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As marketers, we work tirelessly to move the needle on what often seems like a laundry list of metrics. We look at website visits, conversion rates, generated leads per channel, engagement on social media platforms, blog post shares, email click-through rates… and the list goes on and on. When the time comes to present the impact of your marketing efforts, you can’t present everything you measure, so what metrics quickly let everyone know if the marketing you are doing is working? 

While many bosses understand that a solid marketing team can directly impact your company’s bottom line, a large majority don’t believe that marketers are focused enough on results to truly drive incremental customer demand. 

A pretty cringe-worthy stat to see (unlike these marketing statistics), especially since we know so many marketing managers who stress about this every single day. So how can you show your executives that your focus is where it should be? By reporting marketing metrics in their language. When it comes to marketing metrics that matter, expect to report on data that deals with the total cost of marketing, salaries, overhead, revenue, and customer acquisitions. This post will walk you through the three most important marketing metrics your boss actually wants to know.

Let’s get started.

1. Customer Acquisition Cost (CAC)

What It Is & Why It  Matters

The Customer Acquisition Cost (CAC) is a metric used to determine the total average cost your company spends to acquire a new customer. CAC illustrates how much your company is spending per new customer acquired. The lower the CAC, the more profit you can make from each client, but there is a sweet spot. Ideally, you want to recover the cost of acquiring a customer within the first 12 months of acquiring them.You will want to monitor this month over month as an increase in CAC means that you are spending comparatively more for each new customer, which can imply there’s a problem with your sales or marketing efficiency.

How to Calculate It

Take your total sales and marketing spend for a specific time period and divide by the number of new customers for that time period.

Sales and Marketing Cost = Program and advertising spend + salaries + commissions and bonuses + overhead in a month, quarter, or year

New Customers = Number of new customers in a month, quarter, or year

Formula

Sales and marketing cost divided by new customers = CAC

Let’s look at an example:

Let’s say our company sells a piece of computer software that charges clients $250 per month. Our sales and marketing expenses and customers acquired from those efforts are as follows: 

Sales and Marketing Cost in a month = $20,000

New Customers in a month = 8

CAC = $20,000 / 8 = $2,500 per customer

At a CAC of $2,500 per customer and the need to recoup that money within the first year of acquiring the customer, this CAC is in a good place at being profitable after month 10.

Not only can you calculate your total CAC across the company, but you can get granular into each channel. You should always be asking which channels have the lowest CAC.

2. Ratio of Customer Lifetime Value to CAC (CLTV:CAC)

What It Is & Why It  Matters

The Ratio of Customer Lifetime Value to CAC is a way for companies to estimate the total value that your company derives from each customer compared with what you spend to acquire that new customer. The higher the CLTV:CAC, the more ROI your sales and marketing team is delivering to your bottom line. However, you don’t want this ratio to be too high, as you should always be investing in reaching new customers. Spending more on sales and marketing will reduce your CLTV:CAC ratio, but could help speed up your total company growth. The ideal is to be at a 3:1 ratio, if 1:1 or under you are spending too much to get a client as you are losing money on the deal, and if it is 5:1 or over you may be missing out on potential customers because you aren’t spending enough to bring them into the sales pipeline. 

How to Calculate It

To calculate the CLTV:CAC you’ll need to compute the Lifetime Value, the CAC and find the ratio of the two.

Lifetime Vale (LTV) = Gross Margin % X ( 1 / Monthly Churn ) X Avg. Monthly Subscription Revenue per Customer

Formula

CLTV:CAC

Let’s look at an example:

Using our software company again. We know that it has a gross margin of 30% (the percentage of profit that remains after you have paid your costs for the product or service), and it has a monthly churn of 2% (number of clients that turnover month over month out of your client base) and charging client $250 per month we can calculate the LTV to be ((50%*(1 / 2%))*250=$6,250. We figured out our CAC in the previous metric so our LTV:CAC ratio breaks down as follows: 

LTV = $6,250

CAC = $2,500

LTV:CAC = 2.5:1

At 2.5:1 this tells us we still have some marketing efficiencies or customer retention items we can work on at our software company.  We want to make this number closer to 3:1 and, since 2% churn is a good number, we either need to charge more per month to drive up our gross margin or find sales/marketing efficiencies to drive down our Customer Acquisition Cost.

3. Marketing Originated Customer %

What It Is & Why It  Matters

The Marketing Originated Customer % is a ratio that shows what new business is driven by marketing, by determining which portion of your total customer acquisitions directly originated from marketing efforts.

This metric illustrates the impact that your marketing team’s lead generation efforts have on acquiring new customers. This percentage is based on your sales and marketing relationship and structure, so your ideal ratio will vary depending on your business model. A company with an outside sales team and inside sales support may be looking at 20-40% Margin Originated Customer %, whereas a company with an inside sales team and lead focused marketing team might be at 40-80%

Tracking this metric will require a lot of communication between your sales and marketing teams to make sure everyone knows what leads come from which sources and how they are being tracked. This can be done through a marketing automation software, or by manually tracking the sources your leads are coming from, but you will need that info in order to determine how efficient your marketing dollars are being spent. 

How to Calculate It

To calculate Marketing Originated Customer %, take all of the new customers from a period, and tease out what percentage of them started with a lead generated by your marketing team.

Formula

New customers started as a marketing lead / New customers in a month = Marketing Originated Customer %

Let’s look at an example:

Our software company does all inbound digital marketing to create leads and does not have any concerted efforts on outside sales. We already know their customer per month number, and after looking into the leads that converted to customers, we can take away the following metric:

Total new customers in a month = 8

Total new customers started as marketing lead = 6

Marketing Originated Customer % = 6 / 8 = 75%

At 75% marketing leads being our driver of new customers, it would probably be advantageous for our software company to look into referral programs or outside sales opportunities as there are likely sales that could be made to bring that number into balance. 

On the other hand, if our software company did have an outside sales team, this number would reveal potential sales inefficiencies and weaknesses. It may be time to double down on inbound efforts and prune the team, or invest more resources into the sales team.

Never Lose Sight of These Metrics

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With these three metrics you can now make several marketing and sales decisions on how to drive more leads, create more efficiency, and impact your bottom line. And you can start speaking a language your boss will understand. Start focusing your reporting on these metrics and discussing marketing strategy in a way that improves these numbers will help you get the marketing budget and resources you need.

TJ Deluccia

Author TJ Deluccia

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