October 18, 2017
Back in the good old days, measuring your business outcomes and the impact of marketing on those outcomes was a challenge and at best, imprecise. Today, we have the opposite problem. Thanks to the web, Google Analytics, cookies, and other tools – we can measure everything. Unique visits, time on site, clicks, and so much more. But are those the things we should be measuring?
In marketing, there’s an important axiom – just because you can doesn’t mean you should. I think that definitely applies to how we define and measure success. I think that the web has made counting things so easy that we’ve forgotten what actually matters. It doesn’t serve anyone to measure just for measurement’s sake.
There are a ton of tactical things we can measure that correspond to a campaign or a specific marketing tactic. Naturally, we need to watch those too but they’re not going to tell us if a business is healthy or not. They’re only insightful to a point.
At MMG, we’ve always subscribed to the philosophy that you should have a few vital metrics (KPIs, goals – call them what you will) that are at the core of your business’ success and you need to monitor them faithfully – watching for trends, good or bad and reacting accordingly.
Every business may have one or two unique metrics but there are some that are pretty universal. This week, we’re going to look at the financial metrics that every organization should measure. We’ll dig into the marketing/sales and employee metrics next week.
- Lifetime value of a customer (How much does a customer spend over the entire span of working with them)
- Annual value of a customer (How much did the average customer spend this year)
- Profitability of a customer (For every customer you have, how much money did you make)
- Revenue mix (Amount of money from existing customers versus new customers)
Now let’s look at each of these and why they matter.
Lifetime value of a customer: This is a vital metric that tells you how much you can afford to spend to chase after new customers. It also tells you if your pricing strategies are properly aligned and what the loss of a customer is actually going to cost you.
Annual value of a customer: Ideally, this number would increase every year. You want to keep delivering more value so that each customer wants and needs to spend more with you. It should also increase year over year as your retention improves. For most businesses, the customer is much more profitable in years 2+ than they are when you’re onboarding them in year one. The exception to that rule is if you’re a high ticket, considered purchase like a house.
Profitability of a customer: This is one of the most insightful metrics possible. You will quickly identify what size and type of customers are where you make your money. You will also be surprised at the customers who don’t yield a profit or worse – you are paying for the privilege of working for them. It may also suggest that certain products or services that you sell yield better profits.
Revenue mix: New dollars are harder to earn than recurring dollars. But you also need an influx of new dollars to offset the natural attrition that every business experiences. This metric and the retention percentage that we’ll cover next week work hand in hand.
For most organizations, it’s enough to monitor these quarterly because more often than that doesn’t really show much movement. It’s like a built-in early warning system for trouble that will give you time to course correct before the damage is too deep or too expensive to fix.More