Metrics are the foundation for any successful marketing strategy, but most companies fail to use many of these important metrics to calculate success or failure. Too often, companies focus heavily on the number of new leads generated, which ignores many of the complex formulas that can determine the true success of any marketing strategy.
Marketers are in a revolving cycle of constant change and flux. With the increasing number of marketing options and strategies, companies and marketers need to stay ahead of their competition. To help formulate an effective strategy, it is imperative that you understand these critical metrics and their formulas.
1. ROI (Return on Investment).
ROI is the most common formula and probably the easiest to understand. ROI is a measurement tool used to calculate the effectiveness and value of an investment. It shows the gain and/or loss of an investment by comparing and measuring the amount of return on an investment with the investment costs.
More From Entrepreneur.com
ROI is popularly used with other methods to help develop crucial business plans based on the metrics received. However, ROI calculations can be adjusted and manipulated for different uses. One company may use it to evaluate a return on a stock, while another may use it to make vital decisions on whether the new PPC or SEO strategy is effective.
For example, a company makes an investment of $5,000 into Google AdWords and generates $10,000 in net profit. This would be a 100 percent ROI. The formula would look like this: ROI = (Net Profit / Cost of Investment) x 100. Divide the return of an investment by the cost of the investment, and the result is a percentage. In this case, ROI = ($10,000/$5,000) X 100.
2. CPA (Cost Per Action).
CPA is referred to as Cost Per Acquisition, Pay Per Action or Cost Per Action. It is a formula that measures the amount a business has paid to attain a conversion. CPA is also used to define a marketing strategy that allows advertisers to pay for a specified action, such as making a purchase or filling out a form from potential consumers. CPA campaigns are relatively low-risk, as costs are only accumulated once the desired action has occurred.
Most companies define CPA as Cost per Acquisition. For example, a company invests $1,000 in a SEO campaign. They received 100 new customers specifically from SEO. Their CPA is $10/customer. The formula is CPA = (Cost/ Conversions). Divide the cost of the ad campaign by the conversions.
3. ROAS (Return On Advertising Spend).
Simply put, ROAS is a tool used to measure the profit made from advertising. It’s the most useful metric to evaluate the performance of marketing campaigns, as it measures how much revenue you get back on each dollar spent on advertising. While ROI can give you an overall view, using ROAS formulas allows you to gain specific performance measurements based on every marketing network executed. For example, you can apply ROAS to specific campaigns and ad groups to receive a better perspective on the best direction for optimizing unprofitable advertising.
ROAS calculations will also tell you, at the most fundamental level, if your marketing channel is performing at a high enough level, which will allow it to be profitable. For example, a company spends $20,000 on Google Ads and received $60,000 in revenue. Their ROAS is $2 – ($60,000 - $20,000) / $20,000.
The formula: ROAS = (Ad revenue/ Cost of ad source). Divide revenue received from advertisement by the cost of the advertisement.
4. CLV (Customer Lifetime Value).
The Customer Lifetime Value metric is used to determine the economic value a customer brings to your business, not only for the time being, but for the entire time they’re a customer. The metric considers everything from their first interaction to their final purchase with your company. This is essential to determine whether there is more value in long-term marketing channels.
In other words, if your CLV value is high from a specific marketing channel, you will want to invest more into retaining customers -- assuming you have a positive ROI. This metric also allows you to evaluate your company’s success based on the long-term results of your marketing strategies.
Related: 3 Ways to Monitor Customer Churn
For example, if you fill 600 orders gaining revenue of $40,000, your average order value would be $66.67. Then, you can determine the purchase frequency (PF) by dividing the number of orders by the unique customers. In this case, if you had 400 unique customers, the PF would be 1.5. To calculate your Customer Value (CV), you multiply these numbers. In this case, it would be 66.67 (AOV) x 1.5 (PF) = $100 (CV).
Now, to determine the Customer Lifetime Value, you take the CV and multiply it by the customer’s duration with your company. Generally, choosing a number between one and five provides accurate results, so let’s assume each order also comes with a contract. Let’s assume a 3-year contract is your minimum.
Your formula would look like this: 100 (CV) x 3 (Years) = $300. Your customer’s lifetime value is $300 over a course of three years.
The Customer Lifetime Value (CLV) formula:
AOV = (Number of Orders X Revenue)
PF = (Average Order Value / Number of Unique Customers)
CV = (Average Order Value X PF)
CLV = Customer Value X Customer’s Duration with the Company
5. Customer Retention Rate.
Customer Retention Rate is a metric used to calculate how loyal your customers are. Acquiring new customers costs more than retaining current ones. Determining how dedicated a customer is to your company allows you to improve your business strategies. If you can encourage loyal customers to stay with your business longer, you'll maximize your revenue.
For example, if you start a quarter with 25 customers (CS) and gain 10 new customers (CN), but lose seven in that quarter, the customers at the end of the period (CE) would be 28. Using the following formula, you can then determine what your Customer Retention Rate is, which in this case would be 72 percent.
The formula to use for Customer Retention Rates = (Customer’s End Period – New Customers for this Period) / Customers at Start of the Period x 100. Subtract the new customers from the number of customers at the period’s end, and divide that by the customers at the start of the period, and then multiply by 100 to get the percentage of Customer Retention.