Metrics are the backbone of not only marketing, but business in general. It’s important to know what you need to be measuring other than the generic metrics everyone knows about, like click-through rate, page views and conversion rates etc…
Marketing is often seen as an expense rather than an investment, simply because results from marketing campaigns can be quite hard to track and monitor without the right metrics.
Here are some of the more actionable metrics you ought to be measuring.
Customer Acquisition Cost
Customer Acquisition Cost (CAC) is an extremely important metric to be measuring. Along with Customer Lifetime Value (CLV), CAC can give a solid view of how balanced your business model currently is.
CAC can be calculated by adding both marketing and sales costs and dividing them by the number of customers acquired during the time period.
MC = marketing costs
SC = sales costs
NC = number of customers acquired during the period
For example looking at monthly CAC, if my :
Marketing Costs = $100
Sales Costs = $200
Number of Customers Acquired = 20
CAC = $15
Customer Lifetime Value
Customer Lifetime Value (CLV / LTV) is one of the most important and actionable metrics to measure within a company. It gives a good overview of how much you should be spending on new acquisitions, how profitable your current customers are, and which channels have the most profitable customers.
CLV can be a difficult metric to measure due to the variations in average customer spending and the frequency of spending in a given time period. There are so many different variables at play, which is why it’s important to measure CLV often.
There are so many different ways to calculate CLV, methods change depending on the industry, business models and required level of accuracy.
One of the more common methods of calculating CLVcan be done by dividing your customer retention rate percentage over a given time period by the discount rate plus one, then subtracting that by the customer retention rate percentage and finally multiplying the result by the average gross margin per customer lifespan.
Here is an equation to help elaborate that description, where :
m = average gross margin per customer lifespan
r = retention rate percentage
d = discount rate
A simplified method of calculating CLV can be done by just multiplying the Average Monthly Revenue per Customer by the Gross Margin per Customer and dividing that amount by the monthly churn rate, or :
(Avg Monthly Revenue per Customer xGross Margin per Customer) ÷Monthly Churn Rate
For example if my monthly :
Revenue per Customer = $50
Gross Margin = 40%
Churn Rate = 10%
The CLV will be= $200
Simplified methods are usually more favoured because of the complex nature of other metrics such as discount rate.Here is a Useful Tool for Calculating CLV.
Customer Retention Rate
Customer retention rate is a pretty simple albeit overlooked metric to measure. Retention rate can tell you a lot about a customer’s experience with your product and business.
To calculate Retention Rate simply subtract the number of new customers gained in a given time period from the number of customers at the end of the period, then multiplying that number by the amount of customers at the beginning of the same period, and finally multiplying that number by 100 to get a percentage for your customer retention rate during that period.
To translate that into an easier to understand equation :
CE = number of customers at end of period
CN = number of new customers acquired during period
CS = number of customers at start of period
So, for example:
Customers at the start of the month = 20
Customers acquired during the month = 20
Number of customers at the end of the month = 30
((30–20)/20) x 100 = 50%
Customer Retention Rate = 50%
Customer Lifetime Value to Customer Acquisition Cost Ratio
For businesses which have recurring customers or a subscription based product, Customer Lifetime Value to Customer Acquisition Cost Ratio (CLV:CAC) is a crucial metric to measure. It can show how your acquisition costs are reflecting on the lifetime value customers are bringing to your business.
To calculate CLV:CAC simply divide your Customer lifetime Value by your Customer Acquisition Costs.
So if :
CLV = $200 and CAC = $50
CLV:CAC = 4
Now, most people say the number you should be aiming for is 3 or more. Less than that could mean you’re spending too much on acquiring customers and much more than 3 can look nice, but often means you’re restricting potential growth by underspending on customer acquisition.
Time to Pay Back Customer Acquisition Cost
Time to Pay Back CAC can help you find out how many months it takes to recover the money spent on acquiring customers. It’s important to measure because the faster CAC is payed back, the faster you’ll be in profit.
To calculate how long your customer acquisition costs take to be paid back, take your CAC and divide it by your margin adjusted monthly revenue :
CAC ÷ Margin Adjusted Revenue.
Generally speaking, for most businesses, the Time to Pay Back CAC should be less than 18 months and ideally less than 12. This means that a newly acquired customer will be profitable in under 1.5 years.