So, you’ve found that big idea that is worth keeping you on your toes for the next couple of years. The launch and the first growth phase were equally exciting and maddening. Today, most people around you are talking about ROI, profit, taxes – things you’re still trying to wrap your head around. This is usually the moment when you start embracing your new social status as an entrepreneur and want to be able to measure your business growth.
A marketing metrics dictionary could come in handy, right?
Before getting to the formulas for calculating the most significant business growth metrics, you need to make sure you know what your priorities are. Knowing what you’re chasing will help as your compass, whereas your growth metrics will serve as the wind in your sails.
1. Is converting new customers your priority?
If you are running an eCommerce business, the most important thing would be the purchase itself. Moreover, if you are selling home appliances, for example, you should aim for the first purchase. Customer behavior in this field indicates that people buy a new fridge or vacuum cleaner in a single round of shopping. Also, they only do it once in a couple of years, when needed, and they pretty much know what they are after. In this case, you will aim at converting customers at the very moment they are showing interest in your product. Special offers, exclusive discounts, and great reviews will help you close more sales.
2. Is retaining customers your priority?
Other businesses may be oriented towards returning customers. This applies, for example, to subscription-based services. If you developed a tool that your target group recurrently needs, you should be interested in offering convenient discounts for long term subscriptions. People will also pay more attention when choosing to buy this type of service, so this calls for top-notch competition monitoring on your side. There are, of course, manufacturers or sellers that also want to build up consistent relationships with their customers. You might have met some yourself. Check your wallet. If you have several discount cards from retailers, then they’re on to you.
3. Is saving money your priority?
We all want to save some for rainy days, but is this your main goal? If the answer is ‘yes’, then the first thing you need to do is to correlate your marketing metrics to find out which actions bring the best return on investment, basically to find out what’s the cheapest way to get new clients.
The second best option is to focus on designing consistent content and to deliver it efficiently. Social media and other free online distribution channels may also create leads, but pay attention: mistakes in social media marketing may backfire. Make sure you at least got advised by an online marketing specialist before acting on your online communications plan.
Now, here are the growth marketing metrics that you need to analyze every month:
1. Customer Acquisition Cost (CAC)
Yes, another acronym. This one is calculated by dividing all marketing and advertising costs to the number of customers acquired in that month. Let’s say you spent $1,200 in promoting your product last month. You got 120 new customers. Your CAC will be $10/customer.
To have an overview, follow this metric throughout several months. See how it evolves from season to season and find out when it is most efficient to invest a bigger budget. The size of your budget may also impact your CAC. See how much the cost varies according to the amount of money. It doesn’t increase proportionally.
Once you have advertised your business to your core consumer target, you will go to other segments that may be harder to convert. Try to find that sensitive line.
2. Time to Payback
Find out how much time it takes your business to regain the money you have invested in acquiring customers. To do so, divide your CAC to how much a customer pays per month.
If your product is a subscription-based task management tool, that costs $15 per month and your CAC is $10/customer, then your calculation will return: 0.6 months. To be more precise, you will regain the money you have invested in acquiring that new customer in just half a month.
3. Lead Worth
The last thing we need to go through is the lead worth calculation. A lead is an intermediate phase between a person that shows interest and a paying customer.
Let’s say the average value of a paying customer for your business is $4,000. That covers all the money they pay your company during the entire time they stay on your client list. To calculate the value of a lead, you’ll have to find out how many of your leads become customers (5%? 45%? 99%?). Multiply the average value of a customer with the percentage of leads that are converting to clients and you’ll get the value of one lead. If you collect 250 leads in a year on your website, but only 50 of them become clients, 20% of your leads become customers. If the average customer value is $4,000, you’ll find out that one lead is worth $800.
This helps you find out how much you should be paying for referrals and for sales commissions. If one lead is only worth $800, you should never pay $1,000 for one lead.
It is important to pay attention to all marketing aspects when it comes to that big idea you want to transform into a Fortune 500 company. Making these simple calculations every month will help you better understand your own business and what you could improve to increase your profit. Business growth metrics are different from one company to another, but they always show if a business is experiencing growing pains and if those pains are a symptom of failure. Keep an eye on your company’s performance to stop leaking funds and improve your bottom line.
Kristaps Lazda is the founder and CEO of Specfox, a web app that makes it ridiculously simple to write website specifications and design feedback for web projects.