Planning ROI? Turn the Funnel Upside-Down

Many marketers use a funnel to illustrate the progression from prospect to buyer because the narrowing graphic neatly shows the narrowing segments of the sales progression. Most construct the funnel by starting at the top and working their down chronologically through the sales cycle.  They apply projected percentages to each stage, funnel down to a number of buyers, calculate revenue based on average sale, and determine ROI based on promotion costs.

Many marketers use a funnel to illustrate the progression from prospect to buyer because the narrowing graphic neatly shows the narrowing segments of the sales progression. Most construct the funnel by starting at the top and working their down chronologically through the sales cycle. They apply projected percentages to each stage, funnel down to a number of buyers, calculate revenue based on average sale, and determine ROI based on promotion costs.

A different approach to using the funnel starts at the bottom. It has its roots in the tried and true direct response principles of Customer Lifetime Value (LTV) and Allowable Acquisition Cost (AAC). Because these two principles are the components that make up ROI (with LTV as the “R” and AAC as the “I”), the upside-down funnel becomes a useful tool for planning and creating ROI scenarios.

Start with the value of a customer. Set a target ROI and calculate your AAC. For this illustration, let’s assume that a buyer is worth $300 and we set our revenue target ROI at 3:1. This results in an AAC of $100.

See Equation No. 1 in the media player at right.

As you move to the lower portions of the upside down funnel, you apply assumptions about the conversion rates at each stage. For example, if you assume that 30 percent of all qualified leads will convert to buyers, then the Allowable Cost per Qualified Lead is $30.

See Equation No. 2 in the media player at right.

Similarly, you can calculate the Allowable Cost Per Lead, Per Response, and Per Impression all the way to the top of the upside down funnel. So if you estimate that two-thirds of your leads will be qualified, your Allowable Cost per Lead is $20, and so on.

When you reach the bottom of the upside-down funnel, it becomes particularly useful for media planning. You can determine the required response rates from each medium under consideration by:

  1. Dividing the cost of the media by the Allowable Lead Cost to determine the number of leads required from each medium
  2. Dividing the number of leads required by the circulation or number of impressions associated with the medium

For example, see Equation Nos. 3 and 4 in the media player at right.

Then, do a gut check. Is that response rate attainable? Don’t know? Test it. A carefully controlled small test will quantify your assumptions at each point of the upside-down funnel.

Author: Chuck McLeester

Chuck McLeester's blog explores issues about marketing and marketing measurement. He is a marketing strategist and analyst with experience in healthcare, pharmaceuticals, financial services, pet products, travel/hospitality, publishing and other categories. He spent several years as a client-side direct marketer and 25 years on the agency side developing expertise in direct, digital, and relationship marketing. Now he consults with marketers and advertising agencies to create measurable marketing programs.

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