The New Marketing ROI in 4 Easy Steps
Doing so can also help build collaborative relationships with other parts of the organization, making marketing a revenue generator instead of a large expense line item in the budget.
Cut the fluff
Admit it: A lot of marketing metrics are rather fluffy. We track things such as likes, shares, comments, and clicks and create an equation to say this is the percentage of engagement. The reality is the C-suite, sales, and other key stakeholders don’t care about these metrics if they don’t drive revenue or affect the bottom line.
Even lead scoring isn’t enough. Lead scoring models are often based on arbitrary numbers that the marketing department claims represent qualified leads. The sales team, however, may not agree with that assessment, which brings us back to square one.
At its most basic level, ROI represents how much money you made divided by how much you spent. But it’s also important to consider factors such as the cost to acquire a customer as well as onboarding costs and the amount of time it takes to earn that money back also known as the payback period.
So how should marketers include these factors in their calculations and what metrics should they care about? Here are four essential metrics that marketers can use to demonstrate marketing's value.
1. Cost of Customer Acquisition (CAC)
This is the sum of all sales and marketing expenses divided by the number of new customers that were added. This is important so that marketers can look at the channels that were used and figure out how much they can spend on each one per customer to drive acquisitions.
CAC = Sum of all Sales & Marketing expenses / No. of New Customers Added
2. Customer Lifetime Value
We also need to understand the lifetime of a customer (1 divided by customer churn rate) as well as lifetime value (LTV). LTV can be a little tricky to calculate. Each marketer must find the right equation for his or her business. This means taking into account things like revenue, churn rate, and gross margin, which can get complicated. Here’s a simple example:
LTV = Annual Revenue Per Account (ARPA) / Customer Churn Rate
Customer lifetime value is important so that managers can determine how to design strategies for customers that matter in the long run instead of focusing on increasing short-term profits. In other words, a company has limited resources and would naturally want to use it for customers that deliver maximum profits over time.
3. LTV versus CAC
Next, measure LTV versus CAC. The CAC ratio should be greater than 3. This ratio is key to understanding whether the business will be profitable in the long run and how long it’ll take to reach profitability. If CAC:LTV is less than 3, that means that you expect to barely make 2x or less of what it cost to acquire customers in the first place. For example, a 1:1 ratio would mean $0 profit, and a 1:2 ratio would mean you only make twice your CAC back, which for lifetime value typically isn’t good because you have the additional cost of supporting those customers.
LTV: CAC Ratio = LTV / CAC
4. Months to Recover CAC (Payback)
The last metric that marketers need to understand is the number of months it takes to recover the cost of acquiring a customer: CAC divided by monthly recurring revenue (MRR) per customer or annual recurring revenue (ARR). This metric lets marketers know how long they need to retain customers in order to get a positive ROI for their efforts. This is incredibly important to know because if they are churning customers before this payback period, they are actually losing money for the business.
Months to Recover CAC = CAC / Avg. MRR per Customer
Obviously this is just a starting point, it’s but an important one. As marketers dive into these metrics, they will start to find themselves in conversations about where breakdowns occur around churn—is the problem the product, overselling, are the leads not properly qualified, etc.?
All of these are necessary conversations for the business to have. Armed with these four metrics, marketing executives can claim their rightful place at the strategy table. And by integrating marketing and sales data, marketers can align their efforts more closely with the sales team, adding more value and credibility to both teams’ efforts within the organization.