MARKETING MATH
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CEO and CFO need concrete numbers with an obvious relation to the bottom line, but marketers – us included - are often not fond of numbers. So, let us help you do an even better job!
If we focus only on easily acquired data, we will miss the information that could be our ticket to a bigger marketing budget. These calculators make our job easier and gives us more leverage talking to executives and board members.
Why is math important in marketing?
The use of math in Marketing is not just practical, it is essential. Math helps us make real decisions based on evidence, and not just on what our gut is telling us. The more we marketing professionals accept math as a driving component in our industry, the more integrity our decisions will display.
Cost, Profit and Revenue
Mastering these mathematical principles is essential for navigating the landscape of modern marketing. So, buckle up and get ready to feel confident talking about the numbers in your marketing strategy!
Customer Acquisition Cost (CAC)
CAC is the cost of a new customer. To calculate this number, we divide the total sales and marketing costs including all campaigns, salaries, agency fees, incentives, etc. for a period and divide it by the number of new customers for the same period. Choose the costs relevant and available for you. The important thing is to include the same costs over time.
CAC = Total sales and marketing costs / Number of new customers
EXAMPLE: If your total sales and marketing costs for a given period are $500,000 and you gain 100 new customers in that period, then: $500,000 divided by 100 = $5,000 spent per customer. Your CAC would be $5,000. The lower the CAC, the better.
Retention Rate and Cancellation Rate (Attrition)
It requires 4-5 times more to get a new client on board than keeping the ones we have. We all have customers leaving us so following the cancellation rate (churn) over time to get useful insight.
Here’s how we calculate the cancellation rate (churn):
Cancellation rate = (Customers at start + new customers – customers at end) / Customers at start
EXAMPLE: So, if you had 800 customers at the beginning of the year, acquired 200 new customers during the year, and finished the year with 900 customers, then: (800 + 200 – 900) / 800 = 0.125, or a 12.5% annual attrition rate. The lower this number, the better.
The formula for the retention rate is simply 1 minus the cancellation rate.
1 – X = Cancellation Rate
Customer Lifetime Value (CLTV)
CLTV is the sales we get from a customer during the entire time they do business with us. This metric is particularly useful for companies who get repeat customers.
We multiply the average amount customers spend per transaction by the number of repeat sales and by the average retention time (the average time a customer stays with us (not to be confused with the retention rate)).
CLTV = Average amount per purchase × Number of purchases per period × Average customer tenure
EXAMPLE: So if on average customers spend $60 per order and place that order once a month, and the average customer lifespan is 2 years, then: ($60)(12 months)(2 years) = the LTV would be $1140.
Our CLTV needs to be higher than the CAC, or else we’re spending more to acquire customers than we get back. A 3:1 CLTV to CAC ratio is generally the minimum to aim for.
Customer Acquisition Cost (CAC) Recovery Time
The CAC Recovery time is the time it takes for us to recover the money we spent to acquire new customers:
Payback period (months) = CAC / Margin-adjusted revenue per month
EXAMPLE: If your CAC is $5,000 and your margin-adjusted revenue per month is $500, then: $5,000 / 500 = 10 months. It would take you 10 months to recover your CAC. Discuss how many months is acceptable for your industry.
The Value of Marketing
It’s up to us to show our executives the value of marketing as well the cost. The following metrics help us show how marketing benefits the company.
Marketing Originated Customer Percentage
The Marketing Originated Customer Percentage shows how much new business is a direct result of your marketing team.
Say; “This is how much the business grew because of marketing.”
Marketing Influenced Customer Percentage
The Marketing Influenced Customer Percentage shows marketing’s role in helping the company acquire new business.
Share (%) = (New customers where marketing contributed / Total number of new customers) × 100
Return on Marketing Investment (ROMI)
ROMI shows how much profit results from investing in marketing.
ROMI = ((Incremental revenue × gross margin) – marketing cost) / marketing cost
EXAMPLE: If your incremental revenue from marketing is $100,000, your gross margin is 70%, and your costs of marketing are $10,000, then: [($100,000 X 0.70) – $10,000]/ $10,000 = ROMI of 6. Your return would be 6x your marketing investment. Of course, the higher this number is, the more profit marketing is returning.