As content marketers, there are a lot of things that we can and should be measuring—open rates, click through rates, number of visitors (unique and returning), number of users, conversion rates, number of impressions, social media likes and followers, and so on.
All of those numbers are important at the campaign level to know how they perform against other campaigns. But none of these metrics actually communicates the overall effectiveness of your marketing when it comes to bottom line revenue increase.
Sure, you may be able to tell that you’ve got a positive ROI on overall marketing spend, but when we have to tools available that truly measure what creates the greatest impact, there’s no excuse for only measuring branding initiatives.
Ultimately, the only metric that matters is total cost of customer acquisition. From that number, you can work your way backwards to figure out where marketing dollars would be best spent in your situation.
Calculating Total Cost of Customer Acquisition
Because buyers are engaged with both sales and marketing as they move through the sales funnel, it no longer makes sense to draw a hard line between sales and marketing expenditures.
So the total cost of customer acquisition is calculated with all sales and marketing expenses in a given period divided by the number of customers that were acquired as a result of those investments in that period.
CAC = Sales & Marketing Expense in a Given Period / Number of Customers Acquired in that Period
But that’s just a starting point when it comes to measuring marketing’s effectiveness. Rather than thinking about return on investment (ROI) in terms of some vague notion of “marketing spend,” we need to sharpen our focus to find out exactly how much it actually costs to acquire a single customer.
The next key performance indicator we must consider is the customer lifetime value (CLV). You want to know the incremental value each customer brings, not just what part of the overhead they’re going to account for. Customer lifetime value adjusted with your gross margin allows you to create a growth model that does more than just keep the lights on—it actually provides for incremental growth.
CLV = Billing per Client per Year x Gross Margin / Churn Rate (Expressed as a percentage)
Once you know your CAC and your CLV, you can compare the two figures to get a better understanding of the return on your marketing investment. If it costs you more to acquire a customer (CAC) than that customer will bring in over the time they do business with you (CLV), then you are doing something wrong (more on that later).
CAC Ratio = Customer Lifetime Value (CLV) / Cost to Acquire a Customer (CAC)
It is also helpful to calculate how long it takes you to recover the cost of acquiring a customer once that customer has signed on with you. The buying cycle may only be three months long, but it can take much longer than that to become cash flow positive—especially if your customers don’t pay their bills on time.
As businesses begin to shift their sales and marketing dollars into the digital arena, it is more important than ever to focus on customer acquisition and retention models and not nebulous metrics like return on marketing expense or return on sales expense, because those buckets are no longer clearly defined. When you look through the lens of the individual customer, you can make much better budget decisions.
Breaking Down the Sales Process
Now that you have calculated how much you should spend on marketing, the next step is to work your way backwards through sales metrics to fully understand where the next marketing dollar should be invested.
Ultimately, we want to know where we should be spending marketing dollars that support sales—should you spend money building a database or driving more traffic to your website? Or maybe top of the funnel isn’t a problem (you’ve got plenty of web visitors already) and you need to concentrate on converting more of that web traffic into qualified prospects.
In other words, as marketers, we need to start thinking about how many leads we need to provide to the sales team every month to reach the overall growth goals of the company
For calculation purposes, let’s say you have a software product with an average sale price of $100K. When digging into the sales metrics, you find that you’ve got a 25 percent win rate for opportunities. In other words, for every four sales cycles, you’re going to win one of them.
Doing the math backwards and extrapolating costs, you then know that each and every sales cycle is worth $25K.
If I start extrapolating costs for the sales cycles to the sales appointments, to the marketing qualified leads to the raw impressions or names in the database, I can reverse engineer a cost for that funnel stage record and also a perceived value based on the average deal size for that same stage.
By comparing the average cost to the value of a marketing qualified lead (MQL), versus a sales qualified lead, that’s going to tell me exactly where to spend my next dollar.
But until you break down your customer acquisition cost, and then break that down further by funnel stage to know the value versus cost comparison for each stage in the funnel, you can’t accurately know where your best investments are going to be made.
It sounds complicated, but it’s not. It just takes some different research into the numbers—and if you don’t have those numbers, now you know what you need to start measuring.
To make this process even easier, you can use our Revenue Growth Marketing Calculator to work the numbers backwards from your sales goal to determine how many leads you will need to achieve the growth you want.
All you need is your average win size (your sales price) and your conversion rates. Go ahead and enter your numbers into the Calculator to learn how many MQLs you should have.