You've probably gotten advice in your life about picking the low-hanging fruit. But how can you tell where the low-hanging fruit is and how to pick it? In the context of technology companies, how can you tell if your marketing is generating a sufficient return?
For those concerned with managing the bottom line, there are 5 fundamental marketing metrics that can tell you the financial effectiveness of your marketing efforts. What gets measured gets done, so if you manage your marketing against these metrics, you will maximize the return on your marketing investment.
By paying attention to these 5 metrics, you will know which tactics are working and which aren't. With this knowledge can direct your sales and marketing resources to those tactics that generate the highest return.
1. Customer Acquisition Cost (CAC)
Customer Acquisition Cost (CAC) is a calculation that measures the cost of acquiring each new customer for your business. Here is the calculation:
Sales and marketing cost / number of new customers = Customer Acquisition Cost
2. Marketing % of CAC
Marketing % of CAC measures the percentage of your Customer Acquisition Costs attributable to marketing (as opposed to sales). Here is the calculation:
Total marketing costs / Total sales and marketing costs = Marketing % of CAC
3. Ratio of Customer Lifetime Value (LTV:CAC)
The LTV:CAC Ratio measures the relative value of the lifetime revenue you will derive from a customer compared to the money you spend to acquire that customer. Here is the calculation:
Lifetime Value / Customer acquisition costs = Ratio of Customer Lifetime Value
4. Time to Payback CAC
Time to Payback CAC measures how long it takes to recover Customer Acquisition Costs from a new customer. Here is the calculation:
CAC / Monthly Margin-Adjusted Revenue = Time to Payback CAC
5. Marketing Originated Customer %
Marketing Originated Customer % measures the percentage of customers that are generated as a result of marketing efforts like lead generation or paid advertising. Here is the calculation:
New Customers Started as a Marketing Lead / Monthly New Customers = Marketing Originated Customer %
Marketing has traditionally been a business function for which ROI has been difficult to measure. J.P. Wannamaker famously said, "Half the money I spend on advertising is wasted; the trouble is, I don't know which half." By managing your marketing function based on these five metrics, you will know just how effective your marketing really is.