Article:

Key financial metrics for measuring marketing performance

28 July 2020

Rebecca White, Director of Financial Education |

Peter Druker was right when he said, “you can’t manage, what you can’t measure”. Data is such a valuable asset for any organisation. Just as understanding the financial implication of every business decision you make, tracking and measuring your marketing data is critical for any successful growth strategy.

Key to measuring marketing Return On Investment (ROI) is to know what your Customer Acquisition Cost (CAC) and Customer Retention Rate (CRR) is, compared to Customer Lifetime Value (CLV). It is not difficult to calculate these financial metrics yet very few business owners or marketing professionals invest the time in creating a process to capture and calculate this data.

What is customer acquisition cost?

Customer Acquisition Cost (CAC) is the total cost associated with bringing a new customer to your business. Strategic organisations use this metric to determine the success of their marketing activity because it compares the amount of money spent on attracting new customers against the number of customers they acquired.

Why is this measure important?

CAC is an important financial metric because you need to ensure your sales and marketing teams are generating enough income to cover your cost of goods sold and all the operating expenses associated with running your business. The process of measuring CAC should prompt business owners to analyse which channels have the highest and lowest CAC. This should trigger a reassessment of your marketing strategy with a great focus on increasing profit margins. 

How to calculate customer acquisition cost:

  • Set your time frame – monthly, quarterly or annually
  • Calculate all sales and marketing costs incurred in the specified timeframe
  • Divide by total number of new customers acquired in the specified time frame.

The trick here is to calculate all expenses associated with sales and marketing activities. This could include obvious marketing expenses such as Search Engine Optimisation (SEO), Google Advertising, social media, website construction, conferences, sponsorship, printed materials, video production and professional writers for content creation.

However, many fail to consider the not so obvious sales and marketing expenses such as wage cost of business development and marketing staff (this could include a percentage of the business owner’s wage) and software costs like Client Relationship Management (CRM) and lead management tools.

You also need to determine the time period you’re evaluating the CAC. This could be the last week, month, quarter or year. We encourage business owners to establish a process to capture the number of new customers acquired during this specific period. “How did you hear about us?” is such a valuable question to ask each and every customer.

For example, if your company spends $50K on sales and $30K on marketing each year and acquires 80 new customers in that year, the cost of acquiring a new customer is $1,000 per customer (Formula = $50,000 + $30,000 / 80 new customers = $1,000).   

CAC is a critical number to calculate (and consistently recalculate) to ensure the acquisition methods and marketing strategies employed are delivering new clients at a reasonable cost to the business.

In addition to calculating CAC, it is helpful to have a process in place to calculate Customer Retention Rate as well. Typically, it is between five to twenty-five times more expensive to acquire a new customer than it is to retain an existing customer. Loyal customers tend to buy more frequently and spend more money with your business.

What is a customer retention rate?

Customer retention rate measures your ability to retain customers over a specific period. It is the opposite of customer churn rate.

Why is this measure important?

The importance of customer retention rate varies depending on your industry. For businesses providing services or selling software as a service (SaaS), customer retention is crucial as it directly affects the profitability of your business and investor interest.

The process of measuring your customer retention rates also gets business owners focused on:

  • How quickly people are discarding your products and services
  • The reasons why you are losing customers
  • The strategies that are helping to retain customers
  • The loyalty of your customer base
  • How good your customer service is and what happens when you improve.

We have worked with organisations who focused on increasing their customer retention rates by 5 per cent, which delivered a 25 per cent increase in profitability.  

To calculate your customer retention rate:

  • Set your time frame – monthly, quarterly or annually
  • Calculate how many new clients you gained during that specific time frame
  • Calculate the total number of customers at the end of the period less new customers acquired during the period, and divide the total number of customers at the start of the period.

What is a good score?

Ideally, your customer retention rate would be 100 per cent, meaning your business doesn’t lose a single customer. More achievable is a customer retention rate of around 85 to 90 per cent. Of course, this varies between organisations so a more powerful measure would be to start tracking your own customer retention rate and try to improve it every month.

Customers are worth more than the amount of money they spend in one transaction. They have a future value if you're able to retain them as customers. Understanding the lifetime value of a customer gives a better perspective to how much you should invest in the acquisition and retention of a customer.

What is Customer Lifetime Value?

The lifetime value of a customer, or Customer Lifetime Value (CLV) represents the total amount of money a customer is expected to spend in your business or on your products or services, during their lifetime.

Why is this measure important?

This is an important marketing metric because it helps you make decisions about how much money to invest in acquiring new customers and retaining existing ones.

Comparing these values allows you to work out how long it takes you to recover the costs associated with winning new customers in the first place, which includes the cost of sales and marketing strategies.

To calculate your customer lifetime value:

  • Calculate average annual revenue you could expect to receive from a customer, which can be calculated by dividing your annual revenue by the number of customers (e.g. $100,000 revenue divided by 5 customers = $20,000 per customer)
  • Calculate the average lifetime of a customer and consider the average the number of years a customer continues to purchase from your business
  • Multiply average annual revenue by lifetime of customer to find the customer lifetime value.

For example, a customer spends an average of $20,000 a year with a business. Typically, the business retains customers for 8 years. The lifetime value of this customer is $20,000 multiplied by 8 years, which equals a lifetime value of $160,000.

Ready to learn more?

Our 12-month Business Growth Program includes a detailed module on Sales and Lead Management where business owners and management teams are taught how to calculate these key financial indicators and use this data to drive decisions around sales and marketing strategy.

To find out more about the program, download our 12-month Business Growth Program curriculum.

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