Marketing KPIs (key performance indicators) are critical for companies to measure campaign successes, what's working, and what's not.
As you will see in this article, it's essential to calculate several of these metrics because when used together they give each other context.
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1 - Customer Acquisition Cost (CAC)
Customer acquisition cost (CAC) measures what you spend to convert a single lead into a paying customer—sometimes compared alongside customer lifetime value (LTV).
CAC is one of the most important marketing metrics for startups because it tells you how much you need to spend to grow your customer base. Investors often consider CAC to determine a startup's burn rate and how that will affect cash flow.
Customer Acquisition Cost Calculation
Customer Acquisition Cost = Sales and Marketing Expenses / Number of New Customers
You can calculate your CAC on a few levels:
- Campaign level—individual marketing campaigns
- Medium level—social media, paid ads, email marketing, content marketing, custom-defined, etc.
- Total marketing budget
Campaign Level CAC
Your CAC at the campaign level will help you determine how much you spent to acquire customers for a specific campaign. For example, an eCommerce store's Summer Sale that included paid ads, social media, and email marketing.
Medium Level CAC
Medium level CAC calculates how much you spend to acquire a new customer per medium. This calculation will help you determine where to focus your marketing efforts, like social media, paid ads, or email marketing, for example.
Total Marketing Budget
Calculating your customer acquisition cost for your entire marketing budget will determine how much you're spending on marketing vs. the cost to acquire new customers.
2 - Customer Lifetime Value (LTV)
Customer lifetime value (LTV) measures the total average revenue each customer will generate. Companies often measure LTV with CAC to understand the cost to acquire a new customer vs. the total value of that customer.
Customer Lifetime Value Calculation
Calculating your LTV requires two steps. First, you need to calculate your lifetime value, then your LTV.
Step one—calculating lifetime value:
Lifetime value = Average value of sales x number of transactions x retention period
Step two—calculating LTV:
Customer lifetime value = lifetime value x profit margin
If your CAC is higher than your LTV, then effectively, you don't have a viable business model because you will never generate any profit.
Having said that, many startups operate at a CAC higher than their LTV early on to build a customer base. The idea is that once you acquire a certain number of customers, they'll invite other users, which will drive organic growth, and reduce your overall CAC over time.
Without a massive budget, this strategy is extremely risky and could bankrupt the company. It's better to manage your marketing budget with a CAC as low as possible while maximizing your LTV.
How to Increase the LTV?
- Communication builds rapport with customers and increases the likelihood that they'll spend more money.
- Find ways to re-engage existing customers to get them to spend more.
- Develop strategies to build brand loyalty so that customers are more likely to exceed your average LTV.
3 - Cost Per Acquisition (CPA)
Cost per acquisition (CPA) is often confused with customer acquisition cost. Where CAC measures the cost to acquire a customer, CPA measures for any acquisition that is not yet a customer—for example, leads, trial users, sign-ups, etc.
Cost Per Acquisition Calculation
The CPA formula is the same as the CAC calculation.
Cost Per Acquisition = Sales and Marketing Expenses / Number of New Acquisitions
4 - Return on Investment (ROI)
Return on investment (ROI) measures the gross profit you generate from your marketing investment.
ROI is usually represented as a percentage that indicates the difference (margin) between revenue and expenses. The higher the percentage, the more profitable your return on investment.
When calculating returns specifically for marketing campaigns, companies sometimes refer to ROI as ROMI (Return on Marketing Investment).
Return on Investment Calculation
Return on investment = (sales growth - cost of investment) / cost of investment
Spreadsheet tip: If you're adding this formula to a spreadsheet, make sure you set the cell to percentage.
5 - Traffic-to-Lead Ratio
Traffic-to-lead ratio is the number of leads you acquire related to the source—organic, paid ads, email marketing, social media, etc.
Traffic-to-Lead Ratio Calculation
Traffic-to-Lead Ratio = Visitors / Leads
The lower your traffic-to-lead ratio, the more valuable the traffic source.
For example, you get 100 leads from Instagram and 50 leads from Pinterest during a month. You would assume Instagram is where you need focus, right?
But what if, to get those leads, you had to drive 10,000 visitors from Instagram and 1,000 from Pinterest?
Each traffic-to-lead ratio would look like this:
- Instagram: 100:1—one lead for every 100 visitors
- Pinterest: 20:1—one lead for every 20 visitors
Pinterest traffic is more valuable in this scenario because you have to drive fewer visitors per lead.
Traffic-to-lead ratio can help understand several things about the leads you generate:
- Determine the impact of layout or content changes
- Learn which are your best traffic sources
- If you have an affiliate marketing campaign, you can tell which affiliate drives the most valuable traffic
6 - Return on Ad Spend (ROAS)
Return on Ad Spend (ROAS) measures the revenue you generate for every dollar you spend, usually expressed as a ratio.
In most cases, you want your return to be higher than your spending. However, you might also consider your customer lifetime value. If you have a high LTV, then you can afford to lose a little on your ROAS because you know you'll see a return over time.
Return on Ad Spend Calculation
Return on Ad Spend = Revenue generated from ads / Money spent on ads
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7 - Conversion Rate
Conversion rate is the number of customers who complete a specific action usually expressed as a percentage—like a sale, email signup, survey completion, etc. The higher your conversion rate, the better your content, sales funnel, and overall marketing efforts.
Conversion Rate Optimization (CRO) is the practice of looking for ways to improve conversions by testing changes to the marketing strategy—also referred to as growth hacking.
Conversion Rate Calculation
Conversion Rate = (Number of conversions / total visitors) x 100
8 - Follower Growth
Follower growth expresses the gains or losses in social media followers. This metric can help social media managers and brands understand if their messaging and content resonates with their target market.
Follower growth is an essential social media metric because the higher your follower count, the greater your organic reach and the less you need to spend on ads—depending on the platform's algorithm restrictions, of course!
Follower Growth Calculation
Social media managers generally measure follower growth monthly, quarterly, and annually expressed as a percentage.
Follower Growth = (Number of new followers / total followers) x 100
Note: if you lose followers, you must express the number of new followers as a negative to get your net loss as a percentage.
9 - Organic Traffic
Organic traffic measures the number of visitors who find your website through search engine results. Organic traffic is significant because it costs the least to acquire.
You can create a blog post that costs a few hundred dollars to rank your website high in search engines, delivering "free" traffic for months, years, or even decades!
Brands are always looking to increase organic traffic through search engine optimization and blog content.
10 - Email Marketing: Open Rate & Click-Through rate
There are two metrics email marketers measure (expressed as percentages):
- Open rate: how many people open your emails
- Click-through rate (CTR): how many people click email links
Open rate allows you to gauge the success of your email subject line and whether it resonates enough for people to open your email. This metric can also help to determine whether your emails are going to inboxes or straight to spam!
CTR tells you how successful your email content and CTAs were at getting people to click your links. If you have multiple links in an email, you can measure a separate CTR for each one to determine which content hyperlink was most effective.
Open Rate & Click-Through rate Calculation
Open Rate = (Total emails opened / total emails delivered) x 100
Click-Through Rate = (Total link clicks / total emails delivered) x 100
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