Do the Math: Key Metrics for Strategic Planning
In the changing world of marketing, tunnel vision is an ever-present risk — and even the sharpest marketers can lose their way. One study found that marketers who claim, “inbound alone drives business,” still report 25% of revenue from outbound. And those who claim to rely entirely on outbound report 36% from inbound. So, it’s no surprise that there’s significant value in having a proven, reliable way of determining where you really stand. Having a list of key metrics for strategic planning can help!
By using the right marketing metrics — Lifetime Value, Customer Acquisition Cost and Return on Investment — you can regain your bearings, uncover key business insights and successfully impact your company’s marketing planning and execution.
The terms behind the numbers
You’ve heard the names before, but what do these key marketing metrics really mean?
Lifetime Value (LTV) combines the purchases of one customer and adds them up to express a single per-customer dollar figure. LTV involves three calculations:
- The average sales of your first transaction with a customer
- How much you make each year from a customer after the first purchase – including cross-sell and upsell revenue
- How long a typical customer continues to do business with you (Ideally, this will be in years – not months or weeks)
Once you have these numbers nailed down, the math is straightforward. Here’s a simple example: Customer X has an average first sale of $300, and spends an additional $350 a year, over a typical customer lifespan of five years for a total LTV of $1,700 ($300 + $350×4).
Remember, assessing the value of a customer is not based solely on their initial transaction, but on their relative value to your business over their lifetime.
CUSTOMER ACQUISITION COST
Every marketing organization can — and should — know their overall Customer Acquisition Cost. It’s critical to planning and can be used as the baseline to compare campaigns. This calculation’s slightly simpler than LTV, as it only requires two numbers:
- Your total marketing/media spend for the year
- The total number of new customers acquired in that year
From there, the formula is simple: Marketing/media spend ÷ New customers
For example, you spend $5M to acquire 1,000 new customers. Your Customer Acquisition Cost is $5,000. With most brands now engaging in multi-channel acquisition campaigns, it’s vital to understand which channels are delivering the strongest acquisition strategy at the lowest cost. So, it’s wise to dig deeper into understanding your Customer Acquisition Cost by examining the performance of specific channels, campaigns and offers.
RETURN ON INVESTMENT
You likely already know that ROI is the ratio of a profit or loss made in a fiscal year. It’s expressed in terms of an investment and shown as a percentage of increase or decrease in the value of the investment during the year.
The basic formula: ROI = Net Profit ÷ Total Investment *100
As marketers, we often look at the term Marketing ROI (MROI). As defined by the Harvard Business Review, “Marketing ROI is a straight-forward, return-on-investment calculation” that in its most basic form looks like this:
According to HBR, the goal of any ROI calculation is to end up with a positive number — as high as possible. Some companies establish a threshold for MROI, below which they are hesitant to make investments. They consider the risk balance and cost of capital to justify a project in financial terms. A negative MROI makes it much more difficult to rationalize.
We recommend looking at the big picture of yearly gains and yearly spend, so you have an aggregated business baseline to use as a reference.
Taking it to the next level
Once you have your overall LTV, Customer Acquisition Cost, and MROI figures in hand, the next step is adding insight and refinement — essential elements in developing a healthy marketing plan and measuring individual campaign success.
The strategy you employ to dig deeper into your numbers is directly correlated to the resources available to you and your brand. Keep in mind that although we are surrounded by data, few brands have the time or tools available to perfect attribution in our multi-channel, consumer-centric world.
According to a DMA study, “Dedicated identity-oriented technology platforms, managed services and data assets — commonly taking the form of device graphs, onboarding solutions and customer data platforms (CDPs) — are rapidly emerging to help marketers address a range of use cases. But relatively few said they’ve implemented such solutions and realized value from the deployment. By contrast, CRM databases (cited as in-use and driving value by 57.7% of respondents) and other established tools continue to represent centerpiece identity tools for many.”
So, what’s a marketer to do?
Take these overall key metrics and use them as a baseline for the campaigns and media channels you’re looking to measure. Determine if the campaign performed is better, worse or on par with your overall numbers.
You may find that you can’t fully credit all transactions to just one media source. In these scenarios, create “attribution clusters” to measure how these connected spends work in comparison to other clusters. From here, you’ll want to:
- Rank your marketing clusters from best to worse with data you have available on each of the three key metrics
- Consider what percentage of your budget went into each of the cluster areas
- Look to reduce areas that rank poorly and increase those with higher rankings
- Trim down (but don’t completely eliminate) the areas that look weak
- Shift budget spends and work to improve your tracking and attribution, so you can see the results of your changes
Taking full advantage of your data
Marketing pioneer John Wanamaker famously once said, “Half the money I spend on advertising is wasted; the trouble is I don’t know which half.” Chances are, he would have loved the data-driven world we live in today. But without doing the math, he would still face the same major challenge.
At digital marketing agency d3, we understand data and analytics, and how they affect your marketing strategy — and your bottom line. Need help running the numbers or improving the result? Let’s talk.