5 Marketing Metrics and Their Definitions
An Introduction to Marketing Metrics
If you had to, how would you answer these questions?
Are you investing in ways that will increase your company’s revenue?
Are you successfully retaining long-term customers?
Are customers engaging with your brand in a meaningful way?
Are you converting enough leads?
Thankfully you don’t have to guess — these questions can be intimidating, but they do have answers. Using the right marketing metrics can give you valuable insight into your company’s performance.
What Are Metrics?
Marketing metrics are measurable values used by marketing teams to evaluate the effectiveness of campaigns. Many believe KPIs are the same however, KPIs are a little different as they measure values that show you how effective you are at achieving business objectives. Metrics simply track the status of a specific business process. In short, KPIs track whether you hit business objectives/targets, and metrics track processes.
It’s crucial to monitor metrics so you can make informed decisions. Metrics can guide your decisions about:
- Marketing tactics
- Ad spend
- Channel selection
- Price points
- Website content and features
- Customer retention efforts
The list goes on. Without metrics, you might only have a vague idea of whether you’re turning enough of a profit. Metrics will give you a much more comprehensive evaluation.
By monitoring your marketing metrics over a long period and comparing them to your past results, you can paint a picture of where you’ve been, where you are, and where you’re going — information that can empower you to scale intelligently.
Successful CEOs and CFOs rely on these five metrics to provide crucial insight into their company’s performance across several variables:
1. Return on Ad Spend (ROAS)
What Is ROAS?
ROAS is a marketing metric that measures how much your business spends on marketing or advertising against revenue. ROAS helps you determine how effectively you’re spending your marketing budget.
It’s important to note that while ROAS is similar to return on investment (ROI), they are not interchangeable terms:
- ROAS examines a specific advertising or marketing campaign.
- ROI considers investments beyond advertising and marketing.
The ROAS metric is not a passing or failing grade. Instead, ROAS gives you context about your ad spend.
How to Calculate ROAS
The equation itself is straightforward:
ROAS = Revenue / Investment
ROAS is expressed as a ratio. For example, if your ROAS is 3:1, it means that for every dollar you spend on advertising, you’re making $3 in revenue.
Take All Ad Costs into Account
When calculating ROAS, be sure to include all the expenses related to the ad campaign. Everyday indirect advertising expenses include:
- Vendor costs
- Contractor fees
- Affiliate Commission (including network transaction fees)
Including indirect expenses will give you information about the ad’s effectiveness, including data you can use later to pinpoint potential cost savings in your processes.
What Is a Good ROAS?
A ROAS of 4:1 is a commonly cited benchmark and a ratio many marketing departments work toward.
However, a “good” ROAS can vary depending on the nature of the campaign, the industry itself, and your marketing goals.
Remember that an accurate ROAS metric depends on the accuracy of the figures used to make the calculation. This is the first place to check if your ROAS seems off the mark.
There are times when a lower ROAS does not reflect a failed campaign. For example, you might see a lower ROAS if you’re using banner ads, which tend to have low click-through rates, but help to increase brand awareness.
You might also see a low ROAS if you’re still establishing your brand and need to work to gain traction.
Still, if you are coming up with a ROAS around 3:1 or lower, it may be time to shift gears.
Why Use ROAS?
ROAS goes beyond standalone measurements like click-through rates (CTRs) and conversion rates. As any good marketing pro will tell you that advertising is about more than driving traffic and earning clicks. Those are good and necessary elements, but without conversion, you won’t see a return. ROAS can help you identify potential barriers to conversion.
The deep insight provided by ROAS lets you compare the effectiveness of campaigns against one another. As you accumulate this data, you’ll make better decisions about where and how to target your message. You’ll also know which strategies you should consider adjusting or dropping.
While ROAS is more revealing than click-through and conversation rates on their own, this doesn’t mean you should forgo these metrics. The combination of low ROAS and high conversion rates for specific products, for example, can guide you toward decisions about price points and which keywords to optimize for SEO.
Without conversion data, low ROAS only gives you a general sense that the campaign isn’t effective. On the other hand, high ROAS on its own is equally incomplete — if your overhead is too high, a high ROAS on its own is misleading.
ROAS, CTR, and conversation data — taken together — paint a much clearer picture.
Customer Acquisition Cost (CAC)
What Is CAC?
CAC is the total overall cost to acquire a customer. In e-commerce, in particular, having a positive CAC is the only way for a business to succeed.
