Nowadays, marketing goes hand in hand with analytics. Marketing has become far more measurable than ever before. So, you can estimate customer engagement and determine which tactics work and which don’t through the use of marketing metrics.
It’s not always clear which metrics you should use, and more importantly, it’s not obvious how to use them to improve your results.
To lend a helping hand, the eLama marketing team has decided to cover key metrics, their advantages and calculations.
Let's start with the basics:
- ROI (return on investment)
ROI (return on investment) reflects the efficiency of your investments. The easiest way to calculate ROI is to deduct the marketing costs from the total profit and divide the balance into them:
ROI = ((Total profit - Marketing costs) / marketing costs) * 100
- CPO (cost per order)
CPO (cost per order) can be translated as «cost per order» and indicates how much the advertiser has paid for selling one unit of the product. In marketing, this indicator of efficiency is calculated by the formula:
CPO = Marketing costs / The number of orders
- CPC (cost per click)
CPC (cost per click) is the price you pay for a click, the amount that an advertiser pays to a contextual system for click. No matter how many times the ads are viewed, the advertiser will only pay for the number of times it is clicked. How to calculate CPC:
CPC= Cost to the Advertiser / Number of Clicks
- CPA (Cost per Action)
CPA (cost per action) — with the help of the CPA metric, advertisers can calculate how much they have paid for targeted action on their site. In other words, CPA is the cost per action. How to calculate CPA:
CPA = Marketing costs / The number of targeted actions
Advanced marketing metrics to strengthen your marketing campaign:
Customer Lifetime Value
Customer Lifetime Value (LTV) is one of the most important marketing metrics. It is the average revenue you get from a customer during your relationship. By using LTV you can calculate how much you should spend to acquire new customers. You are in profit if your LTV is higher than your CAC (cost to acquire a customer). If it’s not, you are in loss.
Calculate this value mathematically using one of the methods enumerated below:
- LTV = Total revenue from a customer - Customer acquisition and retention cost
- LTV = Average purchase * Average number of purchases * Average retention time in months or years
This method requires more input but results in greater precision.
- LTV = ((T * AOV) AGM) ALT
T = average number of orders (sales) per month
AOV = average receipt
AGM = share of profit in revenue
ALT = average duration of customer interaction with the company (in months)
Determine the real return on investment (ROI) against the cost of acquiring a new customer.
Maximize lifetime customer value in relation to the cost of attracting new clients (CAC).
Elucidate your target audience.
Strategize customer retention more accurately.
Knowledge of LTV is needed to produce a comprehensive cross-section of clients based on their value. By means of thorough comprehension and proactive use of this indicator, any company can build a strategy to work with their specific client base and focus its attention on the group of clients with whom it is more profitable to do business.
Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is the total sales and marketing cost of convincing a potential client to buy your product or service. In other words, it is the average amount of money that you have spent to acquire a new customer.
To calculate CAC just add all of your marketing and sales costs for a specific period together and divide them by the number of customers acquired during that period:
CAC = Marketing and sales costs / The number of customers acquired during that period
For instance, if you spent 150000 per month and got 25 new customers, then your CAC is 6000.
As previously stated, your CAC should be lower than your LTV. Otherwise, you are not in profit.
LTV to CAC ratio measures the relationship between the lifetime value of a customer and the cost of acquiring them.
This ratio shows the performance of your investments into marketing and sales. Tracking this metric over a time period provides you with an insight into your business strategy. For example, if you’re spending too much per customer or if you’re missing opportunities from not spending enough.
Once you have both LTV and CAC calculated, it’s easy to calculate their ratio. Just divide LTV by CAC. For example, if your LTV is $3,000 and your expenses for acquiring a customer are $1,000, then your LTV:CAC ratio would be 3:1.
An ideal LTV:CAC ratio should be 3:1 or higher. The value of a customer should be three times more than the cost of gaining them. At the same time, higher is not always better. Keep in mind that if your ratio is too high, it is likely that you are under-investing in marketing and sales.
Payback CAC is a measure that shows how long you take to earn back the CAC you spent to get a new customer. It tells you break even on a specific customer, group of customers or all of your customers.
This metric is relevant for SaaS companies where you have to spend money upfront to acquire new customers and payback comes over a period. You become “profitable” and your CAC is recovered once the sum of the profit from a customer overcomes the amount of money invested in their acquisition.
How to calculate Payback CAC:
Take your CAC and divide it by margin-adjusted revenue per month for the average new customer you just acquired. Thus, you get the number of months to payback.
Payback CAC = CAC / (MRR - ACS)
CAC = average customer acquisition cost
MRR = average monthly recurring revenue
ACS = average cost of service
Marketing Originated Customer Percentage
The Marketing Originated Customer Percentage is a ratio that shows what percentage of your business is driven by marketing efforts. This metric is very useful in determining how the efforts of your marketing team affect your business.
It is calculated by dividing the number of customers through marketing leads by the total number of customers.
Marketing Originated Customer % = New customers started as a marketing lead / All new customers in a month
It’s typically expressed as a percentage, so multiply your result by 100.
Marketing Influenced Customer Percentage
This metric is similar to the Marketing Originated Customer Percentage but it takes into account all of the new customers that marketing interacted with while they were leads anytime during the sales process. The number of these leads is obviously higher than the Marketing Originated percentage.
Marketing Influenced Customer % = Total new customers that interacted with marketing / Total new customers
Measuring these metrics on a regular basis is crucial for marketing and gives you an opportunity to understand what’s working and what’s not. The metrics provide you with a full insight into the performance of your investments. Based on the results you get from these metrics you can analyze and optimize your marketing strategy.