As a strategist at IMPACT, I talk to a variety of companies in a wide range of industries. Through these conversations, I’ve found that many of them already make some effort to measure their financial metrics, such as the numbers of new sales they make each month, the dollar value of their sales, the gross profit on sales, and so on.
While most companies track revenue metrics, fewer have developed a robust set of key performance indicators (KPIs) for monitoring the performance of their marketing and sales efforts. But why?
Well, in my experience, it’s easy to get sidetracked by flashy “vanity metrics” such as Facebook likes or Twitter followers. These types of metrics might be easy to track and measure, and may sound critical, but they aren't the numbers that translate into revenue.
So, if you're looking to grow your business and drive revenue, what are the revenue metrics you should be measuring? Here are five that I think should be part of every company's management scorecard.
1. Cost of Customer Acquisition
First and foremost, you need to know how much you spend acquiring new customers. To do so, add up everything you spend annually on marketing, including staff salaries, as well as the cost of pay-per-click advertising, marketing agency fees, contractors, the cost of software, etc.
Next, look at how many customers your marketing efforts bring in each year and divide your cost by that number. That will give you the average amount you spend to bring in each client, also known as the cost of customer acquisition, or "CAC."
Why is this number important?
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For starters, you'll want to ensure you're not spending more to acquire your customers than you are profiting from them (see "customer lifetime value," below, for more on this). The larger the gap between CAC and CLV, the greater the company's overall profit.
CAC is also important to understand if you are thinking of working with a marketing agency. You need to ask how many customers they expect to bring in for you and how much the service will cost. Look for agencies that can lower your CAC and bring in customers for less than you currently spend acquiring them.
2. Customer Lifetime Value
In addition to calculating the cost of customer acquisition, you also need to work out how much each customer is worth to your business. This is known as the customer lifetime value, or "CLV." Put simply, this is the value that a customer will contribute to your business throughout the entire time they work with you as an active client.
You can calculate CLV using either historical data or a predictive analysis that considers previous transaction history as well as behavioral indicators. As an example, let’s imagine you sign a customer up for a 12-month contract at $5,000 per month. If the client stays only for one year, the customer lifetime value is 12 times $5,000, or $60,000 in total.
On the other hand, if the average client stays for three years, the customer lifetime value will be three times that much, or $180,000.
Unfortunately, many businesses don’t collect good enough data from their customer relationship management systems to calculate the customer lifetime value. It's a critical metric, however, so now is the time to start. You can do this manually by selecting a representative sample of customers and using a spreadsheet to calculate CLV, or you can work with your IT and accounting teams to build this metric into your existing software systems.
However you calculate CLV, the goal is to use the data to maximize CLV in relation to CAC.
3. Net Customer Worth
Once you have calculated the two metrics listed above, you can subtract the customer acquisition cost from the lifetime customer value to calculate the net customer worth. This is the amount of revenue that your business earns from each client, after taking the marketing costs into account, and is also expressed as an LTV:CAC (or the ratio of customer lifetime value to the cost of customer acquisition).
LTV:CAC is important because it allows you to define your return on investment (ROI) and develop a more effective growth strategy for your business. If your LTV:CAC is high, this means that your sales and marketing team are delivering greater ROI to the company.
The goal isn't necessary to get this number as high as possible, because unusually high LTV:CAC numbers can be a red flag that indicates your customer retention is good but new customer acquisition is suffering. And when that happens, your business won't grow as quickly.
4. Digital Funnel Metrics (Visitors, Leads and Customers)
It’s important to obtain metrics relating to each stage of your sales funnel. First, how many visitors come to your website each day, week or month? For most companies, these website visitors make up the majority of people coming into the top of their sales funnel. The larger this number, the more opportunities you have to make a sale.
In addition to tracking how many website visitors you get, you should track how many leads your website generates in that same period, and how many of those leads turn into customers.
5. Conversion Rates
Once you've quantified your visitors, leads and customers, you can calculate your conversion rates, including visitor-to-lead conversions and lead-to-customer conversions.
These numbers are critical because they can help you determine where to focus your efforts and get the greatest bang for your marketing and sales buck. How? There are two ways you can grow your business using digital marketing: You can either increase the total number of visitors to your website or improve conversion rates.
In general, it is easier to control your conversion rates than bring more people to your site, as making tiny changes - tweaking where you place calls to action, how you phrase them, and how you structure each page of your site - can make a big difference to your conversion rates.
In our experience, the above metrics are the ones that will give you a complete picture of your marketing and sales funnel, as well as what needs improvement and why, and how your marketing and sales efforts are contributing to your bottom line and fueling your growth.
If you have money to invest, marketing automation software such as Marketo or Hubspot can make it much easier to measure these key business metrics, especially over time. On a small scale, it’s often possible to measure these metrics using a simple spreadsheet and data from Google Analytics.
Ultimately, it doesn't matter how you choose to measure your metrics, just so long as you are taking the time to measure them at all. Yes, it might take a bit more effort, but the insights you gain to help grow your business will be invaluable.
Because, as the old saying goes, "If you can't measure it, you can't manage it."
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