Evaluating Your Marketing Spend: Is It Delivering Enough ROI?
By Dave Burnett, Online Marketing Expert at AOK Marketing • Last updated: June 16, 2025
Key takeaways for evaluating marketing ROI
- Understand Customer Acquisition Cost (CAC) – total cost to win a customer.
- Calculate Lifetime Gross Profit (LTGP) – profit from a customer over their full lifecycle.
- Use the LTGP-to-CAC ratio – 3:1 is good, 5:1 is excellent, below 3:1 suggests a problem.
How do I calculate Customer Acquisition Cost (CAC)?
Customer Acquisition Cost (CAC) is a crucial metric that helps businesses understand the cost-effectiveness of their marketing strategies. It encompasses the total amount spent to gain one new customer and includes several categories of expense.
When calculating CAC, it’s important to factor in all direct and indirect costs. These include:
- Online advertising such as Google Ads and social media platforms
- Costs of content creation including blog posts, videos, and infographics
- Software licenses for tools like CRMs, email marketing platforms, and automation suites
- Full-time salaries and freelance payments for marketing and sales personnel
- Outsourced services from marketing agencies or consultants
- Promotional events, webinars, and in-person trade shows
CAC Formula: CAC = Total Marketing and Sales Expenses ÷ Number of New Customers
Example: If a business spends $100,000 and gains 500 new customers, the CAC is $200 per customer.
Monitoring CAC over time can help you identify trends, such as increasing costs during seasonal campaigns or decreasing efficiency during high-spend periods.
What is Lifetime Gross Profit (LTGP) and how do I calculate it?
Lifetime Gross Profit (LTGP) measures the financial value a customer brings to your business over the duration of their relationship. It’s essential for assessing how much return you are generating per customer over time, especially in subscription-based and service-driven businesses.
To calculate LTGP, use the following formula:
LTGP Formula: LTGP = (Average Purchase Value × Purchases Per Year × Years as Customer) - Costs to Serve
Example: If the average order is $50, the average customer buys 4 times a year and stays for 5 years, the total revenue is $1,000. Subtract $200 in servicing costs and your LTGP is $800.
Include all variable costs to serve the customer: fulfillment, customer support, returns, transaction fees, and discounts.
This metric helps you plan more effectively for retention strategies and lifetime engagement campaigns.
How do I use the LTGP-to-CAC ratio to measure ROI?
The LTGP-to-CAC ratio is a powerful indicator of marketing efficiency. It compares how much gross profit you make per customer against what you spent to acquire them. A ratio greater than 3:1 indicates a strong marketing ROI.
ROI Formula: ROI = LTGP ÷ CAC
Example: If LTGP is $800 and CAC is $200, the ratio is 4:1. You are making $4 for every $1 invested in customer acquisition.
Use this ratio to compare marketing channel performance. For example, email campaigns might show a 6:1 ratio while paid search delivers only 2:1. This insight informs where to allocate future budget.
- > 3:1: Strong efficiency and ROI
- < 3:1: Consider optimizing funnel or reducing acquisition cost
- > 5:1: High performance, potential to scale
Ensure the ratio accounts for the same time period across all channels to maintain consistency.
What is a good ROI for marketing campaigns?
Marketing ROI varies by industry and business model, but most businesses strive for a 3:1 LTGP-to-CAC ratio or higher. This benchmark ensures your marketing spend is generating profit and sustaining business growth.
- 2:1 or lower: Risk of loss; evaluate campaign structure or customer value
- 3:1 to 5:1: Ideal; marketing investments are profitable and scale-ready
- Above 5:1: You might be underinvesting in marketing—consider increasing budget
Track this ROI across customer segments, products, and campaigns to identify top performers and underachievers.
Why should I regularly evaluate my marketing spend?
Regular review of your marketing spend enables proactive decision-making and course correction. It ensures that your business maximizes returns and avoids wasteful tactics.
- Prioritizing high-return channels and cutting underperformers
- Improving campaign structure based on data insights
- Maintaining alignment between marketing and sales teams
- Better forecasting and budget planning
Monthly or quarterly reviews of your CAC and LTGP metrics help keep your strategy nimble and competitive.
What common mistakes reduce marketing ROI?
- Neglecting to include indirect costs like labor, software, and content creation
- Using outdated or inflated customer lifetime values that skew LTGP
- Failing to analyze by channel which masks underperforming segments
- Tracking vanity metrics like likes and clicks instead of conversions and revenue
Build dashboards that track real ROI data and educate teams to focus on outcomes that matter.
How can I make data-backed marketing decisions?
Start by centralizing your data using CRM and analytics platforms. Define a clear measurement framework including CAC, LTGP, ROI ratio, and channel performance.
Benchmark against past performance and industry standards. Use insights to run A/B tests, segment your audiences, and continuously optimize spend.
Bottom Line: Data-backed marketing decisions ensure growth and reduce risk. Marketing becomes a revenue engine—not just a cost center.
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