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Every euro spent on marketing really has to count when you’re operating a small business. When it comes to marketing metrics, all that really matters is return on investment (ROI) — how much are you getting back from every euro you spend? Page likes, social media followers or video plays are of little value if they don’t contribute towards a customer making a transaction, whether that’s online in an e-commerce purchase or an offline booking of a service.
Here are the metrics that really matter from a marketing perspective….
Customer Acquisition Cost (CAC) tells you how much you’re spending to gain a new customer. It includes all marketing expenses — ad spend, tools used in marketing (e.g. MailChimp, CRM), agency and design fees, etc.— divided by the number of new customers acquired during the same period.
Formula:
CAC = Total Marketing Costs / New Customers Acquired
If you spend €1,000 on marketing in a given period and get 10 new customers, your CAC is €100. On the surface of it, if your average transaction is less than €100, you’re losing money on marketing. But it’s important to understand the lifetime value of that new customer — are they likely to be a loyal customer with repeat purchases over years? This drastically alters how you assess your CAC. If you have faith in your value proposition, this should be demonstrated by a proportionate investment in your marketing budget.
Customer Lifetime Value (LTV) is the total revenue a business expects to earn from a customer over the lifetime of their relationship with the business. Does your business sell multiple products or does it target one-time buyers? This distinction is important in understanding how much to spend on marketing.
Formula:
LTV = Average Purchase Value × Purchase Frequency × Customer Lifespan
Comparing LTV to CAC is critical, even for small businesses.
As an example, if you are running a new coffee shop near a busy school, your marketing might target parents dropping kids off to school in the morning. A single purchase from that customer might only generate €4 in revenue as a once-off transaction but if a new customer buys a coffee from you every day, throughout the school year for 5 years, their LTV is in the region of €3,500+. The value of repeat business has to be factored in to your marketing budget.
A good benchmark to aim for: your LTV should be at least 3 times the value of your CAC. So if you’re spending €100 on marketing for every new customer gained, you should be aiming to generate €300 from that new customer.
Conversion rate is an important, yet tricky metric. Essentially you’re asking “how many of your total visitors have converted into customers?” Understanding this can help you to decide how to apportion your marketing spend.
Formula:
Conversion Rate = (Conversions / Total Visitors) × 100
If your website has 1000 visitors and 10 of them convert into paying customers, your conversion rate is 1%.
A simplistic approach to conversion rate is to attribute a sale to the last click source e.g. a customer clicked a Facebook link and then purchased something from your website (known as last-click attribution). This is an over-simplified and misleading assessment of their intent and overall customer journey as the steps they took (across multiple devices/platforms) to learn about your company beforehand, evaluate alternatives etc. are not considered.
When considering conversion rate, it’s very important to consider it as part of the bigger picture — don’t over-react to small sample sizes when making decisions; consider audience engagement levels of different channels; the customer journey is not linear, it’s more nuanced and every marketing touchpoint has a role to play in generating revenue at the lowest possible CAC. Marketing is the process of increasing LTV and decreasing CAC. There’s no silver bullet.
Return on Ad Spend (ROAS) is a quick and useful measurement of how much revenue you make for every euro spent on ads. Again, like conversion rate, it shouldn’t be taken in isolation. It can be a useful way of comparing the effectiveness of different ad campaigns but it’s not a comprehensive measure of ad effectiveness.
Formula:
ROAS = Revenue from Ads / Ad Spend
If you spend €500 and earn €2,000, your ROAS is 4:1. It’s one of the fastest ways to determine if a paid campaign is profitable. The problem with ROAS is that it has the same last-click bias mentioned above, so it needs to be considered as one element in a bigger picture when assessing marketing spend. For example, of the products you are selling most successfully from advertising campaigns, what is the profit margin of those products and what is the LTV of customers from advertising as a channel?
Growing revenue is what it’s all about. Your marketing effort will also build brand awareness which is harder to measure but ultimately, that should result in more sales too. If you cannot make a connection between revenue/profitability and a given metric, it’s probably not worth measuring. Attributing revenue to marketing campaigns takes a little bit of configuration (depending on your CRM / analytics platforms). Using UTM tags you can attribute values throughout the marketing funnel from top of funnel clicks to email clicks (mid-funnel) through to purchase or sign-up. By applying value to touchpoints along the funnel, you can reduce the bias of skewed attribution models (like last-click attribution) and ensure you’re evaluating your entire marketing effort objectively rather than over-investing in end-of-funnel activities due to biased metrics.
Measuring the impact of your marketing ultimately comes down to assessing how it impacts revenue growth. If revenue isn’t growing on the back of marketing spend, something isn’t working. If you need expert input on getting a positive return on your marketing investment, please get in touch!
