In the first quarter of 2009, total ad spend in America fell by more 10%. That was the midst of the recession. Those two things are not unrelated.
Marketing and advertising budgets are often the first things cut during tough financial times. During hard financial times, individuals cut costs on things deemed “not necessary,” and it turns out, businesses act the same way.
The reason marketing is often filed under “not necessary” is that it can be incredibly difficult to measure return on marketing spending. If you show an ad during the Super Bowl, where would you even begin when trying to attribute subsequent sales to that ad? And how about all of the non-revenue value it creates, like brand awareness?
It’s not that marketing is not valuable, it’s just incredibly difficult to quantify its value.
The good news is, we’ve been getting better and better at quantifying it. Thanks, in part, to the internet and the increased ease of attribution, but also due to the recognized need for it.
If your marketing team is struggling to quantify its value, there are a number of go-to metrics you should start measuring. It’s worth noting, there are countless metrics you can choose from, so I’ve narrowed it down to 11 that are easily generalizable regardless of your business industry.
Let’s get started.
#1: Return on Marketing Investment (ROMI)
Okay, I’m putting this metric first because if you can calculate it accurately, it’s the most important one. On its face, it’s a very simple metric and is measured by the sales growth during a marketing initiative munis the marketing costs and then divide that number by the marketing costs.
To make this less abstract, here’s an example.
Before a Google AdWords campaign, a used bookstore had sales of $4,000 per month. After the campaign, sales bumped up to $5,000 per month, making the sales growth $1,000 per month. The campaign cost $100. So, the calculation would look like this:
(($1,000 – $100) / $100) = 900%
Here comes the but:
First of all, these returns shouldn’t be expected from an AdWords campaign, this was just an example.
Second of all, this example doesn’t consider the numerous other potential moving parts that could have an effect on sales growth. This would really only work if you did everything the exact same before and during the campaign (except for the campaign, of course), and even then, it wouldn’t account for some external factors.
Changing your hours of operation, hiring a new cashier, changing the sign in the front of the store, or even HBO’s upcoming Fahrenheit 451 movie inspiring the country to start reading more could all impact your sales and throw a wrench in your ROMI calculation.
The point is, you can try to control for as many factors as possible to get an accurate ROMI number, but it’ll never be perfect. This is not to say you shouldn’t track it, but rather just be aware that it has its flaws and should be just a part of your marketing reporting and not the whole thing.
#2 Customer Acquisition Cost (CAC)
Customer acquisition cost is simply the amount of money it costs to acquire a customer. Divide all of the costs spent towards getting new customers—these are largely, though not necessarily exclusively, marketing costs—by the number of customers you’ve acquired.
Voila! You’ve got yourself your CAC.
This is a crucial metric as it tells you how effective your marketing efforts are. Generally speaking, the higher your CAC, the less efficient your marketing is.
This rule of thumb does not apply equally to every company of course. Typically, CAC is going to be higher for companies that sell things that are worth more.
And while CAC is an important metric on its own, its real value is apparent when combined with another crucial marketing metric…
#3 Customer Lifetime Value (CLV)
This is another somewhat self-explanatory one. A customer’s lifetime value is the projected revenue that a customer will generate will generate during their lifetime. You can take the average revenue generated by all of your customers and use that to tell you how much each customer (on average) is worth.
It might be obvious, but the reason this metric and CAC are so useful when combined is it can serve as a guide for how much you should be willing to spend to bring in new customers. Also, the bigger the gap between your CLV and your CAC the better (assuming the CLV is the higher number).
Kissmetrics provides a nice infographic to help explain how to calculate CLV:
++ Click Image to Enlarge ++
Source: How To Calculate Lifetime Value
Churn is as much a customer service metric as it is a marketing metric, but it’s certainly worth mentioning, as the organizations are often intertwined. Churn tracks the number of customers that you are losing and can be viewed from the total customer or total revenue perspective.
This metric isn’t going to be useful for every kind of business. It’s often used in subscription-based businesses and wouldn’t be particularly useful for, say, an e-commerce company (although e-commerce companies could use this metric to measure things like churn as it relates to an email list).
Here’s the formula for calculating customer churn:
*The customers at the end of the month number should not include any new customers gained during that month.
You can also use different time periods to calculate this—maybe quarterly or annually.
Revenue churn functions differently from customer churn, and in many organizations, it is the more valued number. It’s a tad more complicated. Here’s the formula for calculating revenue churn:
Let’s clarify this formula with an example.
Your MRR at the beginning of the month is $100,000. You lost $10,000 in MRR from customers leaving or downsizing. However, you had $20,000 in expansion revenue from people upgrading their subscriptions. That leaves you with:
As you can see, in this example, we’ve come out with negative churn. This is a good thing. Since expansion revenue outweighed the revenue lost, you’ve got negative churn, signifying a growing business.
If there was only $5,000 in expansion revenue, your churn would be at 5%, which would be an issue.
The reason revenue churn is often more valued than customer churn is it accounts for customer size. You can lose five customers, but if they’re your smallest customers, it may not be all that big a deal.
#5 Take Rate
The take rate is a very simple metric that does an great job of measuring the effectiveness of a particular campaign. Put simply, it is the percentage of people you contacted who accept an offer.
We can look at a practical example of deriving this metric by looking at when auto mechanics leave fliers under windshields.
Let’s say a mechanic printed 1,000 flyers advertising a deal for a discounted oil change and left all of them on cars. 25 people come in with the flier to get the discounted oil change. This means, of the 1,000 people contacted, 25 accepted the offer, making the take rate 2.5%.
You can then use the take rate to measure CAC for a specific campaign. If the fliers cost $.25 each, the cost of the campaign was $250. Since 25 people became customers, you can divide $250 by 25 to get your CAC for this campaign of $10.
#6 The Test-Drive
In Mark Jeffery’s book Data Driven Marketing: The 15 Metrics Everyone in Marketing Should Know, Jeffery outlines the story of a Porsche ad campaign during the peak (or valley) of the recession. In 2009, the luxury car company delivered “more than 241 million online display impressions and 17 million in print” aimed at getting potential customers to take a test-drive.
Given the state of the economy, many met this campaign with pessimism, especially considering the primary call-to-action was to just test-drive the car and had nothing to do with buying it.
Soon, however, dealers changed their tune, as they were making sales they wouldn’t have under ordinary circumstances. They realized how crucial marketing for a test-drive was.
The test-drive metric is simply of the people who take a test drive (or trial whatever your product is), how many make a purchase. If you give 100 test-drives and 20 people make a purchase, your test-drive conversion rate is 20%.
Once you know your test-drive conversion rate, you can more easily predict total conversions when marketing for a test-drive, or free trial.
#7 Transaction Conversion Rate (TCR)
People often look at traffic and clicks when evaluating the success of their website. Nobody would be wrong to use those metrics, but unless it’s for a website that makes the lion’s share of its revenue from advertising, those numbers leave a lot to be desired.
If you’re bringing people to your site with the hopes of selling them something, it doesn’t matter how much traffic you generate if nobody is buying. You could have a million unique visitors per month, but if 0% of those million result in a transactional conversion, you might as well pack up your things and go home.
This is why your transaction conversion rate is so important. It’s easily calculated as the percentage of customers who purchase after clicking through to your website. So if you get 100 visitors, and 10 of those visitors make a purchase, you have a 10% TCR.
It’s hard to say what a good TCR is because it really depends on your industry and what your selling. However, by knowing what your TCR is, it becomes much easier to predict the value of a marketing campaign.
#8 Customer Satisfaction (CSAT)
These last two metrics are a little different from the first seven because they’re much more difficult to measure and sometimes rely on things like surveys.
CSAT is a measure of how likely a customer is likely to become a product evangelist and help you sell by recommending your product to a friend. CSAT is derived from surveying customers and the question behind it is “how likely would you be to recommend [product] to a friend or colleague?” You might also know this metric as the Net Promoter Score.
We all know the value of word-of-mouth, so it’s no surprise that the higher this score, the better. However, obtaining this metric is a little tougher than the others. You can’t just look at a spreadsheet, make a calculation and have your answer.
Getting your CSAT score means actively surveying customers, but if you can do it well, you can get valuable insights about future sales, as well as identify trends. If your CSAT score is trending upward, good news, you’re doing well. If it’s trending down, you need to identify the problem and find a solution.
#9 Brand Equity
I don’t think there are too many people out there who would question the value of a strong brand, but you might find a fair amount of people who are skeptical about measuring the power of a brand.
Their skepticism is not unfounded. Measuring brand equity is very difficult, but not impossible.
To drive home the point that brands matter, Mark Jeffery, in his book, takes a look at water.
“Pure water is an odorless, tasteless liquid made from molecules of two hydrogen atoms and one oxygen atom,” he writes. “So why spend $2 a bottle for the brand and not 25 cents for the generic grocery store brand when the products are identical?”
Right now you might be shouting that Dasani is different from Aquafina. This just demonstrates the power of a brand.
But how do you measure a brand? Well, there are several ways to do it.
One way to do it is to subtract all the tangible assets of a business from the total market valuation of the business. The remaining value is the brand. This is probably the most black and white measurement, but it’s unreliable because it relies on so many approximations and assumptions.
The other approach is to use surveys.
Brand equity surveys are simple but can be laborious. They’re often based on two questions (with several follow-ups meant to refine the answers depending on the product/industry).
- Question 1: “For [category of product], what is the first [product or company] name you think of?”
- Question 2: “For [category of product], what other [companies or products] have you heard of?”
Again, these two questions are a great jumping off point, but they are not the finish line. Other questions like “How much more would you be willing to pay for [brand x] than [brand y]?” can help you refine your brand equity.
Conclusion: Using Key Marketing Metrics
Remember, there is no magic bullet when it