One of the first questions I'm often asked is, What metrics matter in Marketing? Now, more than ever, metrics that communicate ROI matter most. CFOs have become CFO-no's, scrutinizing marketing spend at a level unseen since '08-'09. CEOs are under more pressure to retain customers and grow revenue while also preserving capital and cash. The job of the CMO, then, is ultimately to align marketing activity to support top-line and bottom-line goals.
There are three metrics that I think tell the story - particularly for SaaS or subscription based businesses.
LTV = customer lifetime value
CAC = customer acquisition cost
ROMI = LTV / CAC
The LTV/CAC ratio compares the value of a customer over their lifetime, compared to the cost of acquiring them. If you're an early stage business you may be upside-down on this metric where CAC > LTV - particularly if you are heavily discounting your product to drive sign-ups. As your business grows, LTV must exceed CAC in order to put the company on a path to profitability. A 3:1 ratio is very good. Anything 5:1 or higher is likely best-in-class. But there's no one-size-fits all answer here. Much will depend on your industry and your organization's financial goals and strategy.
What drives LTV?
LTV is primary a function of average contract value and retention rate. The higher your average contract value (ACV) and the higher your retention, the greater your LTV.
To increase ACV you can increase pricing, increase usage (if your pricing is based on users), or drive higher attach rate (sell more products per customer).
To increase LTV, you need to focus on customer health (looking at metrics like net promoter score). It's important to explore what drives customer retention (is it product delight, or customer support, or pricing, something else, or a combination?) More importantly, when customers churn and leave your business, why do they leave? Understanding drivers of retention and churn are critically important to improving your entire customer journey and product set.
What drives CAC?
Your Customer Acquisition Cost is basically a roll-up of everything you spent to acquire customers, divided by the total net-new customers closed. So if you spent $100,000 to acquire 10 customers, your CAC is $10,000.
As a marketer, you can control CAC by reducing your cost per lead (CPL) and improving your marketing conversion. To do this effectively, you need to dig into the data to look at what your spending by lead source and how those leads convert. Not all leads are created equal. Some are more expense and each lead source will have a different average conversion rate. You then want to optimize your spend toward those leads that deliver the highest ROI to the business.
For most businesses these days, that means optimizing your website to acquire more organic visitors (focusing on SEO) and then improving your digital experience (landing pages, etc.) to drive higher website conversion.
Wrap-up: Keep it simple but accurate
Less is more when it comes to measuring marketing performance. It's easy to get bogged down trying to measure everything. As a CMO or marketing leader, your number one goal is to build pipeline that drives sales -- and to do that as profitably as you can. Everything else is subordinate to these goals.
By focusing on what you spend per customer (CAC) and what each new customer is worth to the business (LTV) you elevate the importance of Marketing within the c-suite and ensure you're allocating those precious dollars as best as you can.