BLOG: The two marketing metrics every business should measure
The Marketing Centre, a part-time provider of marketing directors, looks at the mathematics of marketing.
Marketing is a gamble. Possibly not what you’d expect to hear from a marketing company, but bear with us.
Your marketing budget is your stake, the tables and slots at the casino are your marketing channels, and new customers – falling into your lap like golden coins from a slot machine – are your prize.
A professional gambler will not be seduced by the flashing lights, the big headline numbers and the dealer’s spiel, because professional gambling is not glamour, it is mathematics – it is less about unknown risk and more about predictable return. Professional marketing is no different.
Whilst marketers can’t rely on the science of statistical probability, there is a seemingly never-ending array of marketing metrics which can be measured, but as we shall see, there are two which matter above all others.
The only metrics that will ever be truly useful are those that link inputs with outputs. To the gambler, that’s the odds of their stake generating a return. To a marketing professional, it’s the return on investment – how the marketing cash invested compares to the sales cash generated.
So, which two metrics should every business measure, and why?
Marketing as a percentage of sales
The first to consider is Marketing as a Percentage of Sales. Quite simply, how much sales income is being spent on marketing. Divide the former by the latter to find out.
So, then the question becomes, ‘how much is enough?’. According to Robert Stead, one of our marketing directors, the sweet spot for Business to Business marketing (B2B) is between 4% and 8%: “If your marketing spend is less than 1% of sales, you either have a monopoly or you are missing opportunities. If it is over 15%, it sounds inefficient.”
It is important to consider both the direct and indirect costs of your marketing activities to ensure you get an accurate figure – you may have been invoiced £12,000 for the stand space at the show, but what about the cost of constructing the stand and pulling five team members out of the field to staff it for three days?
In business-to-consumer marketing (B2C), the sweet spot may be higher, particularly when launching a new product or service. In this instance, though, a further challenge could be a lack of data: how do you know the true cost of something if it doesn’t exist yet?
Whilst calculating marketing as a percentage of sales is often undertaken as an annual exercise looking at spend for the previous year, it can also be used when planning ahead.
According to our customer champion and brand-builder Richard Kent, “It’s business modelling as much as anything else – it all hinges on the net profit a business needs to achieve. If we’re just getting started, we may want marketing to be 20% of cost of sale, but in order to get there, we need to accept 25% for at least the first quarter as we back our assumption that (for example) paid search is a good fit for our business and we develop our skills in that area.”
“This is where we reflect back on the CPA for that particular channel…”
Which leads us nicely onto our second key metric.
Cost per acquisition
Cost per Acquisition (CPA) can drive marketing decisions on a project-by-project, month-by-month or channel-by-channel basis and is calculated by taking the total marketing budget and dividing it by the number of new customers acquired. Equally, the spend and acquisition from a particular channel can be used to calculate and compare the most effective marketing activities.
To continue Richard’s B2C example, “…If after the first quarter the CPA for a particular channel is too high, then we need to ditch it and find something else. We may not have any data, but we’ll get it, as we’ll be fishing where the fishes are.”
Hotel Chocolat, a business Richard has worked with, is a perfect case in point for this type of CPA analysis: “Breaking things down by channel was so important for us. By understanding which channel – insert, shop or Adwords – a new recruit came through, the business could be led by the data.
“12 million inserts into The Sunday Times at Christmas brought in thousands of clients for Hotel Chocolat, but the cost of the insert was above the target CPA of £7. We discovered that smaller niche publications delivered a CPA of £6 or less, so The Sunday Times and other big name publications were dropped. In this way, CPA data can wean a company off vanity projects (such as advertising in The Sunday Times).”
As Robert Stead explains, in B2B, there are other considerations: “A B2B CPA benchmark for a serious professional service delivered over several years could be £500-£1500. A new account for a simple, repeatable product delivered over several years could be £60-£100, and a one-off transactional product, £10-20.”
He also urges consideration of the long game: “For example, an audit firm who can win a £200k audit contract for 5 years (i.e. £1m of business) will probably find it beneficial to spend £100k plus in the first year to win it. Seen as 50% of £200k revenue it makes no sense, but as 10% of £1m revenue it’s a bargain.
In this way, CPA leads naturally into longer term planning and projection.
Measure of success
Just as a professional gambler uses mathematics to improve their chances of success, so a marketer should keep a firm grasp on these metrics to improve the likelihood of the stake that they have invested seeing a return. Without measuring these metrics, marketers may find themselves focusing too heavily on the glitz and glamour, leading to unknown risks and unpredictable returns. Professional marketing shouldn’t be a gamble.
The Marketing Centre works alongside small to mid-size companies to help them grow through making improvements to their marketing processes. To find out how your business is performing in the key marketing areas, try our free online Marketing 360 Healthcheck.
This article was originally published via Vistage.