Jargon. You can get lost in a treasure trove of digital marketing metrics that can make your head spin. You can throw around terms like visits, conversion rates, click through rates, leads per channel, engagement on social media platforms, shares… And the list can continue into an alphabet soup of CPC and CPE. We don’t like jargon because it’s not relatable. It’s not human. But it’s important to know about actual, tangible results and what metrics are most important in indicating success. How good is a million website visits with no leads? Or a 50% engagement rate on your social media efforts that doesn’t add to the bottom line?
Half the money I spend on advertising is wasted; the trouble is I don’t know which half. – John Wanamaker, early retail pioneer
73% of executives don’t believe that marketers are focused enough on results. In fact, this is one of the primary reasons why digital marketing can be more effective than traditional marketing. We have a vast amount of data and metrics that tells a story. Most executives are expected to report on the total cost of marketing in addition to fixed costs like salaries and overhead.
So what pieces of data tells your story and gives you a great idea on overall marketing effectiveness?
Customer Acquisition Cost (CAC)
One of the most important metrics to evaluate your marketing is the customer acquisition cost. This number gives us an overall take on how effective marketing is. It’s a pretty straightforward metric that simplifies many of the underlying tactics needed to fulfill it. Calculating it is basic arithmetic:
CAC = Sales and Marketing Cost / Number of New Customers
Your sales and marketing cost takes into account programmatic and advertising spends, salaries, and overhead over a given period (monthly, quarterly, and annually, for example).
New customers is as basic as it sounds.
As an example, if your sales and marketing costs over the course of a year were $150,000, which generated 100 new customers, your CAC is $1,500. This number is important for a variety of reasons. Comparing this cost to the average lifetime value of a customer gives a good indication on how well your marketing is working (more on that in a minute). Comparing year-over-year (YOY) values of your CAC lets you know which direction your marketing is heading.
Marketing Percentage of Customer Acquisition Cost
This one is a mouthful and is a bit technical. But what it shows is how well performing your marketing team’s performance and spending is. It’ll give insight into how well your marketing program is functioning.
You calculate M%-CAC by taking all marketing costs and dividing by the total sales and marketing costs you used to calculate CAC. It’s important to note that your sales and marketing costs take into account salaries, advertising spends, and overhead of both sales and marketing while the marketing cost abstracts just the marketing department.
M%-CAC = Marketing Cost / Sales and Marketing Cost
If your sales and marketing cost was $150,000 and your marketing cost was $75,000, then your M%-CAC is 50%. Obviously, the lower M%-CAC is, the more effective your marketing program is. Increasing M%-CAC can mean a few different things:
- The sales team could be underperforming.
- Your marketing team could be underperforming and spending too much per customer.
- You’re in investment mode and profitability is a lower priority than new customer acquisition.
Ratio of Customer Lifetime Value to Customer Acquisition Cost (LTV : CAC)
Mentioned above, the lifetime value of a customer is an important indicator when evaluating marketing budgets and spend. The LTV : CAC ratio gives a general rule on how well each customer performs compared to the bottom line. Lifetime value can be a difficult number to get a firm hold of when forecasting, but much easier to understand when looking in the rear view mirror.
If a customer pays $550,000 over the course of a year and your CAC is $100,000, then your LTV : CAC is 5.5 to 1.
LTV : CAC = LTV / CAC
Obviously, the higher this ratio, the more profitable your business is. It’s important to determine what an acceptable LTV : CAC is at the onset of a marketing campaign. Although you want this number as high as possible, if it goes too high, it may signal that you’re missing opportunities for growth. Reinvesting some of the profit could lead to a lower LTV : CAC but higher overall revenue and new customer acquisitions.
Time to Payback CAC
Time to Payback CAC is how long it takes for your company to earn back the investment of each new customer. This formula is simple to calculate but aids in understanding how you may structure your contracts for the maximal benefit to your bottom line.
Time to Payback CAC = CAC / Margin-Adjusted Revenue
If your margin-adjusted revenue is $500 per month and your CAC $3,000, your Time to Payback CAC is 6 months.
If you’re in an industry where your customers pay an annual fee, your goal is to have your Time to Payback CAC less than the contractual term. In other words, to keep an account in the black, your Time to Payback CAC needs to be less than 12 months. The quicker you’re able to pay down your CAC, the quicker your accounts go in the black.
Marketing Originated Customer Percent
The Marketing Originated Customer Percent is a ratio that shows you what business is originated through marketing channels compared to the total customer acquisitions.
Marketing Originated Customer Percent = New Customers Via Marketing / New Customers
This number is often produced monthly, quarterly, or annually. As an example, if you get 50 new customers in a month, 40 of which resulted from marketing channels, your Marketing Originated Customer Percent is 80%. This metric is particularly powerful because it can showcase how scalable your company is. If you’re able to create 80% of new opportunities from marketing, you have the ability to allocate more funds to the marketing department to experience further growth.
The Importance of Marketing Data Integrity
Bad data tells a bad story. These metrics are only meaningful if they’re backed by quality data. Getting the data should be your first priority if you don’t already have it. Platforms like Google Analytics only provide a single point of view of your total marketing, whereas more robust tools like HubSpot can centralize both marketing planning and marketing results. With this data in hand, it should be as simple as a few mouse clicks to get actionable numbers.
If you’re not prepared to report on these numbers at the next meeting with your boss, give us a call and let’s put a plan in place to get you where you need to go.