Gone are the days of the CMO who is not fluent in metrics, analytics and spreadsheets. The Internet has made marketing far more measurable (and therefore more accountable to the CEO and CFO) than ever before. Yet I frequently hear from my CMO peers that they are struggling to find the right metrics that will gain credibility and show the real contribution of marketing to the bottom line.
The best marketing metrics look at the total cost of marketing, including program spend, team salaries and overhead, and relate that cost to the results you care about: revenue and customer acquisition. Other metrics like cost-per-lead, cost-per-follower or cost-per-page-view can be useful to look at within a marketing team, because they can help you make decisions about where to focus and what parts of your marketing process are broken. But most CEOs really just care about the cost and net results, not the interim steps. This list of metrics focuses on the most critical measures of marketing that you should discuss with your CEO.
1. Customer Acquisition Cost (CAC)
This is your total sales and marketing cost—all the program or advertising spend, plus salaries, plus commissions and bonuses, plus overhead—for a given time period, divided by the number of new customers during that time. That time period could be a month, a quarter or a year. For instance, if you spent $300,000 on sales and marketing in a month and added 30 customers that month, then your CAC is $10,000.
2. Marketing Percentage of Customer Acquisition Cost (M%-CAC)
I like to compute the marketing portion of CAC and call it M-CAC, and then compute that as a percentage of overall CAC. The M%-CAC is interesting to watch over time, as any change signals that something has changed in either your strategy or your effectiveness.
For instance, an increase in M%-CAC may mean:
- You are spending too much on marketing
- Sales costs are low because they missed quota
- There is an attempt to raise sales productivity by providing higher-quality leads and spending more
For a company that does mostly outside sales with a long and complicated sales cycle, M%-CAC might be 10 to 20 percent. For companies that have an inside sales team and a less complicated sales process, M%-CAC might be 20 to 50 percent. And for companies that have a low cost and simpler sales cycle where sales are somewhat humanless, the M%-CAC might be 60 to 90 percent.
3. Ratio of Customer Lifetime Value to CAC (LTV:CAC)
For companies that have a recurring revenue stream from their customers—or any way for customers to make a repeat purchase—you need to estimate the total value of a customer and compare that to what you spent to acquire a new customer.
To compute the LTV, take the revenue the customer pays you in a period, subtract out the gross margin, and divide by the estimated churn percentage (cancellation rate). So, if your customers pay $100,000 per year and your gross margin is 70 percent, and that customer type is predicted to cancel at 16 percent per year, the LTV
Once you have the LTV and the CAC, you compute the ratio of the two. If it cost you $100,000 to acquire this customer with an LTV of $437,500, then your LTV:CAC is 4.4 to 1. For growing SaaS companies, most investors and board members want this ratio to be greater than 3X; a higher ratio means sales and marketing have a higher ROI. Higher is not always better though; when the ratio is too high, you may be restraining your growth by underspending and making life easy for your competition. You might want to spend more on sales and marketing to grow faster.
4. Time to Payback CAC
This is the number of months it takes you to earn back the CAC. Take the CAC and divide it by the margin-adjusted revenue per month for the average new customer you just signed up. The result is the time to payback. In industries where customers pay one time up front, this metric is less relevant because the up-front payment should be greater than the CAC (otherwise, you lose money on every customer). On the other hand, in industries where customers pay a monthly or annual fee, you usually want the payback time to be less than 12 months so that a new customer becomes profitable within the year.
5. Marketing Originated Customer Percentage
This ratio shows what percentage of your new business is driven by marketing. To compute, take the new customers you signed up in a period and determine what percentage started with a lead that marketing generated. This is much easier to do when you have a closed-loop marketing analytics system, but you can do it manually—just know it will be time- consuming.
What I like about this metric is that it directly shows what portion of the overall customer acquisition originated in marketing, and it is often higher than sales would lead you to believe. In my experience, this percentage varies widely from company to company. For companies with an outside sales team supported by an inside sales team with cold callers, this percentage might be pretty small, perhaps 20 to 40 percent. For a company with an inside sales team that is supported by a lot of lead generation from marketing, it might be 40 to 80 percent. And for a company with somewhat humanless sales, it might be 70 to 95 percent. You can also compute this percentage using revenue instead of customers, depending on how you measure your business.
6. Marketing Influenced Customer Percentage
This is similar to the marketing originated customer percentage, but adds in all new customers where marketing touched and nurtured the lead at any point during the sales process (not just lead origination). For instance, if a salesperson found a lead, but the lead attended a marketing event before it closed, that new customer was influenced by marketing. This percentage is obviously higher than the originated percentage, and for most companies should be between 50 and 99 percent.
By focusing on the most critical measures of marketing, these six metrics provide CEOs the information they care most about: cost and net results.