Running a lead generation campaign without tracking the right metrics is a bit like driving at night without your headlights on. You very well may know the route home, but you’re just as likely to end up parked on your front lawn as you are in your driveway.
In my travels I’ve learned that there are numerous helpful metrics to use at various stages of a lead generation campaign – from open rates and and click-through to coupon redemption and in-store foot traffic. But when it comes to the “critical” metrics I always come back to 4: Yearly Revenue per Customer; Churn; Lifetime Value of a Customer and Customer Acquisition Cost.
Quick tangent: These metrics are valuable both in the planning and post-mortem stages of a lead gen campaign. However when used for planning for a new product or service you can sometimes run into a chicken-and-egg problem. Meaning, when tackling a new market you may not have good historical data to base your assumptions on. If you find yourself in that position you have three options:
- Research the industry as a whole and find generic historical data that can inform your formulas. Trade associations, the Internet and even friends can be a great resource when on the hunt for this info.
- Use your existing marketplace experience to inform your assumptions. For instance, you may not have experience selling shoes online, but if you’ve sold hats you may be able to fudge the numbers enough to come up with a reasonable assumption to measure results against.
- Run a few small tests in the marketplace to acquire data that you can then plan with. Yes, I know this will cost you money.
OK, now back to our regularly scheduled program…
Yearly Revenue Per Customer
This one is pretty straight forward and represents the amount of money that a typical customer will spend with you per year. If you want to get fancy you can segment this number based on customer profiles (e.g. high-value vs. low-value), but for simplicity’s sake the equation I like to use is:
Total revenue (yearly) / total number of customers (yearly) = yearly revenue per customer
Example: $100,000 (revenue) / 10 (customers) = $10,000 per customer in yearly revenue
Yes, I recognize that the outcome can be thrown off by outlier customers who spend a whole lot or very little with you. However when planning you want to have a reasonable benchmark to measure against; and when evaluating results post-mortem you want to see change over time. Therefore, stay consistent in the formula and you should be fine.
This one is an insidious little sucker. As most of us know its a whole lot less expensive to get an existing customer to purchase from you again than it is to acquire a new customer. And for certain industries – like cloud subscription services – a high churn rate can be a killer.
To calculate churn the formula to use is:
Customers lost during timeline / (Total # of customers at Date #1 + Customers added during timeline – customers lost during timeline)
Example: let’s say you had 1,000 paying customers on January 1, 2010. During the year you added 500 new customers but lost 250 existing customers. On December 31, 2010 this would give you 1,250 customers (1,000 + 500 − 250). Therefore, your churn rate is:
250 (# of customers lost) / 1250 (total # of customers at the end of the year) = 20%
Lifetime Value of a Customer
The LTVC of measure of how much a customer is likely to spend on products or services with your company over the course of their, and your, lifetime. If I had to ballpark it, I’d say LTVC is usual 2x to 6x the price of the first purchase the customer makes with your company. But if you want to get scientific about, see Wikipedia for details on the correct formula. 😉
Customer Acquisition Cost
The CAC (for short) is a measure of, well, how much it costs you to acquire a new customer. There’s a couple of different ways you can slice this, but to keep this blog post practical I think the easiest way to calculate CAC is:
CAC = Lifetime value of a customer – refunds/cancellations – cost of goods sold – fixed costs (per product sold) – desired profit
Lifetime Value of a Customer = $10,000
Refunds/Cancellations = $1000
Cost of goods sold = $4000
Fixed cost = $2500
Desired Profit = $1500
The CAC is
$10,000 – $1,000 – $4,000 – $2,500 – $1,500 = $1,500
So, if using this calculation for planning purposes, it would tell you that the most it is reasonable for you to spend to acquire a new customer is $1,500. If you’re using the formula for post-mortem then you have a good feel for how much you actually spent to acquire a new customer.
What are you measuring?
As it comes to key performance indicators there’s unarguably a long list that marketing types like to track. What are you favorite lead generation KPIs for measuring success and/or informed learned?