It’s important to note that while CAC is related to the cost per acquisition (CPA metric), they are not interchangeable terms:
- CAC measures the cost to acquire a customer.
- CPA measures the cost to acquire something other than a customer (for example, a lead).
- CPA measures the value of things that are leading indicators to CAC.
How to Calculate CAC
To measure CAC, divide all the costs you’ve invested in acquiring your customers by the number of customers acquired through the investment. To get an accurate number, only measure the number of acquisitions in the period when you invested.
CAC = Total Cost of Sales and Marketing / Number of Customers Acquired
For example, if you spend $1,000 on marketing in a month and acquire 100 customers in that same month, your CAC is $10.00.
What Is a Good CAC?
When it comes to CAC, low numbers are best. The less you need to spend to acquire a customer, the more profitable you will be. For your CAC to be considered in good standing it needs to be looked at in relation to CLV or customer lifetime value and the payback period to cover the CAC.
There is a crucial exception to this rule of thumb. Like ROAS, a “bad” CAC (a higher dollar amount) may be acceptable if your goal is to increase brand awareness. An example is an introductory promotion, where a customer gets a free product or month of service. In the short term, CAC will be low, but the long term ROI can be well worth the risk.
Why Use CAC?
The CAC metric is a useful way to calculate the success of marketing campaigns. You can use CAC to compare the effectiveness of different marketing campaigns, which can later guide your decisions about marketing investment.
Like all metrics, CAC on its own is one piece of a larger picture. Marketing, after all, is only one expense among many.
If your average order value (AOV) falls below the total CAC, you will not turn a profit. CAC can help you understand the broader scope of your marketing efforts and whether you should adjust costs and price points.
Similarly, you may have a low CAC based on marketing spend, but if you had to hire a consultant or the campaign was unexpectedly delayed, the metric becomes less useful on its own.
Customer Lifetime Value (CLV)
What Is CLV?
CLV, sometimes referred to as lifetime value (LV), is the projected revenue a customer will generate over their lifetime.
How to Calculate CLV
There are several ways to calculate CLV. Common methods include historical, predictive, and traditional approaches.
CLV Based on Historical Data
If you have access to historical customer data, this method is the most straightforward.
Here, you’ll need to determine the average revenue per user (ARPU):
ARPU = TR / CQ, where:
TR = total revenue in a given period
CQ = number of customers in a given period.
For example: Ten customers brought in $1,200 in contribution over a three-month period. ARPU (3 months) = $1,200/10 = $120.
Next, we can extrapolate ARPU to a full year:
ARPU (12 months) = ARPU (3 months) x 4 = $120 x 4 = $480 per year, per customer.
Finally, you’ll need to estimate how many years you think you’ll maintain your relationship with a given customer. Multiply this figure by the per year value ($480 in our example).
CLV Based on Predictive Approach
This approach is the most complicated, but also the most accurate. At a high level, the predictive CLV calculation is:
CLV = T x AOV x AGM x ALT / Number of Customers for the Period, where:
T = Average number of transactions in a month
AOV = Average order value
AGM = Adjusted gross margin
ALT = Average customer lifespan in months
We won’t dive into the calculations involved in determining sub-metrics like these in this introduction, but it’s not a bad idea to get up to speed. The University of Virginia offers a free marketing analytics course that will go into more detail on these and other metrics and calculations.
CLV Based on Traditional Approach
The traditional CLV formula is helpful when you don’t have flat yearly sales.
You’ll need to determine a few metrics to use this method:
CLV = GML (R / 1+D-R), where:
GML = Gross margin per lifespan
R = Retention rate per month
D = Discount rate per month
What Is a Good CLV?
CLV on its own is limited in its usefulness, but, generally speaking, higher is better.
You’ll get more helpful insight by comparing CLV to CAC. A typical recommended goal is to shoot for a CLV to CAC ratio of 3 to 1. The lower the CLV, the more you’re spending on acquisition costs. A 1 to 1 ratio, for example, likely indicates you’re investing too much in acquisition cost.
Why Use CLV?
CLV helps you determine how much you should invest in retaining a given customer.
Knowing the lifetime value of a customer allows you to answer these questions:
- How much should you spend on marketing?
- What revenue can you predict in the future?
- How can you optimize CAC?
- How much should you invest in retention costs?
Because there are so many variables that go into CLV, you should only fully trust the calculation if you are confident that each sub-metric is accurate.
Even if you only calculate CLV to get a high-level sense of each customer’s lifetime value, this can be helpful in a big picture sense.
