Here’s the truth: you don’t need magic to figure out if your marketing works. The secret? Dig into the details and work with your accounting team to measure marketing performance. Companies often fall into the trap of tracking broad metrics without diving deeper, leading to misleading or unhelpful results. They expect to get valuable information from simplistic metrics like Marketing as % of Total Revenue, which doesn’t actually measure marketing performance – just spend. Metrics have to be as pure as possible to be useful. There is no free lunch, you cannot get epiphanies from systems that don’t dissect and isolate data. Precision is what makes analytics meaningful.
Common Mistakes in Using Marketing Metrics
Imagine navigating with a map that only shows continents when you need to find a street in your city—that’s what relying on surface-level marketing metrics feels like.
Example 1:
Consider the challenge of accurately measuring Return on Marketing Investment (ROMI) – explained below. Without isolating the specific revenue and costs associated with a particular campaign, companies might mistakenly include revenues or expenses from unrelated marketing efforts. Using blended figures gives a distorted view of a campaign’s true effectiveness. For example, attributing a surge in online sales to a social media ad campaign without accounting for an ongoing email marketing promotion can inflate the perceived success of the ad campaign.
Example 2:
Similarly, when calculating Customer Acquisition Cost (CAC), a common mistake is not distinguishing new customers acquired through different channels. For instance, a business might credit a costly digital ad campaign for a wave of new sign-ups, overlooking that a significant portion originated from a free, viral social media post. This oversight not only skews CAC but also misleads investment in channels that might not be as effective as presumed.
In both cases, the lack of detailed data analysis leads to unreliable insights, misguiding marketing strategy and investment. Precision in dissecting and allocating data is crucial for extracting actionable insights. These oversights don’t just mislead; they misguide future strategies, costing you money and time. Precision in tracking and analysis, achieved through the detailed work of skilled accountants, turns raw data into clear, actionable insights. It’s the meticulous parsing and categorization of data that empower companies to truly understand and optimize their marketing performance.
My Favorite 5 Metrics:
- Customer Acquisition Cost (CAC):
Formula: CAC = Total Marketing and Sales Costs / Number of New Customers Acquired
Definition: CAC measures the average cost a business incurs to acquire a new customer.
Inputs: Total marketing and sales expenses (including salaries, advertising costs, etc.) and the number of new customers acquired over a specific period. The best way to use CAC is to track it by channel and to distinguish between new and renewing customers.
Common Mistakes:
a. Not including all relevant expenses (e.g., salaries, software costs) in the calculation.
b. Failing to account for the time period over which the CAC is calculated, leading to inaccuracies.
c. Not considering different customer segments or marketing channels, resulting in skewed averages.
- Conversion Rate:
Formula: Conversion Rate = (Number of Conversions / Number of Visitors) * 100
Definition: Conversion Rate measures the percentage of website visitors who take a desired action (e.g., make a purchase, sign up for a newsletter).
Inputs: Number of conversions (desired actions) and the total number of website visitors.
Common Mistakes:
a. Focusing solely on increasing traffic without optimizing conversion pathways, leading to a low conversion rate.
b. Not segmenting conversion rates by different marketing channels or customer demographics, which can obscure insights.
- Customer Lifetime Value (CLV):
Formula: CLV = (Average Purchase Value * Average Purchase Frequency) * Average Customer Lifespan
Definition: CLV represents the total revenue a business can expect from a single customer over their entire relationship with the company.
Inputs: Average purchase value, average purchase frequency (per time period), and average customer lifespan.
Common Mistakes:
a. Underestimating future customer value by focusing only on short-term profits.
b. Not accounting for customer churn or changes in purchasing behavior over time.
- Return on Marketing Investment (ROMI) – similar to ROAS:
Formula: ROMI = (Revenue from Marketing Campaign – Marketing Cost) / Marketing Cost
Definition: ROMI measures the revenue generated from a marketing campaign relative to its cost.
Inputs: Revenue generated from the campaign, marketing campaign cost.
Common Mistakes:
a. Not accurately attributing revenue to specific marketing efforts, leading to inflated or underestimated ROI.
b. Failing to consider the long-term impact of marketing campaigns on brand awareness and customer loyalty.
- Customer Retention Cost:
Formula: Total Marketing Cost for Retaining Existing Customers/Number of Retained Customers
Definition: Customer Retention Cost calculates the average cost incurred to retain a single customer over a specific period. It provides insight into the resources allocated to customer retention efforts.
Inputs: Total marketing cost for retaining existing customers (including loyalty programs, customer support, etc.) and the number of customers retained.
Common Mistakes:
a. Using inconsistent measurement periods when calculating customer retention cost, such as comparing monthly marketing expenses with annual customer retention rates.
b. Treating all retained customers equally without segmenting them basedon their value to the business or their likelihood of churning.
c. Failing to consider the long-term value of retained customers when calculating this cost. This metric should be assessed in conjunction with CLV to ensure that the cost of retaining customers is justified by their potential revenue contributions over time.
d. Failing to integrate customer retention cost tracking with your CRM system and other relevant data sources. This integration facilitates more accurate tracking and analysis of customer retention efforts and associated costs.
Be detailed in how you track data and you will be rewarded.