You’ve got your advertising campaign, and it looks great! You’ve researched essential keywords, checked the formatting carefully, made sure that everything works and you’ve got your preferred target audience.
The CPC or CPM is low, your sales pages are all ready, and you’ve carefully allocated the budget and distributed it across Google and Facebook.
Google Search Console shows that your traffic is increasing, you’re getting positive responses from customers or clients and it’s all looking positive.
Your VP or CEO looks at the figures and says, “That’s great! So what metrics should I be looking at to gauge performance?”
Now you could bluff it and talk about the uplift in sales and how the business website is experiencing higher footfall, but that doesn’t always lead to cold, hard statistics that can be used to accurately gauge how well your advertising campaign is actually doing quarter on quarter. When you need to improve? How much are you really spending? And what you actually need to know to calculate whether your campaign is worth it?
With the average small and medium business spending 1-5% of revenue on advertising alone, it’s essential that the money is invested just right.
So what are the three essential metrics you need to scale?
The 3 Metrics You Need to Scale
The three metrics here assume that your data is accurate and current. Without appropriate data, you cannot accurately use these metrics to scale up your advertising campaigns and focus on the key areas to acquire new customers and what your budget is per customer.
1. Average 90-Day Customer Value (90-Day CV)
The average 90-day customer value is simple: it’s the average profit per order multiplied by the average 90-day frequency.
AVG 90-Day Customer Value = Avg Profit Per Order x Avg 90-Day Frequency
As a simple example,
Essentially, cash flow is vital to any business, and the average lifetime value of a customer isn’t much help if it takes a year or even longer to convert a customer into profit on your bottom line. While this is especially true for start-ups, it remains true for any business, as most businesses do not have massive cash reserves available. Given the recent stress on the economy, this is especially relevant at this time.
Larger businesses often have the luxury of having a year’s worth of reserves, which allows them more time to react to changes in the business environment. As a medium enterprise or even a start-up, you likely do not have that luxury.
Compounding this, most strategic decisions are made in 90-day increments. Although you may have a yearly or even five-year plan, it’s still usually created out of 90-day chunks (sometimes called Quarterly Rocks).
It’s also important to focus on profit rather than revenue. As a business, you cannot afford to be giving away product, and there is little point in having $100,000 of revenue if you’re making a loss or breaking even on every sale when you factor in customer acquisition costs.
Wait, Why These Numbers?
It’s simple: There are only three ways to grow your business.
By calculating your average 90-day customer value, you now know the sales amount and the sales frequency.
This gives you a figure for how much you can afford to pay for new customers and stay profitable.
2. Average Customer Acquisition Cost (CAC)
Again, this is a simple metric: add up all the costs that you spent on acquiring more customers during a period and then divide it by the number of customers you acquired during that period.
Average Customer Acquisition Cost = Marketing & Sales Costs / #of Customers
As part of a very simple example,
This tells you how much you are spending on acquiring each customer, and you can compare it to your 90-day customer value. This creates a ratio. And ratios can tell us a surprising amount.
What's the Ideal 90-Day CV:CAC Ratio?
You should be getting three times more from the customer than you spend on acquiring them, which is a ratio of 3:1.
For some businesses, it might make sense to have a 1:1 ratio, at least for the first 90 days, especially in highly competitive fields or businesses that have a slower life-cycle (such as those offering maintenance or long-term service contracts). And in some high-turnover businesses, it might make sense to have a 5:1 ratio, such as in businesses that focus on producing novelty products or services.
For most, however, a 3:1 ratio is ideal, as it ensures there is sufficient profit to power the business while also ensuring that you don’t miss out on prospective business by underspending.
But What About Scaling?
If you are stuck at a 1:1 90-day CV:CAC ratio, you won’t be able to scale quickly without outside investment. And that outside investment can rapidly start to affect what you can do and how you can do it. That’s why it’s important to understand this particular ratio. Understanding it also lets you understand how you can affect it to shift your business onto a more profitable footing.
Both of these important metrics are essential, but they are both long-term strategic metrics. These are both known as lagging indicators, because they have to be calculated at the end of a set period. However, we need at least one leading indicator to indicate what’s working in the short term.
3. Breakeven Return on Ad Spend (ROAS)
Money talks. And this is saying “Don’t spend too much.” The breakeven return on ad spend is simply the percentage return that you need to achieve so that you don’t lose money. It’s your upper limit, essentially.
But first, you need to work out your return on ad spend:
Next, you need to work out your breakeven return on ad spend:
As long as you keep your actual return on ad spend higher than your breakeven return on ad spend, you’re good.
Hang On: Why Are You Using Net Margin?
It provides a slightly more accurate figure than gross margin. That’s all.
Oh, That Makes Sense
We thought so, too.
So, at this stage, you have your leading indicator, which is your breakeven ROAS vs. actual ROAS. As long as that is healthy, your 90-day CV:CAC ratio should be healthy, and that means that your overall advertising strategy is healthy.
Regularly checking these ensures that you can take actions as needed to modify your advertising campaign or perhaps refocus it. Through that, you can scale much more easily.
But Wait — There's More: Target Cost Per Lead
Any business can use ROAS — that’s the beauty of that metric. However, there are some businesses, notably those that are primarily lead generators, that suit a slightly different leading indicator: target cost per lead (CPL).
However, you first need to know your average value per lead (VPL).
If you have 10 leads that convert into two prospects and one customer, you have a
You then take your 90-day CV and multiply by the qualification rate and the average close rate and you have the average value per lead.
Taking the example above and assuming a $3,000 90-day CV, you get:
You then calculate your VPL:CPL ratio. Ideally, it should be a 3:1 ratio or thereabouts.
Zooming In and Out
Typically, you look at your 90-day CV:CAC ratio, checking that both of these are healthy, and then you zoom in to check your ROAS or target CPL, depending on which one is relevant to your needs.
This gives you a good idea as to the short-term and long-term health of your business. Ultimately, it means you can plan ahead for long-term strategic initiatives or make quick tactical decisions.
This could mean checking that costs aren’t slowly creeping up — something that’s been happening a lot as PPC campaigns have become more and more expensive.
Don’t forget that you can also use segmentation. This means you can understand and optimize your marketing and find the big opportunities through the following segments:
Most importantly, you need reliable, accurate data so that you can trust the very foundation of what you are using to measure success.
At Ollo Metrics, we help customers develop effective ad strategies across the business and help them refine, manage and deliver those campaigns to maximize their ROIs. Book a free discovery call with us today to see how we can help you use digital marketing to grow your business.
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