That Dammed Denominator
The fashionable marketing metric today is Marketing Return on Investment (MROI), meaning simply how much revenue do you get for your marketing dollars. This is expressed as a ratio: you divide your total revenue (the top number, or numerator) by the total of all of your marketing costs (the bottom number, or denominator). In principle this is clean and neat and tells you whether your marketing efforts are earning their keep. In practice it is a mess. It’s easy to find your total revenue. The problem is that damned denominator.
What goes into total marketing costs? Is it what it costs to send out a campaign? Do you include advertising? The salaries and benefits of your marketing team? Is marketing’s share of the company overhead part of the total costs? There are too many possibilities, so MROI becomes a very squishy number.
We suggest a different approach, much easier to calculate, more actionable when you want to improve it, and thus in our opinion more meaningful. We think the key metric is revenue per customer, the total annual revenue divided by the total number of active customers. When revenue per customer grows, profitability almost always does too (if you have your customers segmented into groups, you should calculate the revenue per customer for each group).
Marketing Measurement 101
The task of marketing is to grow total revenue. We can do this by increasing revenue per customer (existing customer marketing) or by increasing the number of customers (acquisition), or both. Both are good, and each way can be measured separately. All companies have a mix of revenue from new and existing customers, their revenue mix. For most healthy companies, the revenue from their existing customers exceeds the revenue from their new customers. When the balance tips the other way, we say a company is “addicted to acquisition” and like a shark that has to keep swimming to survive, such a company must be constantly acquiring new customers at a rapid rate in order to stay in business. And acquisition is expensive—it is much more costly to acquire a new customer than to make a sale to an existing customer.
In comparison, a healthy company gets most of its revenue from its existing customers. They grow revenue by running better campaigns, with more effective targeting, a differentiated contact strategy, and more appropriate offers. Unfortunately most companies, even healthy ones, under spend on existing customer marketing. We estimate that as many as nine out of ten companies are seriously under spending on the easiest way to grow revenues. So another key metric is the ratio of marketing spend on acquisition compared to spend on existing customers. If this does not correspond in some meaningful way to the ratio of revenue from these two populations, your company is likely in the under spending group.
Customer Lifetime Value
The fourth key metric is Customer Lifetime Value (CLTV), or how much a customer is worth to you over their lifetime as an active customer. This number should guide your acquisition strategy (don’t spend more to acquire than the customer is worth to you) and your retention strategy (it tells you how much you will lose if they defect). Most companies have no idea how to calculate CLTV, but with the metrics we have in hand now this is actually easy.
CLTV is the annual revenue per customer times the average number of years a customer remains active (lifetime). Lifetime is just the average retention, in years, of your active customers. Of course these metrics should be calculated separately for each customer segment.
So there you have it — the key metrics you need to measure your marketing are annual revenue per customer, the revenue mix between new and existing customers, the marketing spend ratio, and the customer lifetime value. The good news is that each of these numbers is easily measured and actionable. Campaign execution can be tough, but at least we know what to do and how to tell if we are making progress.