Marketing Forensics: Establishing Performance Metrics

Posted on February 2, 2009

OK, so last week I launched a post that jumped into the always popular topic of measurable marketing.   Specifically, what can really be known as it relates to customer lifetime value (CLTV), customer acquisition costs, customer churn, and even customer buying cycles?  While these topics may sound like a bad nightmare from your graduate marketing courses, we’d like to propose that there is a definitive order in which you can approach quantifying them.

If we’re going to try to calculate a customer’s lifetime value, then we need to know some things about the customer’s buying habits: how much they buy, how often they buy, which channel(s) they purchase from, how long they remain a customer, and the role they play in influencing other prospective buyers.

As a result, I wanted to outline some foundational performance metrics that every marketer might considering undertaking:

* Step 1: Identify and quantify the customer’s buying cycle (include referral, churn, and social media influence)

* Step 2: Quantify the net value generated throughout the buying cycle become the lifetime value of that customer (be careful to focus on contribution margin, less costs)

* Step 3: Identify the sales funnels (awareness, consideration, purchase) for each customer segment and assign a cost estimate (it is unclear if an absolute value can ever be known due to purchase influencers that cannot be fully identified as part of the psychological purchase process.)

* Step 4: Compare the CLTV (Step 2) to the cost of acquisition (step 3) to determine if customers are being profitably acquired (a general rule of thumb is to keep acquisition costs to 10% of CLTV if possible)

* Step 5:  Perform multivariate testing on sales funnel components over time to isolate those that impact cost of acquisition and the resulting CLTV of the customers gained when components are altered

Regardless of how accurate your results are (precise figure or directional estimate), the fact that you are undertaking the task of assigning a quantitative value provides new insight for your future marketing decisions.  One of those decisions is how to allocate your marketing budget.   One of the most lame approaches we ever see in budget planning is to carry over the majority of last year’s tactics because of laziness — usually in the form of advertising commitments, direct mail (and other forms of interruption), trade shows (without lead generation results or ROI), and a host of other habitual expenditures.   Marketers simply start slotting these items into the following year’s budget without any real quantitative evidence that these tactics do anything to drive sales.  We frequently refer to this as “tactics in search of a strategy.”

I like to use an alternative approach to budgeting that involves (to borrow from Stephen Covey), “..starting with the end in mind and working backwards.”  Specifically, identify the kind of customer(s) you want to attract (the Objective), and then develop a plan to acquire them based on their buying cycle and channel preferences (the Strategy).   Once the strategy(s) are defined, THEN (and only then) you begin to allocate portions of your marketing budget to specific tactics that contribute to moving a prospect through the sales funnel(s).   It is at this stage that having metrics (even if only estimates) can guide your decisions as to funding applied to each tactic.  Without it — you’re back to guessing with your company’s money.   That is not a recipe for job security in today’s fragile economy.

Regardless of industry or company tenure, getting these right will provide immense insights for making future marketing decisions.  For companies who are generating the majority of their business offline, don’t be fooled into thinking that analytics and metrics are just for dot-com companies.  If your company sells via “old economy” channels, that’s fine — you can still establish benchmarks to improve your financial performance.

A detailed discussion of each of these topics begins this week.

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