As we discussed before, the modern marketer is part artist and part scientist. The artist part takes care of the creativity of the campaign messages while the scientist part analyses marketing metrics and generates reports for the boss to understand how marketing efforts are contributing to the company’s business.
In this post, we’ll share five marketing metrics, their importance, how to calculate them and what observations to make from the answers. We’ve also included five downloadable images that will tell you all you need to know at a glance. We hope you’ll find these useful when you next take a report to the executives.
The cost of customer acquisition is the average amount of money your company spends to gain one new customer. CoCA is usually represented as a ratio (also called Customer Acquisition Cost ratio) between the total amount of spending versus the number of new customers.
The total amount of spending to include in the calculation differs from business to business. Usually, SaaS (software as a service) businesses include all sales and marketing expenditures and divide them by the total amount of new customers. Your sales and marketing expenditures would include employee salaries, advertising budgets, bonuses and overhead cost per month etc.
A low average CoCA ratio means you’re spending less money to gain more customers which is great. But you should also strike a balance so that your company invests in your customers and turn them into loyals. This metric is extremely useful in calculating the cost effectiveness of your marketing campaign.
The customer lifetime value is the average amount of money you derive from each customer. This metric helps you evaluate the loyalty of a customer and improve customer relations. You can easily determine which customers are spending more and deserve higher attention.
The CLTV (also called CLV) can be calculated by multiplying the monthly revenue from a customer with the percent gross margin and then dividing the product by the churn rate.
The monthly revenue is the amount of money a customer pays in a month.
The percent gross margin is the expected increase in revenue.
The churn rate = (customers lost – new customers) / total customers. The lower the churn rate number, the better.
The CLTV will help you focus on the long-term value of high-paying customers instead of investing in “cheap” customers who bring in a low total revenue.
The ratio of customer lifetime value to the cost of acquiring a similar new customer helps a company decide how much they should be spending to strike a balance between expenditure and profits.
Ideally, CLTV should be greater than CoCA by a factor of more than 3 or higher, and optimally around 4. This metric will help you determine how much profit you can earn if you increase spending on one customer. The ratio should be high but it shouldn’t be too high as you need to spend on gaining new customers and retaining old ones.
This is the number of months your company has to wait to earn back the money you spent on acquiring one customer. It is calculated by dividing CoCA by the monthly revenue from one customer. Ideally, your payback time should be less than 12 months and as close to 6 months as possible. For startup businesses, the number could be higher of course, but startups should focus on the CLTV:CoCA ratios to maintain healthy cash flows.
The marketing originated customer percentage tells you the number of customers who started business with your company directly because of marketing efforts. This metric is very useful in determining how the efforts of your marketing team are paying off for you.
It is calculated by dividing the number of customer through marketing leads by the total number of customers.
Additionally, you can also calculate marketing influenced customer percentage by changing the numerator to represent the number of leads your marketing team corresponded with during the sales process.
If you have an in-house marketing team, which focuses on lead generations, you might expect this percentage to be around 40-80%.
In conclusion, when you’re next going to present the achievements of your marketing team to your boss, you should consider calculating these five metrics to hit the point home. The cost of acquiring a new customer will help you determine marketing budgets. The lifetime value of a customer will help you analyse the quality of services you are providing. The time to payback metric will help you inform your executives how soon they can expect their expenditures to be reimbursed. Finally, your marketing originated customer percentage will let your boss know how well your marketing team is contributing to the company’s business.