Do you “set and forget” your marketing and know whether your activity is truly driving results or are you operating on good faith?

Marketing is one of the largest investments a business can make, yet it’s so often “handed over” to somebody in the office that was employed for another reason or given to a third party without a concrete brief or a method to measure effectiveness. If you don’t have the right data you can’t realistically know what is working, what is wasting budget and what you could improve upon.

In this article, I’m going to show you the most critical marketing metrics that you need to know and most importantly how to track them, giving you a simple framework for turning your data into decisions. No gobbledygook or buzzwords, just helpful metrics to measure your marketing effectiveness.

Understanding The Importance of Tracking Marketing Metrics

turned on black and grey laptop computerWhy?

Aligning your marketing activity with your business goals ensures that what you are doing is actively contributing to meaningful growth, rather than “setting it and forgetting it” or marketing just because somebody said there was a need for it. It can help you to avoid wasting budgets on underperforming strategies and prevent knee-jerk reactions because the sh*t hit the fan in the last board meeting. Critically, tracking the right metrics will help to grow a data-driven culture within your business and help to make smarter decisions at crucial junctures.

What are the common mistakes?

Marketing is often treated as a reactive measure rather than a proactive one. You missed your sales target this quarter or costs have outstripped revenue for the first time and the recent emergency all-hands meeting has everybody flapping to get back on top. Coupled with an over-reliance on vanity metrics (e.g., likes and followers on social media), that aren’t tied back to your business goals, leaves decision-makers without the clarity or understanding needed to assess how marketing directly contributes to revenue and growth.

The Marketing Metrics That Matter

Customer Acquisition Cost (CAC)

CAC is quite an easy metric to follow and one of the most important. In simple terms; how much does a new customer cost you? It’s important to establish what your target CAC is, and tie it directly back to profitability and your business goals.

To calculate CAC, you need to take the amount of money you’ve spent on marketing and sales activity to acquire the customer(s) and then divide it by the number of customers acquired. As a crude example, you spent £50,000 on marketing in the last quarter and you brought in 10 new customers, you have a CAC of £5,000. The catch is how you measure the timeframe, if you have a long time period for conversion, then you might need to measure marketing spend at day one versus new customers at day 90, as an example. It can also be beneficial to use a rolling timeframe to smooth out variability in longer sales cycles, i.e. it’s easier to sell in January then it is in December.

Note: this is the simple approach and you can also take a complex approach and add: wages associated with sales and marketing, software costs and then general overheads. Normally, this is left out as it’s seen as part of doing business, but, it pays to be aware of these costs, because sales and marketing professionals aren’t free. In an ideal world you would compare CAC to gross margin generated by the customer, not just the revenue.

Tip: Tracking CAC across different product types and different acquisition channels can help you to focus where it matters. Whilst an overall CAC figure is helpful for measuring performance at a board level, it’s important to measure if certain products have a lower CAC or a certain marketing or sales method performs better, allowing you to concentrate your efforts in the right place.

But, how do you calculate how much to set as your CAC? That’s where lifetime value comes into play, or “LTV”.

Customer Lifetime Value (LTV)

Assuming that your business model involves your customers making more than one transaction with you over a period of time, they have a set value throughout their “lifetime”, that is, the length that they area couple of people sitting at a table with a laptop engaged with you.

For example, you’re a fund administrator and you’re providing essential services to investment funds. Your typical client is a fund manager and they pay you an annual fee for your services. Based on your internal reporting, your average client lifetime is seven years and you charge £20,000 a year, you have an LTV of £140,000.

But on the flipside, maybe you’re an estate agent or a recruitment agent; arguably, a long LTV is a lot harder to come by and quite sporadic and you might only ever secure one “sale” from that customer. So your LTV is your average single sale price, like a single 2% on the sale of a house. For example, if your average house sale price is £500,000 and you net £10,000, so your LTV is £10,000. But that’s also for the buyer and the seller combined (remember, the buyer doesn’t pay you anything), which means you have to apply a bit more scrutiny. There’s a much deeper rabbit hole to go down and there are nuances for every business type, but this will set you on the right path.

Tip: There’s also another often unforeseen value of LTV and that’s what happens beyond your primary sale. Does the customer refer other business, do they partake in a loyalty program, do they sign up to a newsletter – all of these activities, depending on your business goals, have value and can contribute to their LTV.

This gives you a realistic long-term look at how much customers are worth to your business and allows you to set a CAC that is, over the long-term, profitable. But remember to review these figures regularly and also remember your cashflow, just because you have an LTV of £140,000 doesn’t mean you drop £100,000 acquiring one customer; you need to remember your operating costs and you need to keep in mind seasonality and market fluctuations. Which takes us to the next metric that matters…

Your conversion rate

Your marketing will deliver leads, some will be qualified and some will be unqualified. You’ll need to set your rules for what a qualified and unqualified lead is. But, you need to convert them to a sale. So, if your marketing efforts bring in 100 leads and you convert to 10 customers (good going!) then you have a conversion rate of 10%. Improving your conversion rate is absolutely critical to improving profitability and lowering your CAC.

Tip: If you’re trying to figure out how to qualify or unqualify a lead, a helpful framework is BANT. Do they have the Budget, do they have the Authority to agree the sale, have they expressed a Need for what you offer and what is their current perceived Timeline. A qualified customer, could be, they understand your pricing and it’s within their Budget, they’re director-level and have Authority to make this deal, they have shown a clear and present Need for what you offer, and their current Timeline is to roll this out before the end of the quarter.

And at the end?

Providing you have all of your ducks in a row, tracking these three core metrics: CAC, LTV and conversion, will give you the data-driven foundation to improve your marketing efforts effectively.

In summary, this is how they work together:

  • CAC tells you how much you’re spending to acquire a customer and, most importantly, whether it’s sustainable.
  • LTV provides you with a long-term view of how much value a customer brings to your business over time, and can tell you if your CAC is profitable.
  • And lastly, your conversion rate, will reveal how efficient your sales process is and how effective your marketing is at delivering qualified leads. Remember, sales and marketing work together, one cannot function without the other and it’s a team effort. Your conversion rate directly affects your CAC and overall ROI.

How to move forward

Start small, Rome wasn’t built in a day. Pick one metric to refine, like optimising your conversion rate by improving your sales process or ensuring your marketing delivers better qualified leads, or start to measure your LTV and find out which customers or which products are more valuable to your business.

If you’re unsure on where to start and you’re looking for a sustainable, results-driven marketing strategy, my flexible CMO service can help. Whether it’s setting up the right systems, tracking the right metrics effectively or providing strategic guidance, I work with businesses like yours to build an effective and profitable marketing function, tailored to your business goals. You can read more about the service, here.