When Kaplan and Norton’s Balanced Scorecard Concept (BSC) was introduced in 1992, it largely transformed the traditional approach to performance metrics and measurements. It shifted them from being purely financial to a more thorough and holistic approach. The model is still valid today and presents a great strategic framework for companies to organize objectives, measure performance and action the right initiatives.
So how can you really prove the effectiveness of your marketing campaigns? And how can you demonstrate the exact contribution marketing makes to the entire company’s results?
In this article, we look at the four essential financial Key Performance Indicators (KPIs) to help you answer these questions. But bear in mind: though fundamental, these KPIs should not stand alone, they are just four pillars in a broader set of marketing KPIs that includes financial, internal, customer and organizational.
MCAC adds ‘Marketing’ to CAC (Customer Acquisition Cost). This metric is one of the most important KPIs as it lays down the price you pay for every new customer.
- The simple approach:
The simple approach only takes marketing campaign cost into consideration. So while it doesn’t weigh up all costs, it’s less complex so the KPI can be calculated and monitored more frequently – which gives you a good indication of your profitability trajectory.
- The advanced approach:
The advanced approach aims to factor in all costs. However, calculating a ‘pure’ MCAC requires that you have a good attribution model in place that attributes all fixed costs based on allocation. This extra complexity often makes it difficult to calculate with any great frequency.
- Model: What is your attribution model for fixed costs (e.g headcount, salary proportion)?
- Frequency: How often should these metrics be updated (what is realistic and useful)?
Once you have estimated your MCAC, you can start doubling down on the related cost KPIs including Cost Per Action (CPA), Cost Per Click (CPC) and Cost Per Impression (CPI). However, you also need to determine the benchmark to measure your KPIs against. The benchmark (too often set arbitrarily) should stem from what you are actually willing to pay for a customer – which brings us to the revenue side, namely Customer Lifetime Value:
Customer Lifetime Value (CLV) is the prediction of customer profitability over time. So ultimately it’s the net present value of all future streams of profit generated from the individual customer.
The Pareto Principle states that 20% of the invested input is responsible for 80% of the output. Applied to marketing, this means that 80% of the profit comes from 20% of the customers. Although not always accurate, the principle emphasizes one crucial lesson: not all customers are equal. And some are more important than others making it vital for marketers to identify and nurture the most profitable ones.
The CLV KPI is not just an isolated metric, it can also be an input into other profit KPIs. This ensures that long-term returns are considered when evaluating your marketing efforts.
- Value perspective: Not all customers are equal; some are more profitable than others. Your investment in acquiring and retaining them should reflect this.
The Return On Ad Spend (ROAS) metric can (and ideally should) both be calculated on a campaign basis and in total as well. A 50% ROAS indicates that you bring in 50 cents for each dollar you spend.
The metric can’t stand alone as a predictor for future advertising investments, as it is merely a still frame that doesn’t factor in the risk of diminishing returns or incremental effects.
Attribution is a key element that must be considered before implementation. Whereas the campaign cost is easier to allocate, the Revenue Attribution Window (RAW) can be somewhat more complex. The RAW can be defined as the time between a click or view and conversion that you include when attributing the revenue. The window can have a big effect on how profitable a campaign looks.
Another key attribution consideration must be made regarding clicks and/or views for digital campaigns. Should view-throughs have a place in your attribution model? And if so, how much time will you accept from view to conversion? This is an important question to answer before starting to measure your KPIs. Furthermore, you must also decide how your click attribution should look. First, last or linear attribution? The decisions will have a huge impact on how profitable your channel or campaign appears.
Click attribution models:
Whereas the first and last touch models are the easiest to comprehend and implement (and are unfortunately still the most common) they don’t show a very accurate picture. The user journey rarely consists of only one touch or channel.
- Google Analytics: Use the Multi-Channel Funnel views to investigate how your marketing channels work together.
As ROAS is a rather tactical KPI, it should not stand alone, but be used in conjunction with more strategic metrics:
Return On Marketing Investment (ROMI) measures the incremental revenue generated for each additional dollar spent on marketing. The KPI (and analysis) helps you gain insights into the effectiveness of the marketing spend.
Marketing efforts should always aim to maximize profits. Thus, marketers must also consider the strategic impact of shifting from low to high ROI activities. Brand value, customer acquisition and the corresponding customer (lifetime) value must also be considered. If not, marketers risk optimizing only for the short term and losing sight of the bigger picture.
ROMI should be as much a mentality as a financial metric. For example, if your marketing campaign generates a lot of social engagement and buzz but you can’t attribute any significant, short-term financial value directly to it, is it a bust? Not necessarily. Brand building and other objectives should never be ignored just because the dollar value is hard to quantify.
Be mindful of:
- Mindset: ROMI should be as much a mindset as a financial KPI – what is the return on my marketing investment in terms of resources, assets and campaign impact?
The big picture
It is imperative that marketing KPIs are connected to broader objectives including company strategy and vision (and vice versa). This should be the fundamental rule of marketing KPIs, whether they are top-level KPIs or a subset attached to content marketing, social media, etc.
The main function of marketing KPIs is to measure and determine how well the objectives you’ve set are doing. By understanding them you can prioritize the actions that will most effectively execute the strategy and ultimately actualize the vision.
While maybe not as fun as the creative side of marketing, KPIs are what keep your department informed and relevant to the organization. The formulas presented in this article may seem complex to the untrained eye, but for data-driven marketers they are the fundamentals for fuelling the efforts of the entire marketing department.
However, like most other aspects of marketing and customer experience management, not all KPIs can or should be directly linked to a monetary value. Furthermore, the KPIs outlined here should be seen as only a top layer linked to a subset of KPIs for each marketing activity.
So marketers, before going ahead and experimenting with these formulas, take a second to consider: what exactly are you measuring and how can you best show the value?