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Math Can Be Beautiful

This post is all about how to measure your marketing success.

For many bright and beautiful beginners, It takes a little bit of effort to overcome math and measuring resistance. You have to dig a little deeper if you’re not the numbers “type” to get going.

The good news?

You can do this! I’ll explain how with straightforward examples and you’ll be happy to know that the none of this takes you beyond division (which is, after all, why calculators were invented).

Let’s start with benchmarking since, without benchmarking you will not know if you are truly headed towards success, stagnating or, heaven forbid, heading away from success.

How to Benchmark

Benchmarks can be used to compare your business to other businesses or to establish your own performance baseline.

For small businesses like yours, setting financial goals and then establishing benchmarks helps you feel confident and stay organized. Plus, you need benchmarks to make certain calculations (as you will see).

If, like many of us, you have already launched your business and are just now getting around to measuring, your benchmark will be as simple as figuring out what you have accomplished so far and committing to measuring monthly or quarterly as you move forward.

How to Measure Your Marketing Success

To keep it simple, I’ll have you focus on just 3 key measures of marketing success to get you started.

They are:

  1. Customer acquisition cost (CAC)
  2. Ratio of customer lifetime value (CLV) to CAC and
  3. Payback period for CAC

I know, this is already a lot of letters and words like “ratio” and value. Don’t worry. We’re starting with only three measures and they are not, I promise, that difficult to figure out.

Customer Acquisition Cost (CAC)

This measure is about how much marketing money you spend to get a customer. It is the total of all of your marketing costs (staff, advertising, printing, etc.) divided by the number of customers you acquire (get) over a given period of time.

To set your benchmark, add up all you have spent on marketing since you began your business and divide it by the number of customers you acquired during that same period.

Generally speaking you want to keep marketing spending at a steady rate — unless investing money in a given campaign will help you acquire substantially more customers (and cash).

Example: Since you started your business, you have spent $10,000 on marketing and acquired 100 customers. Divide 10,000 by 100 and you will find that you have spent $100 per customer. Not bad!

Pro tip: Once you have established your benchmark, commit to measuring at least quarterly.

Ratio of Customer Lifetime Value (CLV) to CAC

I admit, we’re getting a bit more complex now. But stick with me.

To figure out the CLV to CAC ratio, you need to know:

  • Revenue/customer/time period
  • Minus gross margin
  • Divided by churn (customer loss rate)

Let’s break it down.

(We will use the example of the customer who cost $100 to acquire. We will call her Senorita 100. Remember — she represents the average of all your customers.)

Revenue/customer/time period. Senorita 100 spends $2,000 per year and she is likely to be with your company for 4 years. Her lifetime value is $8,000.

Gross margin. This is the amount of money you spend providing Senorita 100 with $2,000 of product. Let’s pretend that is costs you $200 to provide $2,000 worth of product. This means that your gross margin is $1800.

Churn. By its nature, your churn rate is a dynamic number (in other words, you hope to be constantly acquiring new customers and, of course, you will lose some number of existing customers. You need to know your:

  • Total number of active customers (remember your benchmark?)
  • Number of new customers and
  • Number of lost customers

in a given period.

Example: Let’s say you set your benchmark at 100 customers. In the latest period you lost 10 customers and gained 20. Subtract the 10 lost customers from the 20 new customers, giving you 10 new customers for a total of 110 customers. To get a percentage, divide your 10 lost customers by your 110 total customers. You have a churn rate of 9%. You are doing great!

Pro tip: Naturally you want your churn rate to be lower rather than higher. That’s what customer loyalty is all about.

Now let’s calculate your ratio:

$8,000 (revenue/customer/time period) minus $1800 (gross margin) divided by 9 (churn) equals $7,800 (LTV) to $100 (CAC) or 7.8 to 1. Excellent.

Payback Period for CAC

Now you want to know how long it will take you to earn back the money you spent acquiring new customers.

You will need to know your:

  • Margin-adjusted revenue (how much your customers pay on average per month) and
  • CAC

This one is a little easier than LTV:CAC. All you need to do is divide your CAC by your Margin-adjusted revenue for, in this case, one month.

Example: We already know that Senorita 100 has a LTV of $7,800 so let’s divide that by the number of months she is going to be with us (that would be 4 years times 12 months) which gives us $162.50 per month. She only cost us $100 to acquire, so she will require less than one month to become profitable.

I think you’ll agree, we all want customers like Senorita 100.

Pro tip: The faster you make back your acquisition costs, the faster you are profiting.

Conclusion

Is your head spinning? I hope not! I understand, though, that if you are not used to math, these formulas can be a little confusing.

If it feels overwhelming, start with calculating your CAC and then start experimenting with the other formulas. If you don’t put pressure on yourself you might even start to think it’s fun.

Knowing exactly how much you spend acquiring customers and how much each customer is worth to you will (eventually) feel great!

Your Turn

What is it like learning how to measure marketing success? Share your stories in the comments.

Citations

Volpe, Mark. The 6 Marketing Metrics Your CEO Actually Cares About [Cheatsheet]. Hubspot. January 15, 2013.

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