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By Jeremy Balius
8 October 2021

6 important marketing ROI metrics

marketing ROI
Business leaders are presented with a lot of metrics and understanding marketing ROI is a real challenge.
There is an endless amount of detail and data that can accessed, from website visits, conversion rates, generated leads per channel, engagement on social media platforms, blog post shares, email click-through rates and the list goes on and on. 
 
Every business leader wants to know the actual impact of your marketing efforts. In the end, the ultimate metric is ROI.
The purpose of this article isn’t to outline every metric that is important, but rather, to understand high level metrics that can help determine marketing ROI.

The challenge of identifying marketing ROI

While many business leaders theoretically understand that a solid marketing team can have a direct impact to their company’s bottom line, it can be just as common for executives to believe that marketers aren’t focused enough on meaningful or impactful results. They want marketing to able to show how a strategy or activities are driving or contributing to driving incremental increase in customer demand.
 
When it comes to metrics that identify marketing ROI, you should be looking to achieve reporting that includes data on the total cost of marketing, salaries, overhead, revenue, and customer acquisitions. Depending on where a business is at, this is often easier said than done.
With so many variables and hurdles, even identifying the simplest of metrics can be enormously challenging. The following six metrics to identify marketing ROI are a good place to start.

Customer Acquisition Cost (CAC)

What CAC is

The Customer Acquisition Cost (CAC) is a metric used to determine the total average cost your company spends to acquire a new customer.

How to calculate CAC

Take your total sales and marketing spend for a specific time period and divide by the number of new customers for that time period.
Sales and Marketing Cost = Program and advertising spend + salaries + commissions and bonuses + overhead in a month, quarter or year
New customers = Number of new customers in a month, quarter, or year
 
Formula:  sales and marketing cost ÷ new customers = CAC

What this means and why it matters

CAC illustrates how much your company is spending per new customer acquired. You want a low average CAC. An increase in CAC means that you are spending comparatively more for each new customer, which can imply there’s a problem with your sales or marketing efficiency.

Marketing Percentage of Customer Acquisition Cost (CAC)

What it is

The Marketing Percentage of Customer Acquisition Cost is the marketing portion of your total CAC, calculated as a percentage of the overall CAC.

How to calculate it

Take all of your marketing costs, and divide by the total sales and marketing costs you used to compute CAC.
 
Sales and Marketing Cost = Program and advertising spend + salaries + commissions and bonuses + overhead in a month, quarter or year
 
Marketing Costs = Expenses + salaries + commissions and bonuses + overhead for the marketing department only problem with your sales or marketing efficiency.
Let’s look at an example:
Marketing Cost = $150,000
Sales and Marketing Cost = $300,000
/ M / CAC = $150,000 ÷ $300,000 = 50%

What this means and why it matters

The M%-CAC can show you how your marketing team’s performance and spending impact your overall Customer Acquisition cost. An increase in M%-CAC can mean a number of things:
  1. Your sales team could have under-performed (and consequently received) lower commissions and/or bonuses.
  2. Your marketing team is spending too much or has too much overhead.
  3. You are in an investment phase, spending more on marketing to provide more high quality leads and improve your sales productivity.

Ratio of Customer Lifetime Value to CAC (CLV:CAC)

What CLV:CAC is

The Ratio of Customer Lifetime Value to Customer Acquisition Cost (CLV:CAC) is a way for companies to estimate the total value that your company derives from each customer compared with what you spend to acquire that new customer.

How to calculate it

To calculate the CLV:CAC you’ll need to compute the Lifetime Value, the CAC and find the ratio of the two.
 
CLV = (Revenue the customer pays in a period – gross margin) ÷ Estimated churn percentage for that customer
 
Formula   CLV:CAC

What this means and why it matters

The higher the CLV:CAC, the more ROI your sales and marketing team is delivering to your bottom line. However, you don’t want this ratio to be too high, as you should always be investing in reaching new customers. Spending more on sales and marketing will reduce your CLV:CAC ratio, but could help speed up your total company growth.

Time to Payback CAC

What it is

The Time to Payback CAC shows you the number of months it takes for your company to earn back the CAC it spent acquiring new customers.

How to calculate it

You calculate the Time to Payback CAC by taking your CAC and dividing by your margin-adjusted revenue per month for your average new customer.
 
Margin-Adjusted Revenue = How much your customers pay on average per month
 
Formula   CAC ÷ Margin-Adjusted Revenue = Time to Payback CAC
Let’s look at an example:
Margin-Adjusted Revenue = $1,000 CAC = $10,000
Time to Payback CAC = $10,000 ÷ $1,000 = 10 Months

What this means and why it matters

In industries where your customers pay a monthly or annual fee, you normally want your Payback Time to be under 12 months. For industries where a single product or project service is sold, the Payback Time can look differently. The less time it takes to payback your CAC,  the sooner you can start making a profit off of your new customers.
Generally, most businesses aim to make each new customer profitable in less than a year.

Marketing Originated Customer Percentage

What it is

The Marketing Originated Customer Percentage is a ratio that shows what new business is driven by marketing, by determining which portion of your total customer acquisitions directly originated from marketing efforts.

How to calculate it

To calculate Marketing Originated Customer Percentage, take all of the new customers from a period, and tease out what percentage of them started with a lead generated by your marketing team.
 
Formula   New customers started as a marketing lead ÷ New customers in a month = Marketing Originated Customer %

What this means and why it matters

This marketing ROI metric illustrates the impact that your marketing team’s lead generation efforts have on acquiring new customers. This percentage is based on your sales and marketing relationship and structure, so your ideal ratio will vary depending on your business model. A company with an outside sales team and inside sales support may be looking at 20-40% Margin Originated Customer Percentage, whereas a company with an inside sales team and lead focused marketing team might be at 40-80%.

Marketing Influenced Customer Percentage

What it is

The Marketing Influenced Customer Percentage takes into account all of the new customers that marketing interacted with while they were leads, anytime during the sales process.

How to calculate it

To determine overall influence, take all of the new customers your company accrued in a given period, and find out what percentage of them had any interaction with marketing while they were a lead.
 
Formula    Total new customers that interacted with marketing /  Total new customers = Marketing Influenced Customer %

What this means and why it matters

This marketing ROI metric takes into account the impact marketing has on a lead during their entire buying lifecycle. It can indicate how effective marketing is at generating new leads, nurturing existing ones, and helping sales close  the deal. It gives you as business leader a big-picture look into the   overall impact that marketing has on the entire sales process.

Using metrics to understand marketing ROI and inform decision making

Tracking different marketing data points to better understand what’s working and what’s not can sometimes result in losing sight of what’s most important.
 
Reporting on the high level impact of marketing ROI doesn’t mean you should no longer pay attention to site traffic, social shares, and conversion rates. It simply means that when looking at metrics for reporting, it’s crucial to understand performance that displays ROI to your company’s bottom line.
 
Rather than focusing on just the tactical metrics, use the metrics we detailed to understand at a higher level how your marketing program led to new customers, lower customer acquisition costs, or higher customer lifetime values.
 
When you can review metrics that provide visibility on actual marketing ROI, you’ll be in a much better position for making strategic and budget allocation decisions based on evidence and performance.

Want to figure out how to identify marketing ROI?

 Get in touch with us to discuss how we can put a foundation of marketing metrics in place for your marketing program.

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