Forecasting Revenue with Digital Marketing
For many startups, digital marketing is the only marketing they do.
There are no physical locations, billboards, print ads, etc. And while digital marketing strategies need to always evolve, the beauty of digital marketing is that it makes it easier to track where a customer is coming from, and how much it cost to acquire them.
Once a startup has a firm handle on these metrics, they can take it one step further and start to forecast how much revenue they will earn based on their digital marketing spend.
If you want to use digital marketing to forecast revenue, you'd first want to outline your inputs.
The easiest way to explain this is through examples. Below are three different ways to outline the inputs. All of them use ad spend as an input that will eventually drive sales.
The inputs used are ad spend and customer acquisition cost.
You can then take the ad spend divided by the customer acquisition costs to calculate the number of new users you will acquire. In this case, 22 new users.
Note that as with anything that you do in a financial model, it’s important that you can defend your inputs, ideally using historical data.
This is a little bit more detailed. The inputs are ad spend, cost per click, and conversion rate.
Dividing the ad spend by the cost per click gives you the total number of leads you expect to generate.
From there, you can drill one level deeper by factoring in the conversion rate. This will give you the number of new users you expect to gain that period.
In addition, this allows you to get an implied customer acquisition cost based off the amount spent and the number of new users.
Finally, similar to the final step in the last example, you can use the inputs of ad spend and how many new users you think you will acquire with that ad spend.
That allows you to calculate the customer acquisition cost.
All three use cases above help you understand how many new customers you're going to acquire and at what customer acquisition costs, using different inputs and generating different outputs.
Once you've done this for all your digital marketing channels, you can then sum all of the users that you are projecting to acquire and multiply it by your sales price to get the total revenue for the period.
And when you have the total revenue, there are tons of things that you can do to expand upon this:
Are there any repurchase rates with your current customers?
How are other channels affected by this, like organic or overall referrals based off your total customers?
Is there any deferred revenue involved where when a customer purchases your product or service it will last for multiple periods?
These are all items that can be expanded and forecasted based on this basic revenue build.
Using digital marketing to forecast revenue helps determine the best places to allocate resources, and helps you understand where your customer growth is coming from.
Josh Aharonoff CEO and Outsourced CFO for startups
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