3 Core Metrics to Measure Your Marketing ROI
Every dollar you spend on marketing should improve your sales revenue.
Most companies never take the time to properly measure the effects of their marketing efforts on their sales.
Calculating your marketing ROI is crucial for knowing whether you are heading towards profitability.
We know. It is difficult to measure the performance of your content defined in your content marketing strategy.
But we came up with a three metrics you can easily measure and keep track of how well your marketing campaigns are doing, so you can make the right decisions for your business.
1. Cost to Acquire a Customer (CAC)
This metric is just what it says it is:
The total cost for getting one new customer.
It is calculated by dividing the total marketing spend by the number of new customers.
By comparing the customer acquisition cost with the average revenue per customer, you can easily find your marketing ROI.
If you spend fifty dollars to get a customer that buys a service worth $500, you made a solid profit. If your margin is too low, you can increase that by lowering your CAC by having an expert audit your marketing activities and sales funnels.
You can calculate the CAC over a certain time period, which is useful if you want to compare the cost for different strategies. You can also calculate the CAC for all time, which comes in handy when you need to compare this with the lifetime value of a customer.
2. Customer Lifetime Value (LTV)
Instead of using one purchase as a metric, you can look at how much money one customer brings in over the course of many purchases. For this, we use customer lifetime value, or LTV.
Customer LTV is the amount of net profit a customer brings in over the course of the customer’s life cycle. You calculate it, multiply your margin with the value of all purchases made. If the average customer buys ten products with a total value of $5,000 and you have a margin of 20%, the average LTV is $1,000.
If you sell a subscription-based service, you take the monthly or yearly subscription revenue and multiply it with the length of the average customer life cycle.
$120 (annual subscription revenue) x 3.5 (years) = $420 average customer LTV.
3. Customer Retention vs. Churn Rates
Your customer retention rate is the percentage of customers you retain on a yearly basis.
Churn rates are the opposite: how many customers leave you in that same year.
If your main competitor lowers his prices and steals your customers, your retention rate falls down and your churn rate shoots up.
Every customer you keep is one customer less for the competition.
By aiming for the lowest possible churn rate, you make it harder for your competition to stay in business. Not only that. The cost of bringing your churn rate down is nothing compared to the CAC. You bring up the LTV of every customer you acquire and this pays off in the long-term.
Your LTV-to-CAC ratio and Churn Rates
The lifetime customer value (LTV) to customer acquisition (CAC) cost ratio gives insight into the ROI of your marketing spend.
A low LTV-to-CAC ratio means the current strategy is not profitable enough. Basically, you are spending too much money to make money.
If the LTV-to-CAC ratio is too high, it means you may not be spending enough on marketing and thus missing out on growth opportunities. In that case, it would be wise to invest more in marketing to ensure further growth.
One of the fastest ways to increase LTV is to drastically lower the churn rate. By ensuring that every subscriber keeps renewing as long as possible, you maximize the ROI of your marketing budget. Making sure customers receive good service and competitive pricing goes a long way.
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