acquire one customer, then why not?
Further Readings & References: