Measuring Marketing Success in Dollars Is the Ultimate Win
Greg Alvo, OrderGroove
What are the most compelling ways to measure marketing success?
Gone are the days of CMOs not fluent in data, analytics, and spreadsheets. To validate an increase in their marketing budgets to CEOs and CFOs, savvy marketers are measuring the impact of every advertising campaign, email blast, and press hit like never before. This seems like progress, right? There are more marketing metrics than ever. Unfortunately, not all companies are focusing on the ones that matter most.
As a CEO myself, I understand that metrics such as website visitors, number of leads, and conversion rates are vitally important to track to determine what's working and what's not working in the short term. However, the marketing programs tied to a projected ROI—in dollars—are the ones that get my immediate attention. I ask myself the same question for every proposal that comes across my desk: Is this expenditure a cost or an investment?
To truly consider a marketing program a success, it must contribute to meeting or exceeding a revenue target. Before starting any marketing activity, setting up the budget and goals must be an analytical exercise. Let's use an example of a marketing proposal I could really get behind:
|Marketing program proposal:|
|Overall revenue target||$10,000,000|
|Average order value/customer||$50|
|Average annual spend||$100 ($50*2)|
|Visitors needed||2,000,000 ($100K/.05)|
|Cost per visitor||$1.50|
|Marketing budget needed||$3,000,000 (2M*$1.50)|
Why is this proposal going to get my attention? First and foremost, there are dollars in it—not impressions, likes, downloads, or followers; actual cash that will enable continued growth for my business. Second, there's an ROI based on reasonable projections. Third, it's possible at every step to measure progress. Are we lagging, on track, or exceeding expectations? The numbers will give you the answer throughout the life of the marketing program.
Once clear goals are defined, marketing initiatives must remain under a quantitative lens. I'm always looking at three metrics in particular to measure the effectiveness of OrderGroove's sales and marketing investments. Although they're not the most commonly used marketing metrics, they're critical to long-term success for executives in every industry. Why? They align sales and marketing initiatives directly with the company's bottom line.
Customer acquisition cost (CAC):
This is a company's total sales and marketing costs—campaigns, ads, events, paid search, salaries, commissions and bonuses, travel—over a certain time period, divided by the number of new customers in that same time period. For example, if your company spent $500,000 on sales and marketing in 2013 and gained 20,000 new customers, your 2013 CAC was $25. Track this number religiously over time to ensure that sales and marketing efforts stay efficient and effective.
Customer lifetime value (LTV):
LTV measures the recurring profit streams of a given customer, less their acquisition cost. In the simplest of terms, a profitable business will always have a positive LTV. Let's use an example:
- Customer A spends $100 per year with your company. Her CAC was $25. You have a 50% gross margin and 10% general and administrative (G&A) expense costs.
- The $100 will generate $50 of gross margin and $40 of profit each year ($50 - $10 of G&A costs)
- Over 5 years Customer A will generate $200 of profit ($40/year * 5 years)
- LTV: $200 - $25 = $175
- $175/5 years = 35% annualized profit margin
Segment your marketing prospects by potential LTV to determine where your highest-value customers will be. The higher the LTV, the more time and energy should be spent getting those customers in the door. Customers you already have? Identify every opportunity to deliver more value via upselling and cross-selling to drive up LTV over the course of the relationship.
Any company that has repeat customers needs a way to estimate the value of these customers, and compare that to the money spent on acquisition. The CAC:LTV Ratio allows you do to this; a higher CAC:LTV Ratio means a higher ROI on sales and marketing. Using the numbers we calculated above, our five-year CAC:LTV Ratio is $25:$175, or 1:7. Sounds great, right? Not necessarily. Depending on the stage your company is in (start-up, growth, enterprise), you may actually want to spend more on sales and marketing to expedite growth and diminish competition.
To prove marketing success today, marketers must balance softer metrics that impact day-to-day decisions with dollar-driven metrics that impact revenue and growth. Ultimately, my answer to this “tough question” is quite simple: Measuring marketing success in dollars is the ultimate win—for the marketing department and the company as a whole.
Greg Alvo, OrderGroove
As CEO and founder of OrderGroove, Greg Alvo is responsible for setting the strategic direction of the company and overseeing its day-to-day operations. Prior to OrderGroove, which was founded in 2008, Alvo held a variety of sales and business development roles at Liquidation.com, where he was responsible for signing partnerships with some of the largest retailers, manufacturers, and distributors in the world to handle their excess inventory. The Miami native holds a degree in entrepreneurship/ small business management from George Washington University. Prior to attending GWU, Alvo founded Voteq—a computer consulting firm that he grew to more than 100 clients nationwide. Currently a New Yorker, Alvo enjoys weeknight delivery—Lantern Thai and Hane Sushi are his favorites—and never misses a game when his New York Jets are playing.