The number of social media followers, the number of press release impressions, or the number of site visitors are useful and important diagnostic tools for your marketing team and can help you plan your marketing strategy more effectively, but your CEO and CFO don’t care to hear about them. They need something more concrete and with a more obvious relation to the bottom line.
Some CMOs are daunted by the fact that more concrete numbers are sometimes more difficult to capture. The problem is that if you focus only on easily acquired data, you will likely miss the information that could be your ticket to a bigger marketing budget. But fear not: this guide is designed to make your job easier by laying out the marketing metrics that matter and the ways to use them.
Part 1: The Cost of Marketing
Customer Acquisition Cost (CAC)
Variably known as the Cost of Acquiring Customers (CAC), Customer Acquisition Cost (CAC) or simply Cost of Acquisition (COA), the CAC is the total number of sales and marketing dollars spent on average to acquire each new customer. To calculate this number, divide the total sales and marketing costs (including all campaigns, salaries, agency fees, incentives, etc.) for a period and divide it by the number of new customers for the same period. The resulting number will be the total cost of acquiring each new customer.
If your total sales and marketing costs for a given period are $500,000 and you gain 100 new customers in that period, then: $500,000 divided by 100 = $5,000 spent per customer. Your CAC would be $5,000. The lower the CAC, the better.
Retention Rate and Attrition Rate
According to the Canadian Marketing Association:
- Customer attrition rates (also known as cancellation rate or churn rate) can be anywhere between 2% and 40% per year.
- Reducing attrition rate by even 1% can make a huge difference in dollar amounts.
- Customer acquisition is 4-5 times more expensive than customer retention.
In light of that, it’s important to have a way of calculating retention and attrition rates. The attrition rate is also a necessary variable in some of the possible equations for calculating Lifetime Value of customers (we’ll get to that in a moment). To calculate the attrition rate, add the number of customers at the beginning of a given period and the number of customers acquired during that period; subtract the number of customers at the end of the period; divide by the number of customers at the beginning of the period. Or, visually represented:
So if you had 800 customers at the beginning of the year, acquired 200 new customers during the year, and finished the year with 900 customers, then: (800 + 200 – 900) / 800 = 0.125, or a 12.5% annual attrition rate. The lower this number, the better.
Like the attrition rate, the rentention rate is necessary for some Lifetime Value equations. The formula for the retention rate is simply 1 minus the attrition rate.
Lifetime Value (LTV)
The Lifetime Value (LTV) of a customer is the return you get from a customer over the course of their relationship with your company. This metric is particularly useful for companies who receive recurring payment from their customers or who get repeat customers.
LTV can be calculated in different ways. The basic method of doing so is to multiply the average amount customers spend per transaction by the number of repeat sales and by the average retention time (the average customer lifespan, not to be confused with the retention rate).So if on average customers spend $60 per order and place that order once a month, and the average customer lifespan is 2 years, then: ($60)(12 months)(2 years) = the LTV would be $1140.
There are also other, more complex methods of calculating LTV that can help you determine things like whether or not it would be profitable for your business to provide discounts, or whether or not it would make sense to create more expensive service plan options for your customers. KISSmetrics’ infographic on LTV explains the different LTV formulae.
Your LTV needs to be higher than the CAC, or else you’re spending more to acquire customers than you get back from them. A 3:1 LTV to CAC ratio is generally touted as the minimum to aim for.
CAC Recovery Time
The CAC Recovery time is the time it takes for you to recover the money you spent to acquire new customers. To calculate the CAC Recovery Time in months, divide the CAC by the average amount you receive from your customers in a month (the margin-adjusted revenue).
If your CAC is $5,000 and your margin-adjusted revenue per month is $500, then: $5,000 / 500 = 10 months. It would take you 10 months to recover your CAC. A one-year CAC Recovery Time or less is generally touted as the standard, although this varies according to industry. But a longer recovery time means greater capital investment.
Part 2: The Value of Marketing
So far, we’ve covered metrics that deal largely with cost, profit and revenue. Those are necessary, but presenting only the cost aspects of marketing can give the wrong impression. Even when the cost metrics presented show a decrease in costs and an increase in profit, the result, rather than an increased marketing budget, could actually be a decreased budget. Your higher-ups might think, “If marketing can operate at the same level with less money, why not reduce the budget?” It’s up to you to show them not only the cost but the value of marketing as well. The following metrics will help you show your executives how marketing actually benefits the company.
Marketing Originated Customer Percentage
The Marketing Originated Customer Percentage is designed to show how much new business is a direct result of your marketing team. To calculate the Marketing Originated Customer Percentage, divide the number of customers who started as marketing leads in a given periood by the total of new customers in the same period.
Rather than simply saying, “This is how much the business grew,” this metric tells your boss, “This is how much the business grew because of marketing.”
Marketing Influenced Customer Percentage
Much like the Marketing Originated Customer Percentage, the Marketing Influenced Customer Percentage shows marketing’s role in helping the company acquire new business. To calculate the Marketing Influenced Customer Percentage, divide the number of new customers who had contact with marketing during a given periood by the total number of new customers in the same period.
Return on Marketing Investment
The Return on Marketing Investment shows how much profit results from investing in marketing. To calculate it, multiply the incremental revenue from marketing by the gross margin; subtract from that the cost of marketing; divide by the cost of marketing.
If your incremental revenue from marketing is $100,000, your gross margin is 70%, and your costs of marketing are $10,000, then: [($100,000 X 0.70) – $10,000]/ $10,000 = ROMI of 6. Your return would be 6x your marketing investment. Of course, the higher this number is, the more profit marketing is returning.
Other metrics are important to collect as well, but each metric has its place. Those outlined here are the ones you want to bring into the boardroom with you. With these metrics in hand, you will be able to show your executives the numbers that matter to them and assess your marketing department’s performance.