The next two calculations are considered KPIs not metrics and as we mentioned above KPIs are measurable values that show you how effective you are at achieving business objectives and metrics track process. These two KPIs help as leading indicators to ensure you are on the right path.
Traffic to Lead Ratio
What Is Traffic to Lead Ratio?
The traffic to lead ratio, or new contact rate, helps you understand where your website traffic is coming from, and what percentage of visitors to your site turn into actual leads in a given period.
How to Calculate Traffic to Lead Ratio
The traffic to lead ratio is simple:
Traffic to Lead Ratio = Number of Visits in x Weeks: Number of Leads Generated in x Weeks
For example, if you have 10,000 website visits and 1,000 new leads in a month, your traffic to lead ratio is 10 to 1, expressed as 10:1. Another name for this figure is the conversion rate. A 10 to 1 ratio is a 10 percent conversion rate.
Data Sources for Traffic to Lead Ratio
To determine the number of visits you’re receiving in a given period, you’ll need to gather statistics about your web traffic from Google Analytics or another similar service.
The number of qualified leads is based on your own customer data.
What Is a Good Traffic to Lead Ratio?
To get the most from your traffic to lead ratio, you should track it over time. Taking into account other KPIs, you’ll be able to detect trends and adjust accordingly. A standard benchmark is to shoot for a conversion rate higher than 5 percent.
Why Use Traffic to Lead Ratio?
Traffic to lead can give you insight into website changes you might want to make (content, web forms, mobile optimization, and so on). If your site looks fantastic, and you’re getting tons of traffic, but visitors aren’t converting to leads, it’s time to take a step back and figure out what needs fixing.
Traffic to Lead Ratio Limitations
Examining the number of visitors only gives you part of the picture. Knowing where your traffic originates — organic, direct, social media, or through referrals — is crucial when it comes to conversion. This is the kind of data that helps you decide how to market, where to market, and how much to spend on each channel.
Lead to Customer Ratio
What Is Lead to Customer Ratio?
The lead to customer ratio, also known as the sales conversion rate or lead conversion rate, tells you how many leads you’re closing.
How to Calculate Lead to Customer Ratio
The lead to customer ratio is calculated as a ratio of the number of qualified leads that are converted to actual sales in a given period compared with the total number of qualified leads in a given period:
Lead to Customer Ratio = Number of Qualified Leads that Resulted in Sales: Total Number of Qualified Leads
What Is a Good Lead to Customer Ratio?
There isn’t a universal benchmark for conversion rates that applies to all companies. Still, you should be aiming for a ratio that isn’t too lopsided — one customer per every 10 leads is much better than one customer per every 1,000 leads.
When you’re evaluating sales conversion rates, it’s important to remember that, like all KPIs, this metric doesn’t exist in a vacuum. You may not expect a high lead conversion rate if you’re trying a new campaign aimed at brand awareness, for example. On the other hand, a poor conversion rate combined with expensive per-lead rates is not a positive sign.
Why Use Lead to Customer Ratio?
The lead to customer ratio can give you insight into questions like:
- Is my campaign capturing leads?
- Is our CRM successfully passing qualified leads to sales at the right time?
- How high is our close rate?
In a way, the lead to customer ratio is where the rubber meets the road. If you can’t capture enough leads, or if you can’t turn those leads into sales, you’re not going anywhere. However, if you’re converting a lot of leads, you’re heading in the right direction.
Lead to Customer Ratio Limitations
The lead to customer ratio is only helpful if you’re consistent about defining “qualified lead.” Is a qualified lead someone who spends a predetermined amount of time on your website or someone who signs up for your newsletter? Or, do you consider another set of circumstances when deciding which leads are qualified?
Metrics and Your Sales Funnel
Understanding how these marketing metrics relate can help you develop a more effective conversion funnel:
Lead to Customer Ratio gives you insight into
Traffic to Lead data, which helps you determine
Customer Lifetime Value, which impacts
Customer Acquisition Cost, which ties in directly to
Return on Ad Spend.
As you look ahead, use your metrics to create a conversion funnel. Outline how you plan to improve each metric.
Put Your Data to Work
In the world of marketing, data is everything. If you don’t have confidence that the data you’re using to calculate key marketing metrics is complete and accurate, you can’t truly know where you stand.
Blue Meta knows data. We can help you gain insight into the data that drives your brand and the factors that may be holding you back. Learn more about how our data science services can elevate your brand through thoughtful metric analysis.