In part one of this blog series, I discussed what type of marketing metrics resonate best with senior business leaders and why determining ROI is critical. In this blog, I’m focusing on the second set of vital metrics that marketers must be able to determine: Customer Acquisition Cost (CAC), Customer Lifetime Value (CLV) and Marketing Originated Customer Percentage (MOCP).
CAC is a calculation of the total costs involved in acquiring a new customer. This is key for evaluating if you are overspending on one channel vs. another, talent costs, etc., in ways that are disproportionate to the number of new customers gained.
CAC = ($) spend on sales and marketing
# of customers
While an increase in CAC can be an indicator that you’re overspending on marketing, it could also be symptomatic of an effort to boost sales by increasing marketing spend in order to generate higher-quality leads.
Neil Patel, New York Times bestselling author and metrics expert, cautions that you’ll need to view the CAC metric within the appropriate lens. “For instance, a company may have made investments on marketing in a new region or early stage SEO that it does not expect to see results from until a later period.”
You’re most likely familiar with the old adage that it costs far less to retainan existing customer than to acquire a new one (some experts estimate anywhere from five to 25 times more expensive); that is where Customer Lifetime Value (CLV) comes into play. CLV is a more comprehensive indicator of how valuable a customer is to your company over the course of your business relationship, as compared to the initial purchase.
The benefits of incorporating CLV into your measurement dashboard include:
- More scientifically measuring and demonstrating how marketing activities impact your company’s bottom line
- Planning and aligning your marketing programs with your firm’s financial goals and targets
- Approaching marketing spend and program prioritization through an ROI lens (more on that later)
By understanding CLV, marketers can better plan and budget for how much to allocate to acquire a new customer. When I worked at IBM we relied on using CLV as an indicator of customer proﬁtability and allocated our precious marketing resources based on it.
A pilot study encompassing roughly 35,000 customers in the Americas geographic marketplace run by IBM’s Market Intelligence group and focused on the Midmarket customer segment (companies with employee size of 100-999), relied on CLV to analyze its market opportunity.
The utilization of a CLV approach led to a reallocation of resources for about 14% of the customers as compared to the allocation rules used previously (which were based on past historical spending). The CLV-based resource reallocation method led to an increase in revenue of approximately $20 million (a tenfold increase in realized revenue) without any changes in the level of marketing investment.
The easiest way to calculate CLV is to multiply the annual profit gained from a customer by the average length of time of customer retention. A more detailed formula is included below. (For a more complete guide explaining the various methods of calculating CLV, refer to “5 Simple Ways to Calculate Customer Lifetime Value” by Maryna Sharapa.)
CV = Average Purchase Value X Average Purchase Frequency Rate
CLV = Average customer lifespan X CV
When data from all areas of an organization is integrated however, not only does it becomes easier to calculate CLV but you can approach it by:
- Identifying the touch points where the customer creates the value
- Integrating records to create the customer journey
- Measuring revenue at each touch point
- Adding together over the lifetime of that customer
To further help you on your path to presenting your senior management with impactful metrics, and to reinforce how important it is to look across the organization in a holistic approach, you may also want to consider providing Marketing Originated Customer Percentage (MOCP).
Total # Customers Originated via Marketing Leads / Total # of Recent Customers = COCP
MOCP is a ratio that shows what ‘new’ business is driven by marketing within the customer acquisition envelope. This is a great metric to include as part of your regular reporting.
Keys for Effective, High-Impact Measurement
Follow this checklist to ensure the metrics you track and report will truly convey marketing’s value to your business.
- Measurement methodologies should encompass all channels and properties in a well-integrated, orchestrated manner.
- Squelch the internal pressure, which usually stems from intra-departmental competition, to measure each program component separately.
- Help lead the shift from a culture of competition to a culture of collaboration by performing cross-channel and cross-media capture, measuring and reporting.
- Eliminate siloed reporting which occurs when an organizational entity becomes more concerned about who owns the initiative and their specific efforts than in your company’s marketing program as a whole.
- Report the key metrics your senior leadership will value. Your well-thought-out measurement approach will be seen as the difference maker that can help them to grow their business. And it will showcase marketing’s role in contributing to the health of your company.
- Beware of getting so caught up in micro-optimization (reporting by segment, by size, by product) and in providing such granular metrics that the reporting you share is meaningless for up-line executives.
- Ensure that you have tied these key metrics back to your company’s objectives in order to determine Marketing’s contribution to the company as a whole.
About the Author
Leslie Reiser, a business strategist, lead generator, and speaker is the managing partner of LCReiser Consulting, LLC. An award-winning digital marketing professional during her multi-decade tenure with IBM, Reiser has an extensive skill set in developing social media marketing programs, forging highly profitable partnerships, and deploying complex, global content and influencer marketing programs and capabilities that deliver significant business results across a diverse customer set, including IT channel partners. Leslie has led sales and marketing organizations to achieve breakthrough performance incorporating social, digital and new media marketing. Her expertise lies in growing business from digital investments through targeted content, SEO, web merchandising, marketing automation, actionable analytics, ROI analysis and end-to-end response management. She is also affiliated with some of the top agencies within the industry.