When it comes to Key Performance Indicators, or as we'll reference it as KPI's there is a ton of information you can look at. There are simply items like how many users are coming to your website daily or how much time they are spending on your site. There are more nitty gritty type focuses, such as how many conversions you getting from, say, phone calls or form submissions. We want to keep this sort of high level, so here are the items we will discuss:
Marketing Efficiency Ratio (MER)
New Customer MER
Life Time Value (LTV)
Cost per Acquisition (CPA)
Sales Qualified Leads
Marketed Qualified Lead
Leads
What is MER?
Marketing Efficiency Ratio is a great way to get the 50,000 ft view of how your marketing efforts are doing. This is one of the first Key Performance Indicators you should focus on. In today's world, we are reaching people in many different ways. Just from a digital standpoint, a person could be using Google Ads, Meta Ads, and utilizing SEO for simplicity. Course, there is traditional marketing such as radio, TV, and billboards. How do you determine what's working and what's not? The short answer is you don't. Customers will see you on average 8 times before they become your customer. So it's not just the email you sent last week, or that YouTube video that went viral a year ago, or even the radio spot you have in your local town. People see all of these things before working with you, so you need to diversify and account for them.
This is where MER comes into play. You take your total revenue for the month and divide by how much you spent on advertising
Total Revenue
Total Ad Spend
This is going to give you a ratio. For instance, if you made $40,000 on $10,000 spent, your ratio is 4:1. What is a good MER? For general purposes, anything above 3:1 is typically good.
New Customer MER
What if you're trying to grow your company? You need to look at how to get new customers. The calculation is still the same as before, but you only put new customer revenue into the equation. So instead of $40,000, maybe only $15,000 came from new customers. On paper, this looks bad since your MER is 1.5:1, or half an acceptable rate. This is where Lifetime Value (LTV) will play a key role.
How to Calculate Lifetime Value
Lifetime Value (LTV) is another great Key Performance Indicator. LTV is very important to determining both good MER and good Cost per Acquisition (CPA). So what's an easy way to calculate LTV? An easy way of calculating LTV is taking your last 2 years of revenue and dividing it by the number of customers you serviced.
2 Years of Revenue
Number of Customers
So for easy math, we have earned $1,000,000 over the course of 2 years and have serviced 500 people during that time. The LTV of each customer will be $2,000. So we know now for every new customer we get, they are worth $2,000 over the course of 2 years. They may only spend $95 for an initial service, a sale you having. But based on how you operate today, that customer is worth $2,000. Certainly, there are ways to help grow your LTV, such as touch points leveraging reaching out on a birthday, email marketing, and SMS marketing. That's for another discussion.
Let's go back to the New Customer MER. We found we earned $15,000 from new customers. So let's figure out how much we made per customer. We got 50 new customers, which spent $15,000 with the company for this month. Based on the math, $15,000 / 50 = $300. Now remember your company will make 6.5 times as much off of each of these new customers or over $65k over the next 2 years on this group. This grows each and every month because we're focusing on new customer acquisition.
So you now know each new customer in your company makes $300 this month and $1700 over a 2-year span. So decisions have to be made. Do you want to keep as much money as possible? Do you want to produce as many new customers as possible, knowing what your Return on Investment (ROI) will be? Here is where you play around with Cost per Acquisition (CPA)
What Should My CPA Be?
The easy answer for CPA is how much you spend divided by the number of customers
Advertising Cost
Customers
So that will spit out a number for you. The very next question out of every business owner's mouth is, "Is this a good number?" This is why we worked on MER and LTV prior. These will be your guides in determining if your CPA is good or not. Let's say you want to get aggressive in obtaining new customers. You understand that each new customer based on the examples above will only generate for now $300, but that over the next 2 years, you'll earn $1,700. Maybe you're comfortable with a 4:1 MER meaning the CPA is $500, but you understand your company is making $2000 over the next 2 years. Certainly, this isn't a long-term approach, you will eventually have enough customers to scale back, or if you want to keep growing, you'll keep this approach up. The question is, what are you trying to accomplish, and how do we get there? Each business is different, so each will have its own needs in accomplishing this outcome.
How to Use CPA for Leads
Now that your business has calculated LTV and MER to discover a comfortable CPA for your business, how can that translate on your platforms? Looking at how much you paying for each lead on Google Ads, Meta Ads, or the number of organic leads you getting from SEO. Your business will have to see the breakdown of the process. This means that for every 3 people your business submits, a proposal to 1 comes on as a customer. These 3 people are known as Sale Qualified Leads. They are not only looking for your services but are interested in your services specifically. This could come in the form of booking an appointment for teeth cleaning if you are a dentist or asking you about bookkeeping services. Now we know not every person who inquires wants a proposal. So we figured out that there were 6 good leads overall, and 3 got proposals. These are Sales Qualified Leads. From there, we figured out that there are about 12 calls or form fills that come in to make up those 6 good leads and 3 proposals. This is the number we're looking for. This last number can be figured out just by looking at how many calls and form submissions you got over the month. Perhaps we obtained 60 and based on the previous logic, that got us 5 new customers.
So what do we do with that information? We need first to see if this is acceptable. 5 new customers at $300 a piece generate $1,500 in sales. Great, so we'll take that $1,500 and divide it by 60, giving us a Cost per Lead (CPL) of $25. We now know our target from lead generation is what we can afford. Course, your mileage may vary depending on if you want to get aggressive or if your ratio is better than 12:1 regarding closing. Until we start running ads and doing SEO, we won't honestly know what the market will bear. Perhaps a good CPL is $45; now, do we have the sales to cover that? It's all in calculating the terms above.
We hope this information was helpful in understanding some Key Performance Indicators regarding marketing your business. Feel free to follow us on social media, and if you would like to discuss how to focus on the items discussed above to help grow your business feel free to fill out a Let's Get Started form.
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