Marketing is an analytical process. Setting goals comes first. Developing strategy is second. Third is the execution of the specific tactics to support the strategy. And fourth? Well fourth is measurement and data analysis. Simple right? Most small businesses and startups follow some version of this rational approach to operating and marketing a business. But when it comes to measurement, many managers struggle with developing and tracking the metrics specific to their strategy.
Well the answer is pretty simple: turn to math and leverage technology. A certain amount of your data is right there on your computer hard drive and with some basic spreadsheet work you can answer the most important of questions. Plus, other powerful analytical tools are easily available to you just a mouse click or browser tab away. There are tons of free tools many of which are simple to implement and have a learning curve that is surmountable for most.
An important step is to figure out which metrics are the ones that are important to your business. But each business is unique, and the yours may benefit fro the analysis of certain metrics that are unimportant to mine, and vice-versa. However, there are certain fundamental metrics that are common to all businesses, and a basic understanding of these is where you should start.
1. Customer Acquisition Cost. Every business, whether B2B or B2C has to bring in customers. Without them we are nothing, with enough of them we can be profitable beyond our wildest dreams (usually). The important thing is to understand how much it costs you to acquire a single customer. This is the simplest of analyses: for a given time period (last year for example) divide the amount of money you spent on marketing expenses by the number of new customers that you brought in during that same period, ét voila! The result of this simple is your CPA, or Cost per Acquisition and this is the key to understanding whether your marketing tactics are working for you or not. Why, you ask? Again, simple: if it costs you more to acquire a new customer than you can expect them to provide you in earnings, you’re doing something wrong and you’ll be closing your doors before you can even spell CPA. This simple formula also allows you to compare your marketing tactics: for instance that giant billboard over on I94 that you rented costs you around $572 per customer acquired, while your PPC ad campaigns are costing you only $27 CPA, which one do you think you’ll do better to invest in? Hmmm?
2. Life Time Value. The second half of CPA is known as CLTV, or Customer Lifetime Value. This is the amount of earnings you can expect from an average customer over the life of the relationship – if you can increase this, you win. Some businesses (think subscription-based services) will generate meaningful revenue month in and month out from each customer, while others (think swimming pool installers) might sell an average customer one pool over the entire span of that relationship. The point being, that unless you understand the CLTV of your average customer, you can’t really understand if the CPA is too high to justify. Right?
3. Conversion Rate. How many new customers walk into your store on an average day? How many buy something? The answer to this question is your conversion rate, whether you are tracking foot traffic or leads generated via a mailing list, or traffic to your website generated by online ads. The conversion rate for each of your marketing tactics will be different, and the best performers are those that deserve the highest investment of your marketing dollars.
4. Profit margin. I don’t mean simply the overall margin on your Income Statement (thought that, too is critical), rater the margins for each of the individual products or services you offer. If you are working too hard to sell a product that is not as profitable as one of your others, you need to re-price or even abandon the products or customers that are reducing your bottom line. Understand where your profit is and focus on that!
5. Percentage of repeat business. How many of your customers come back? Aside from the swimming pool installers among us, the most profitable customers we have are the repeat ones. The fact is, once you have spent the money to acquire that new patron, the expense involved in holding onto her will always be lower than what you spent to get her in the first place, therefore the second transaction will always be more profitable than the first. And, over time, the profit margin that she represents will increase even while you continue to spend money to acquire those new customers.
Wikipedia: A pair of “outside” calipers used to measure the external size of an object.
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