When the annual budget process comes around, marketing managers naturally hope to see all key elements of their marketing plan receive funding. Wouldn't it be nice if top management could evaluate your proposed budget along with some supporting evidence of marketing's positive and measurable impact on your business? These 5 metrics may be a bit theoretical and simplistic, certainly not the end-all rationale for setting budgets. For certain types of businesses, they might also be difficult to calculate. Still, knowing things such as your Customer Acquisition Cost may make it possible to explain and verify marketing's impact while establishing some new benchmarks for future tracking.
The suggested metrics, which are adapted here from HubSpot and other sources, are an attempt to go beyond customary reporting of marcom performance criteria such as website visitors and total impressions or clicks/leads generated by a digital campaign. While those criteria are still important, the metrics noted here are more financially-based and may matter more to your CEO and CFO. These metrics are about net results: how a particular level of marketing investment will contribute to the bottom line in terms of sales/profits represented by new customers acquired.
NOTE: You might argue that customer retention or other business goals are equal to or possibly more significant than the number of new customers acquired. We fully recognize the shortcomings of this rather narrow focus. We bring these concepts forward purely for critique and discussion. Still, you may find the calculations interesting as thought starters for your budget rationale.
1. Customer Acquisition Cost (CAC)
For this first metric, begin by adding up all Sales and Marketing program expenses including media and allied activities as well as salaries, commissions, bonuses and other overhead within a given time period. For example: 1 month. Then, divide that figure by the number of new customers acquired in that same time period.
Total Marketing and Sales Expense = $500,000
New Customers Acquired: 500
Customer Acquisition Cost (CAC) = $500,000 / 500 = $1000
2. Marketing % of Customer Acquisition Cost
This is an interesting figure to monitor over time, as it may shed light on whether any changes in that ratio will reasonably move the needle.
Total Marketing-Only Costs = $200,000
Marketing-Only CAC = $200,000 / 500 customers = $400
Marketing % of CAC = $400 / $1000 = 40%
If your company has a long and complicated sales cycle, marketing investment might be only 10-20% of the total. For companies that have an inside sales team and a less complicated sales process, marketing's percentage might be higher, perhaps 20-50%.
3) Ratio of Customer Lifetime Value to CAC
Beyond the initial sale, recurring revenue and additional profits from each customer may accrue later for many types of businesses. Estimating the ratio of "Lifetime Value" (LTV) to acquisition cost (CAC) of each new customer is another tool to understand the ROI of marketing activities. It considers the value of repeat purchases and other revenue such as service. For additional accuracy, you might include a factor for expected churn (% customers lost in a given period).
Lifetime Value (typical per customer) = $100,000 gross sales @ 50% margin = $50,000
LTV ($50,000) divided by CAC ($1000) = Ratio of 50:1
*In this example, $50 in margin (over time) is expected from each $1 in marketing initiatives
4) Time to Payback CAC
This is often expressed as months required to earn back the Customer Acquisition Cost.
Customer Acquisition Cost ($1000) / Margin-Adjusted Revenue per Month ($500) = 2 months payback
5) Marketing-Originated New Business (%)
This metric indicates what percentage of your new business is driven by marketing efforts. If you are already tracking leads generated by marketing, such as is possible with a CRM lead-capture system such as HubSpot, this will be somewhat easier to estimate. In that instance, the calculation would be as follows:
Number of customers converted via marketing leads (30) divided by all new customers (50) = 60%
As marketers, we often track marketing communications data points such as social shares, site traffic, inquiries and other engagement with target prospects. But we may be guilty at times of forgetting to associate those activities with actual creation of new customers, the lifeblood of many businesses. Using the above metrics to isolate that as a central goal may at least give your company officers a new framework for thinking about (and supporting) your marketing program.
Footnote: Of course, there are many other potential directions for similar goal setting and related benchmarks that may be more important to your company. For example, next year may be all about margin enhancement -- calling upon Marketing to trade up customers to higher price, higher margin products. In that case, the same basic calculation methods might be used to establish goals and ongoing measurements. For many of us working in Marketing, having a clear understanding of purpose and using an agreed process to keep score would seem to be a better alternative than the old yardstick of merely setting the Marketing budget as a % of total forecast sales.