.jpg)
In many organizations, digital marketing success is often measured using metrics that appear to be related to its performance; however, they do not correlate to determining whether a digital marketing campaign is generating revenue. While an organization may see an increase in traffic, a reduction in cost per click (CPC), higher levels of user engagement and improved landing page conversion rates, these factors can all contribute to supporting the idea that a digital marketing strategy has been successful while simultaneously seeing little to no increase in revenue.
While each of these factors is used as an indicator of successful digital marketing strategies, most of them are only measures of individual components of digital marketing activities. Therefore, a company could have lower CPCs, higher conversion rates, and increasing amounts of traffic, yet still be unable to grow revenue.
This is primarily due to the fact that most digital marketing metrics are measurements of digital marketing activity and do not account for the ultimate goal of revenue growth. An example would be lower CPCs. Lower CPCs indicate that users are clicking on advertisements at less expensive rates than before. However, this does not take into consideration what type of users are being targeted and/or whether those users will ever result in an additional sale. Another example would be landing page conversion rates. Conversion rates represent the number of visitors who complete a desired action after visiting a website. Again, this only takes into account the percentage of users completing the desired action and does not consider whether or not the actions completed will result in future sales. In addition, increased traffic is just another measure of activity and does not necessarily equate to the generation of revenue.
Therefore, there is one key metric that identifies whether or not digital marketing is ultimately producing results: customer acquisition cost (CAC) compared to customer lifetime value (CLV). Every other metric is simply an indicator of the effectiveness and efficiency of the individual digital marketing activities. CAC compared to CLV is the single metric that indicates whether or not the efforts of digital marketing produce results for the business.
The Formula That Changed Everything
Our firm reviewed the annual spend on digital marketing among eight clients, representing a total of £340k annually in marketing expenditures. We tracked every single penny spent across channels, campaigns, and initiatives. Additionally, we traced each new customer to the exact marketing initiative responsible for generating that new customer.
Seven out of the eight clients demonstrated positive digital marketing ROI according to the typical metrics used to measure such success, including robust conversion rates, relatively low cost per lead, and rising pipeline volumes. However, when we analyzed the true customer acquisition costs for each new customer acquired via digital marketing compared to their respective customer lifetime values (CLVs), the financial picture changed substantially.
For instance, Client A spent approximately £95k on digital marketing and created 45 new customers. At first glance, this appeared to be a successful deployment of digital marketing dollars. However, upon further analysis of customer lifetime value (CLV), the 45 new customers generated on average £2,100 in total lifetime revenue. As a result, Client A’s cost per acquisition was also £2,111. Essentially, Client A was acquiring customers at almost break-even cost.
On the other hand, Client B spent roughly £67k on digital marketing and created 52 new customers. Their customers’ average lifetime value (CLV) was £1,890. Consequently, Client B’s cost per customer was £1,288. Therefore, Client B was able to create customers profitably with an estimated 47 percent margin above their respective customer acquisition costs.
It should be noted that neither Client A nor Client B differed significantly regarding their overall approach and tactics employed in developing their respective digital marketing plans. Instead, Client B focused intensely on acquiring high-value customers through specific channels and messaging, whereas Client A chose to attempt to create customers across a broad array of channels and did not differentiate between high-value and low-value customers.
Once we redirected Client A’s budget toward focusing solely on acquiring customers whose CLVs exceeded £3,500, their revenue per marketing pound invested increased from £0.95 to £2.47. The same amount of money produced completely different results depending upon whether or not we were measuring the metric that truly mattered.
Why Most Companies Avoid Measuring It
Measuring a company’s CAC/CLV requires significant amounts of data and reporting systems that most companies choose to avoid investing time and resources into. To successfully track CLV and CAC, a company needs sufficient customer data to accurately measure true lifetime value over a period of time. Additionally, a company needs systems capable of attributing customers to specific source(s) of acquisitions. Finally, a company needs the internal controls and discipline necessary to continually assess whether certain customer segments justify continued acquisition investment.
Instead, most companies prefer to use easily accessible and immediate metrics like CPC or conversion rates since these metrics require months of customer data collection prior to availability.
However, choosing to utilize easily seen metrics that appear favorable rather than utilizing metrics that prove business success is precisely why many companies continue to expand their marketing budgets without experiencing corresponding increases in business growth.
Do you know your average cost per customer acquisition via digital marketing? Do you know your average customer lifetime value? If you cannot answer either question, then you are unable to determine whether or not your digital marketing efforts are producing business success.