Updated: Apr 22, 2019
When it comes to working with influencers, of any size, most of us have a hard time figuring out how influencer relationships actually work – especially when it comes to what our influencer marketing budget should be. Here’s a quick guide on gaging exactly what you should be spending.
**This guide was originally written by Felicity (Fromholz) Gibson for Cratejoy and originally published on the Cratejoy Sellers blog.” **
We’ve all seen the videos from influencers like Michelle Phan or Huda Kattan – and we all know that being featured in one of their vlogs can be a HUGE catalyst for the growth of a business. But, when it comes to working with influencers, of any size, most of us have a hard time figuring out how influencer relationships actually work – especially when it comes to how much we should be spending on these relationships.
First, a few tips for vetting influencers:
Engagement is important! Look at whether or not they’re engaging their followers. Are they commenting on posts? Are they asking questions? How is the feedback from their followers and what do those conversations look like?
Cohesion is key! Make sure there is some cohesion between the size of their following across the various platforms they use. If their Instagram following is HUGE but they only have a few YouTube followers, it could be that they acquired followers to their channel with bots or something of the sort and that’s not what you want.
No, let's get down to business!
Step 1: Calculate Potential Conversions
For this example, we’re looking at working with an influencer who has 100,000 unique monthly views (UMV).
Make two estimates:
The number of people who think might see a post from this influencer.
The number of people you think will convert (purchase a product) from that same post.
As a conservative estimate, we’re going to assume 1% for each of these – it’s a safe bet to make until you’ve actually worked with a specific influencer a time or two and know more about how their followers will convert.
So, of the 100,000 UMV for this influencer, the assumption is 1%, or 1,000 of those visitors might see the post.
The math: 100K X 1% = 1,000 visitors might see the post
Of that 1,000 visitors who might see the post, the assumption is that 1%, or 10, will convert and purchase your subscription.
The math: 1,000 X 1% = 10 of those who saw the post might purchase a subscription
Step 2: Calculate LTV + CAC
A customer’s Lifetime Value (LTV) and the cost to acquire them (CAC) are extremely important metrics to track overall, and are necessary to know when calculating your influencer marketing budget. You can learn more about these metrics, and others via the “Key Performance Indicators for Subscription Boxes” post on Cratejoy's Subscription School blog.
Subscriber Lifetime Value (LTV) = The total $ amount attributed to the average customer throughout the lifespan of their membership.
Customer Acquisition Cost (CAC) = The $ amount you spend acquiring a new customer.
For this example, we’ll assume the following for calculating LTV:
Here are the numbers we'll use for calculating LTV:
Box Cost = $45
Profit Margin = 35%
Average Customer Lifetime = 4 months
The math: $45 X .35% = $15.75 X 4 months = LTV of $63
Now, we divide our LTV from above ($63) by 3. Why? Because the ideal CAC:LTV ratio is 1:3 – meaning, for every dollar you spend on acquiring a customer, you should be making 3X that in the LTV.
The math: $63/3 = CAC of $21
Step 3: Calculate your Potential Budget & Profit
Now, we’re ready to calculate the budget we have to work with this influencer. To do this, multiply CAC by the # of estimated conversions.
The math: $21 X 10 = $210 influencer marketing budget
…and what will your profit be should those 10 new subscribers actually convert? Subtract the CAC for those 10 potential conversions from the LTV for those same 10 potential customers.
The math: ($63 X 10) – ($21 X 10) = ($630 – $210) = $420 profit
Want to know more about calculating these numbers for your business? Drop us a line, anytime for a FREE 20 minute consultation. We'd love to help you reach your business goals!