There are two expenses closely related to every marketing effort you put in place for your business – time and money.
You have to spend time to develop a plan, and you have to invest money to pay for ad space, pay staff/contractors, marketing services, etc. Nothing comes free in business, and that is certainly true with regard to marketing.
So, considering all that you are putting into your marketing efforts, you should be carefully tracking their outcomes to see if the investment is paying off.
This is where KPIs come into the picture. Key performance indicators are a great way to monitor the performance of your various marketing initiatives. Selecting the right KPIs, and then keeping a close eye on those measures over time, can help you dial up the return on investment you see from your ad spend.
Let’s take a moment in this article to review six important KPIs which will help almost any business improve their performance.
KPI #1: Return on Investment (ROI)
This first KPI on our list is one that you have certainly worked with before. Return on investment – commonly abbreviated as ROI – is a classic in the business world.
The trick with this measure is that it is not quite as simple as it seems on the surface. The concept is simple enough – you measure how much money you make and compare that to how much money was spent. This is the return you enjoyed on your investment, and if it is a positive number, you are at least heading in the right direction.
But how do you determine how much money was spent on each marketing effort? And how do you know which marketing plans resulted in which sales? The apparently simple concept of ROI quickly gets complicated when you attempt to apply it in the real world.
Sadly, many marketing departments would not be able to properly state an accurate ROI for their various campaigns. This is a problem because it may lead to the continuation of a failing campaign or the cancellation of one which was actually returning good results. You want to double down on efforts that are working while pulling back on the others, but you can only do that if you have a clear picture of your results. Having a thorough understanding of the ROI of your campaigns is essential in order to make informed decisions, and this should be part of any business exit strategy in case you decide to sell the business in the future.
Businesses who are willing to put in extra effort can be rewarded with accurate ROI numbers that will help drive appropriate decisions. One of the biggest keys is developing methods for attributing new acquisitions to the right marketing channel.
As one example, it’s possible to use a variety of phone numbers in different places, and those numbers can then be tracked and tied to sales when they come in. All of the calls will go to the same place, but the number used will provide a clear indication of how the customer or client was reached.
KPI #2: Win Rate
Basically, ‘win rate’ is another way of saying ‘conversion rate’.
It comes down to how many new customers you are able to get out of your pool of leads. So, if you attract 100 new leads with a marketing campaign, how many of those people or businesses turn into paying customers?
There is a certain cost associated with bringing every new lead into your business. How much you will have to spend on marketing depends on the market you are in, the customers you are trying to reach, the size of your business, and the marketing services you are using.
While you can’t necessarily control what it costs to communicate with your market, you can work on getting more out of each new lead. This is the point of tracking your win rate.
The win rate is going to largely determine whether your marketing campaigns have a positive ROI.
Turning only a few of those 100 new leads into customers probably won’t cut it, unless you are in a market with particularly high margins.
If your win rate is too low, you might be able to improve marketing results by fine-tuning your sales funnel rather than making changes to your ads.
Or, it might be that the ads themselves are bringing in the wrong kinds of leads. Continue to experiment and monitor how the changes you make impact your ongoing win rate.
KPI #3: Cost Per New Customer Acquisition
Another KPI we are going to discuss is cost per new customer acquisition. The title of this measure tells you nearly all you need to know about what is being measured. How much does it cost your business to bring in a new customer? This is an attractive KPI because it tells an informative story in a single number.
Similar to ROI, the math here is quite simple, but you need to accurately track the inputs so you can trust the results.
For example, let’s turn back to our discussion of bringing in 100 new leads. Imagine you ran a special ad campaign and got 100 new leads for a total cost of $1,000. That would obviously bring your cost per lead to $10 – but that is not the same as the cost per new customer.
To calculate the cost per new customer, you need to monitor how many of those 100 leads make a purchase. Let’s finish our example by imagining that 10 of your leads converts into a buyer. That leaves us with a cost of $1,000 to get 10 new customers, so the cost per new customer is $100.
Is that good? It all depends. For a company that sells small-margin, low-cost items, a $100 cost per new customer probably isn’t going to work (unless those customers come back many times over).
On the other hand, $100 per new customer would be a dream scenario for businesses that sell premium products with big margins. You’ll need to understand your business completely to know whether your observed cost per new customer is at a sustainable level.
KPI #4: Customer Lifetime Value
In the previous section, we discussed an important KPI around the cost to acquire a new customer. This will vary by marketing channel, with some delivering a lower cost while others can’t quite drive new customers at that price point. But without understanding the lifetime value of customer, it’s impossible to know what an acceptable price point is to acquire a customer.
So how do you determine LTV? Well, it’s not easy, and even very sophisticated companies with large marketing and operations departments struggle to arrive at accurate figures. But the key components to hone in on are two-fold:
• Average ticket price
• Average number of jobs performed per new customer
For most companies, the goal isn’t to win someone’s business once but to earn their continued business.
For accountants, the hope isn’t that they do someone’s taxes once, it’s to do them every year. But the reality is some companies truly understand this metric and optimize everything they do around it, and others have no concept of the value of a new customer. So what’s yours? To arrive at that number, you must calculate 2 other important KPIs.
KPI #5: Average Order Amount/Job Size
Take the last 5 years worth of receipts or invoices for your company.
That’s the total number of jobs performed and the total revenue collected from those jobs. Dividing those will give you an understanding of your average ticket price.
KPI #6: Average Jobs Performed per Customer
Now the hard part. On average, how many times does a customer use your service?
Are you able to audit your customer records to arrive at an average number of jobs performed? If so, congrats, now you have all you need to understand the true value of a new customer.
If you’re running your business the right way, it should be considerably higher than just the revenue from the first job you did with them. But once you understand that number, you can identify an acceptable cost to acquire that customer.
The Big Picture
As you monitor your marketing performance, it’s best to keep an open mind and use a variety of KPIs to evaluate each campaign. Focusing too specifically on one measure can cause you to lose sight of the big picture. Taken together, the six KPIs we discussed above will offer you an excellent overall evaluation of what is going well with your customer acquisition strategy, and what can be improved.
Now, your next step will be to build these KPIs with a BI and dashboarding solution. Connect your marketing and invoicing data and visualize it in a dashboard. ClicData can help you achieve that.
About the author
Matt Buchanan is the Co-Founder and Chief Growth Officer at Service Direct, a technology company that offers local lead generation solutions for service businesses. He is a graduate of Vanderbilt University and is also the founder of RestorationEze.com. He has 15+ years of expertise in local lead generation, sales, search engine marketing, and building and executing growth strategies.