The success of any marketing campaign is determined by KPIs (key performance indicators) and using measurement tools to assess effectiveness. As Brisbane marketing consultants, Market Smartly, we work with clients locally, nationally and internationally and all our clients have the same needs when it comes to measuring marketing performance: How do youmeasure the effectiveness of marketing?
All clients want to measure marketing ROI (return on investment). Marketing strategies often lack measurement calculations that can really pin point the initiatives that are effective and which ones aren?t.
KPI 1: Customer Acquisition Cost
Customer Acquisition Cost (CAC) Calculation:
As the name implies, customer acquisition cost involves the summation of sales and marketing costs in order to secure a new client. Common Customer Acquisition Cost components include advertising costs, salaries, networking events costs, trade shows, sales bonuses and so forth. To be completely accurate, we advise to also include 5% of overheads as marketing costs as well.
To calculate your Customer Acquisition Cost for a specific period, use the following equation:
CAC = Total sales and marketing costs over a specific period/number of acquired customers.
For example, if you spend a total of $10,000 on sales and marketing in a quarter and acquired 50 customers, then your CAC = 10,000/50 = $200.
How to Use Customer Acquisition Cost in Marketing Analysis
Customer Acquisition Cost gives you an estimation of the costs incurred to acquire a single customer during a period of time. It takes into consideration the total cost rather than an individual campaign cost and therefore it is a measure of the effectiveness of your integrated marketing activities rather than the effectiveness of a single initiative.
The aim is to reduce the Customer Acquisition Cost. We recently restructured the marketing strategies for a Brisbane based client because their Customer Acquisition Cost was over $1000. By investigating the marketing and sales processes, we made a few simple changes which reduced the marketing costs at the same time as increasing the sales conversions. The Customer Acquisition Cost has been steadily reducing and at the time of writing is $200 compared to $1000.
Your Customer Acquisition Cost also helps focus your staff on the value of acquiring a new customer and consequently, the cost of losing a sale. This increased awareness can be used to motivate staff to find innovative ways to increase sales conversion and/or trim marketing spend in order to reduce the Customer Acquisition Cost.
You can use the Customer Acquisition Cost as a KPI. For example, if there are large fluctuations in Customer Acquisition Cost month to month, this may be indicative of an issue in the sales process or the marketing strategies and allows you to take action to remedy the situation quickly.
The Customer Acquisition Cost is a very important measurement but it needs to be combined with additional KPIs in order to provide an accurate foundation for sales and marketing analysis.
KPI 2: The Ratio of Customer Lifetime Value (LTV) to Customer Acquisition Cost
Customer Lifetime Value is particularly important for businesses where customers make more than one purchase.
It is important to measure Customer Lifetime Value: Customer Acquisition Cost to in order to compare the cost of acquiring a customer against the current sales value of that customer.
We detailed how to calculate Customer Acquisition Cost in the previous post. To calculate Customer Lifetime Value, apply the following equation:
LTV = revenue – gross margin revenue for a customer/cancellation (churn) rate
We’ll use an example from one of a typical client:
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 Customer Acquisition Cost for the same customer is $1000, Then, your LTV:CAC ratio will be 48:1
How to Use Lifetime Value in Marketing Analysis
Usually having Lifetime Value that is triple or more than Customer Acquisition Cost 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.
KPI 3: Marketing Percentage of Customer Acquisition Cost (CAC)
Marketing part of Customer Acquisition Cost (M-CAC) = marketing portion of overall Customer Acquisition Cost
Marketing percentage of Customer Acquisition Cost (M%-CAC) = the percentage of (M-CAC) to overall CAC
For example, if your Customer Acquisition Cost is $10,000 and you spend $6,000 on marketing, then:
M-CAC = $6,000 and M%-CAC = 60%
The value of (M%-CAC) will vary depending on the cost of your sales cycle as shown in the following examples:
If you have a more complicated sales process, sales costs will be very high, resulting in M%-CAC as small as 10%.
How to Use KPI 3 in Marketing Analysis
As you noticed, there is no right or wrong M%-CAC value since it largely depends on the nature of your sales process. However, KPI 3 is very useful to measure overtime.
For instance, if you found a noticeable M%-CAC increase over a 6-months period, it could mean:
- You are raising marketing costs to boost sales volume
- Sales costs are low because they didn’t meet the expected sales quota
- You are spending more than you should on marketing
As you see, KPI 3 is very important. Still, you need to measure it against your overall sales and marketing objectives combined with other KPIs.