The success of any marketing campaign is determined by KPIs (key performance indicators). As marketing consultants we are constantly looking for innovative techniques to measure marketing ROI (return on investment). KPIs are invaluable as they provide a measure of the different components that form your overall marketing strategy and how they integrate.
Throughout our “Essential Sales and Marketing KPIs” posts series, we are explaining the most important KPIs that marketers need to apply in order to enhance their marketing strategy and maximise ROI.
KPI 2: The Ratio of Customer Lifetime Value (LTV) to Customer Acquisition Cost (LTV:CAC)
LTV is particularly important for businesses where customers make more than one purchase.
It is important to measure LTV:CAC to in order to compare the cost of acquiring a customer against the current sales value of that customer.
We detailed how to calculate CAC in the previous post. To calculate LTV, apply the following equation:
LTV = revenue – gross margin revenue for a customer/cancellation (churn) rate
We’ll use an example from one of our Brisbane marketing clients:
The clients customer spends a total of $12,000 per year at a gross margin of 40%. In addition, the client knows their churn rate (the likelihood to cancel) for that type of customer is 10%.
In this case, the LTV = $12,000 x 40% = $4,800/10% = $48,000
If your CAC for the same customer is $1000, Then, your LTV:CAC ratio will be 48:1
How to Use KPI 2 in Marketing Analysis
Usually having LTV that is triple or more than CAC means that you have a high sales and marketing ROI.
However, having a very high ratio in favor of LTV may mean you need to spend more on sales and marketing to grow faster. Under spending means you could be holding the growth of your company back. Of course this needs to be balanced with cash flow.
That’s why you need to consider this KPI against your overall sales and marketing objectives combined with other KPIs.
Stay tuned for our upcoming posts as we will shed light on more sales and marketing KPIs. To your success!
Name: Market Smartly
About: Market Smartly's marketing consultants understand the realities of business and focused on measurable and practical solutions. Our fresh approach to marketing is simple, no frills, highly effective and tailored to your business. Our team of consultants can provide specialist advice in all areas of marketing, from marketing strategies, to online and offline solutions. We’re there when you needs us… not when you don’t!