Using key performance indicators to calculate value, cost, and the best marketing channels for your business!
If an investor approached you, let’s say someone from Shark Tank, and asked you some fundamental questions about your business, would you be able to answer them? Questions such as: How much are you spending to acquire a new customer? Which channels are performing the best? Or what is the lifetime value of your clients?
Regardless of the type of business you are in, identifying some KPIs (Key Performance Indicators) will help you get a better grasp on how your business is evolving and where to focus your resources. You will be able to determine new growth opportunities that you may have overlooked had you not reviewed the data.
By focusing on the KPI’s outlined below, you will be able to discover how much it costs to acquire a new customer, if they are generating a positive ROI for your business, and which channels are working best for your business.
◽ Customer Acquisition Costs (CAC)
Your CAC determines the amount of money you are spending to acquire a new customer. For example, let’s say in 2018 you spent $500 a month on marketing which would be $6000 annually. During this time period, you were able to add 100 new customers to your roster. Your CAC in this scenario would be of $60 or $6000 divided by 100 customers. So on average, it will cost you roughly $60 for each new client you bring in the door.
◽ Lifetime Value (LTV)
Now the question becomes, how long do your customers stay with you on average? How much value are they bringing to the table? What dollar amounts are being generated from that new customer? Don’t just think about one year, consider how much revenue will be made from this customer over the next two, five, and even ten years. The LTV of your customers needs to be much higher than the CAC if you want to generate profits. As a general rule, your LTV should be at least 3x the LTV. Many businesses strive for a much higher number, even upwards of 10x the CAC. It all depends on the product or service you are offering.
◽ CAC by Channel
When creating marketing campaigns, you will likely use multiple channels to deliver your message. For example, you could use social media, email marketing, direct mail, paid advertising or any combination thereof. It is important to accurately calculate your advertising costs so you can determine which channels are converting the most customers and the best rate. Doing so will allow you to better spend your advertising dollars on the platforms and marketing channels that make the most sense.
Some other potential KPI’s include:
- Calculating the percentage of leads that turn into sales – How long is it taking for them to convert? How many times must you contact them before a sale is made?
- Determining the quality of your leads – Which marketing channels and social platforms deliver the highest quality leads? Should you focus on social media? Email campaigns? Or even direct mail campaigns?
- Determining your breakeven point – How much will a client need to spend with you before reaching your desired LTV? How long will this take?
- Using the 80/20 rule to determine your best customers – When it comes to marketing, The Pareto Principle or the 80/20 rule states that 80% or your revenue will come from 20% of your customers. Who are these customers? How were they acquired? What strategies can you use to land other similar clients?
- Analyze your products and services – Which are the most PROFITABLE and which ones are your most popular? How can you obtain more customers for your most profitable services?
These are just a few of the questions you can ask yourself about your business. When it comes to the potential KPI’s you can utilize in your marketing, the list goes on and on. Some people love this sort of thing and go all out, calculating every detail. Others opt to stick to the basics. The bottom line is that if you can embrace your DATA, it will only help you to bring in more clients and provide you with more sales opportunities!
If you would like help generating or analyzing the data for your business, our team is here to help! Reach out to us any time with your questions!