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.
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.