The problem is, so many of them really have nothing to do with the bottom line.
Some of the most popular figures to cite when it comes to “proving” the success of online marketing, such as website traffic or social media followers, are basically vanity numbers. They can be bought if one is willing to throw enough money around. That doesn’t mean they’re actually productive for the company or creating more profit than loss.
In truth, one of the most truly necessary online marketing KPIs — and one which every business should watch like a hawk — is also one of the easiest to compute: your customer acquisition cost.
Is Your Marketing Creating ROI? Check Your Customer Acquisition Cost.
The premise behind the CAC is simple: Find out how much you’re actually paying per converted customer. It’s also extremely simple to calculate. Add up all the costs of your sales and marketing departments for a certain time period (like a month or a quarter) and then divide by the number of new customers acquired in that time.
A Customer Acquisition Cost calculation might look something like this.
Sales: Salaries + Commissions + Bonuses + Communications = $50,000
Marketing: Salaries + Content Creation + Online Hosting + Ad Buys = $75,000
New customers obtained: 50
50,000 + 75,000 = $125,000 total costs
$125,000 / 50 = $2,500 per customer
This basic number — $2,500 — is key to knowing whether or not your sales and marketing expenditures are actually paying for themselves. This is one of the most important online marketing KPIs to track.
What Else Can The CAC Tell You?
The CAC is most useful when combined with your historical sales data. Take the average of your sales over a given year, per customer, to get an average yearly value for your new customers. The ratio of that average to the CAC tells you how many years it will take for each new customer to actually “pay off” the money spent acquiring them.
If an average customer in the above example only spends $500/year, then that company is going to have to retain them for at least five more years to actually turn a profit on the expenditure. ($2500 / $500 = 5)
Is that company actually retaining their customers for that long? It’s a question they’d need to answer quickly. Such a long time to repayment would suggest they’re in danger of losing more money on their marketing than they’re making. Unless their customers are extremely loyal, they would need to either cut sales/marketing costs or spend more time (and money) on customer retention.
Focus On The Metrics That Matter
In short, the Customer Acquisition Cost is one of the single most important marketing metrics you can calculate. It points you straight towards the true bottom line: Are your sales and marketing expenditures actually worth it?
Don’t get distracted by vanity metrics. In today’s highly competitive online market, you need real facts demonstrating profitability to be assured of success.