Crossing your fingers and hoping for the best is no way for a savvy entrepreneur to run their business. That’s why knowing key marketing metrics is critical for business success. Whether you’re running a B2B or B2C business, these four metrics shed light on how strong your marketing efforts are and if you’re business is based on strong fundamentals.
Four essential startup marketing metrics
First things first, let’s make sure you understand exactly what the key marketing metrics are. Once you have them down pat, we can then see how they work together to give you valuable business insights.
1. Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) is the amount of money you spend acquiring a customer. For instance, if you spend $10,000 in marketing activities in a given year and acquire 10 new customers, your CAC is $1,000.
However, as Brian Balfour, CEO of Reforge, previously VP of Growth at HubSpot, explains, “calculating true CAC involves a lot more than a simple, one-size-fits-all equation.” to get an accurate CAC calculation include expenses associated with marketing and sales (e.g. overhead, salaries, tools, etc.).
2. Lifetime Value (LTV)
Lifetime value (LTV) refers to how much money you’ll make from a single customer over the course of their lifespan with you. If customers only buy once from your business, their LTV will be just that single amount they spent with you, minus any cost of goods. However, if they pay you on a recurring basis for your products and services, their value will be the average amount they pay multiplied by the total number of payments they make.
Forbes contributor H.O. Maycotte, CEO of Umbel, explains: “When you succeed in getting customers to come back again and again, over time — the way loyal sports fans come out for their teams, season after season — you create a source of revenue that costs relatively little to maintain and that therefore has great profit potential for your business.”
3. Payback Period (PBP)
Your payback period (PBP) refers to how long it takes to make back the money you spent on acquiring customers. To put it more precisely, the amount of time it take for profit to equal the amount of money spent to acquire that profit.
For example, if a $20,000 marketing investment is needed and there is an expectation of the campaign generating positive cash flows of $5,000 per month thereafter, the payback period is four months. This is a simple and risk focused approach to ascertain the payback period of various projects you may consider throughout the year.
4. Customer Retention Rate (CRR)
A business’s customer retention rate indicates the percentage of customers a business retains over a given period of time. For instance, if 80% of your customers purchase from you more than once in a given year, you had a 80% annual retention rate.
This is the exact opposite of a company’s churn rate, which is the percentage of customers a company has lost over a specific period of time.
Make the most out of marketing metrics
If you look at these metrics in isolation, they don’t necessarily give you high value insights. When compared with each other, they become a powerful way to understand the health of your marketing efforts.
Let’s look at just a few core comparisons:
CAC vs. LTV
How do you know if you’re spending too much on customer acquisition? Look at CAC versus LTV. If you’re spending more to acquire your customers than the money you’re making back from them, then you are spending way too much money. On the flip side, if you’re making a lot more money from each customer than you spend to acquire them, you can afford to ramp up marketing spend and test new marketing campaigns.
LTV vs. CRR
Should you be satisfied with how much revenue you’re making from your customers? If you have a high retention rate and moderate LTVs, then it is time to implement up-sells or high value products and services. In contrast, if you have high LTVs and low retention rates, you have an opportunity to find ways to improve retention and make your business that much more profitable.
PBP vs. CAC
Does it take too long to recoup your marketing investment? Look at how much you spend to acquire customers relative to how long it’s taking to recover that cost. If you’re hitting low CACs and short PBPs, then you may have found a positive acquisition process. Conversely, if you have really long PBPs and really high CACs, you might be waiting too long to recoup your expenses and money could run out.
These comparisons merely touch the surface of how marketing metrics can shed light on the long-term strength of your business. For instance, they can also be used to see if you’re using the right mix of marketing tactics and if customers are excited about your products and services.
According to our internal findings, so many small business owners report that marketing is one of the weakest links in their organizations. But it doesn’t have to be! Committing to a metrics-driven approach to marketing is a key way to drive educated decisions and make the most out of limited resources.
So long as you consistently track these metrics, you’ll be able to keep tabs on new marketing activities and see if those efforts are driving the results you need to build a profitable business.
Laura Troyani is Founder and Principal of PlanBeyond, a Seattle-based marketing agency supporting startups and small businesses. With experience overseeing customer research, go-to-market planning, and marketing operations, Laura advocates for getting the strategic fundamentals down pat to help any organization nail their growth goals.