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I'm new to the site, and am hoping someone can assist. I'm currently trying to find the return on investment (ROI), 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), 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 the sale, 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.

Thank you.

Austin Skyworth
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1 Answers1

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The first calculation is fine. You are claiming that $30\%$ of the leads result in a sale and computing that it takes $300$ leads to make $90$ sales.

Note: this was written when the first paragraph talked about numbers of leads and orders, before it was changed to the cost of leads and orders.

The second makes no sense. The units do not match. The first $300$ and $100$ are dollars, but the second $300$ is the number of leads. What you should do is subtract the cost of fulfilling the order ($100$) and the cost of generating an order. It takes you $\frac 1{0.3}=\frac {10}3$ leads to generate an order. You should multiply that by the cost of a lead to get the profit on one order. If a lead costs you $45$, the profit on one order is $$300-100-45\cdot \frac {10}3=50$$

Ross Millikan
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  • Thanks for the response Ross. Actually, the 90 value in the first part of the equation represents the CPA (the cost to obtain a lead, i.e. cost per acquisition). Does this change your thoughts on the second part of the equation? – Austin Skyworth Feb 16 '21 at 15:37
  • Changing the units in the first paragraph changes the result in the second. In the second paragraph you said the first $300$ was the revenue. Now the calculation in the first paragraph turns the cost of a lead into the cost of a sale, which is fine. If you want to find the profit on a sale, as I said you take the revenue on a sale and subtract the cost of fulfilling the order and the cost of getting the order. The terms in the second paragraph now make sense. – Ross Millikan Feb 16 '21 at 15:44
  • Thanks again for the quick response. Just to be clear, are you saying the the formula as I originally posted is valid? I can provide an alternative formula that I think may be more logically sound. – Austin Skyworth Feb 16 '21 at 15:47
  • Yes, the first formula is valid depending on what the numbers represent. Whether it converts number of sales into number of leads or cost of a lead into cost of a sale it is fine. – Ross Millikan Feb 16 '21 at 15:57
  • First part of formula: 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). Second part of formula: the first 300 value listed represents the revenue of a sold lead, the 100 value represents operation costs to process the sale (in U.S. dollars), and the second 300 value is the value that was generated in the first part of the formula (revenue of a sold lead in U.S. dollars). With this clarification in mind, is this formula logic sound? – Austin Skyworth Feb 16 '21 at 16:06