Is Dividing By a Percentage Valid in the Context of Determining Cost per Acquisition/Return on Investment?
I'm currently trying to find the return on investment (ROI) for a specific campaign, and I can't figure out if the formula below is valid in the context it's being applied; please see the first part of the formula below (keeping in mind this is example data):
90 / 0.3 = 300
Above, 90 represents the cost per acquisition (cost to obtain a lead in U.S. dollars), and 0.3 represents the close ratio (the percentage of leads that result in a sale).
The second part of formula continues as follows:
300 − 100 − 300 = −100
Directly above, the first 300 value listed represents the revenue of a sold lead, the 100 value represents operation costs to process a sold lead, and the second 300 value is the value that was generated in the first part of the formula. As you can see, this results in a negative ROI, which doesn't quite make sense to me.
Please let me know if the logic above is valid in the context of generating CPA/ROI figures.
if by your 0.3 you are saying that for every ten leads you generate you have three sales, then yes, your formula leads to the correct answer. It may be easier to see this by checking the numbers without a formula:
Revenue from three sales..............$900
Cost of ten leads...........................-$900
Operating cost to fulfill the sales...-$300
Net profit from sales......................-$300
The same answer you are getting with your formula, a loss of $100 per sale.