10 Important Inbound Marketing Metrics
Following are ten important inbound conversion metrics for you to populate your Customer Conversion Chain, enabling you to reverse-engineer a plan. Calculate the numbers for each metric, beginning with the end in mind (LTV) so you can make more educated decisions when allocating your marketing resources.
Lifetime value of your customer (LTV)
Your customers are worth more than one purchase. Their value to your company can be defined in influence and in dollars over the course of your business relationship with them. For purposes of calculating ROI, you can simply use the lifetime value of your customer (LTV). Using historical sales data, you can figure it in two different ways. The first one is this:
Average Transaction Purchase Amount ($) x Average Number of Purchases = LTV
For this first formula, use the example of an online education company whose average course fee is $30. If this company analyzes its data to discover that an average student will take ten courses, the lifetime value of its customer is $300. ($30/course x 10 courses = $300)
The second way LTV can be calculated is this:
Average Annual Purchase Amount ($) x Average Length of Customer Engagement = LTV
For this second formula, let’s say you’re a mobile-phone carrier whose average customer has a two-phone plan at $60 per month per phone, and the average customer remains active with you for three years (36 months). Furthermore, assume that you have data that shows that the first year’s purchase will also include two mobile phones and setup fees totaling $1,004.
First year total revenues (mobile phones, setup, and 12 months of service) = $2000
Second 24 months of contract revenues = (2 x $60) x 24 = $120 x 24 = $2,880
$2,000 (Year 1) + $2,880 (Year 2 and 3) = $4,880 LTV
To obtain an even more accurate LTV number, you could apply revenue “erosion,” which arises from contract cancellations and non-fulfillment.
First action value (purchase)
Because it takes time to realize your customers’ LTV, you may sometimes want a quicker view of your marketing ROI. Knowing the initial value of the first action makes it easy for you to calculate your initial ROI.
Using the example of the mobile-phone provider, presume that there is an initial phone purchase that averages $330 and a setup fee of $22 per phone. Also assume that, for these numbers, there is a one-year contract commitment required.
Because the average customer purchases two units, the phone hardware cost is $660 (2 x $330) and the initial setup cost is $44 (2 x $22).
The first-year contract for two phones amounts to (2 x $60) x 12 = $1,440. Also assume the data shows that your customers who don’t fulfill their contracts reduce this amount to, on average, 90 percent of the total first-year contract fees, lowering your average first year to $1,296 ($1,440 – $144 = $1,296).
From this you can calculate your first action value — in this case, the purchase of mobile phones, setup, and one-year service — by adding these three values: $660 + $44 + $1,296, or $2,000.
Your customer’s average first action value purchase, then, is $2,000.
As you become a more sophisticated inbound marketer, you can segment buying groups based on groups who have higher LTVs and focus on attracting more of the same while facilitating their purchase path toward conversion. Likewise, you’ll eventually be able to identify patterns in those who cancel and attract fewer of those types of customers.
Measuring your cost-per-acquisition (CPA) helps you define your marketing ROI. To quickly achieve this, simply take your attraction marketing budget and divide it by the number of first-action purchases. In the mobile phone example, assume your marketing budget was $100,000/month, and that this historically generated an average of 250 customers per month.
CPA = Budget / Number of Customers
$100,000/250 = $400 cost-per-acquisition
If $400 CPA has traditionally been an acceptable number to acquire new customers (meaning it’s a profitable equation for your company), you may now begin to formulate predictive models to project future business.
If you invested $200,000 at $400 CPA, you’ll generate 500 new customers per month.
Does that mean an investment of $1,000,000 might result in 2,500 new customers per month? Nobody knows, so it’s best to adjust your investment in small increments until you reach a point of diminishing returns. If, however, you knew with 100 percent certainty that your million-dollar investment would result in 2,500 new customers, you would certainly invest that much in marketing. There are only two reasons you wouldn’t:
You lack the capacity to produce and serve that number of customers.
You lack the cash flow to sustain the marketing budget for the time between first contact and first contract.
Return-on-investment (ROI) cost-per-lead/cost-per-acquisition
Now that you’ve broken down your marketing budget by assigning your marketing initiative inputs to product pyramids, you can easily figure your ROI. Here’s how it’s calculated:
(LTV x Number of Customers) / Marketing Budget = Total ROI
In the case of our mobile phone company, that looks like this:
250 customers per month x $4,880 = $1,220,000
$1,220,000 / $100,000 marketing budget = 12.2 x return or 12,200 percent
Your marketing budget was 8.2 percent of sales ($100,000/$1,220,000). Just remember you’re not realizing your full return all at once. Rather, in this example, it requires three full years to capture the full return on your marketing investment.
For your more immediate ROI, simply replace the LTV number in your equation with the first action value. This is expressed as:
(First Action Value x Number of Customers) / Marketing Budget = Immediate ROI
In the case of our mobile phone company, that looks like this:
($2,000 x 250) / $100,000 = $500,000 / $100,000 = 5 x (500 percent return)
In this scenario, your marketing budget is 20 percent of sales.
Presentation-to-purchase close ratio
Your sales department is responsible for creating sales. As such, your organization should measure the percentage of the people who demonstrated an interest in your product who become customers, also known as your close ratio. “Demonstrated interest,” in this sense, may refer to the people who attended a sales presentation, a product demo, trial offer, or any other promotion that involves your sales department.
A closed sale is your “first contract.” The close ratio may vary wildly by industry and company. There is no standard definition of a good close ratio, so you’ll have to look internally at historical data to see what your company’s close ratio is and evaluate it accordingly. Some factors that will affect your evaluation of your company close ratio include:
Number of leads delivered
Quality of leads delivered
Which product is being sold
Your sales department’s ability to sell appropriately
Seasonality of product purchase
The profile or persona of the customer making the actual purchase
The complexity of the buying parameters (is it a quick, simple low-dollar transaction or a long, complex buying cycle?)
The competitive nature of the market
To figure your close ratio, simply divide the number of people who became customers by the number of people who demonstrated an interest (as this term was mutually defined and agreed upon by your marketing and sales departments).
So, if one person from every three presentations becomes a customer, your close ratio is 33 percent (1/3).
If you gained 6 customers for every 10 product demonstrations, your close ratio is 60 percent (6/10).
If you close one customer for every 100 product trials, your close ratio is 1 percent (1/100).
As an inbound marketer, you should not be held accountable for the close ratio because it is a function of sales. It’s an important metric for you to track, however, because your conversion links earlier on in the Customer Conversion Chain, especially the quality of leads you’re able to deliver, can influence the close ratio.
It’s your job as an inbound marketer to attract and measure leads; your responsibility to understand lead quality. This is another simple conversion ratio to calculate. Simply divide sales qualified leads (SQLs) by marketing qualified leads (MQLs).
A sales qualified lead (SQL) is a lead that expressed interest, passively or actively, in at least one of your product offerings.
A prospect who downloads several engagement content pieces, filling out multiple forms and sharing potential buying signs along the way, may be considered an MQL. Someone who completes a “Contact Us” form has expressed an active need and may be further down the purchase path but may still be designated as an MQL to be passed on to sales. In a business-to-business model, your salespeople determine SQLs through personal interaction by determining whether the prospect possesses need, intent, timeline, and budget.
There are a couple different ways to track SQL conversion rates; by comparing either SQLs to MQLs or comparing SQLs to total leads. Each is a measure of lead quality, however, they are two different metrics reporting from a different base. The formulas, respectively, are:
SQL / MQL: This ratio provides clues as to the quality of leads your marketing department is nurturing and then handing off to sales. Examining the SQLs conversion path from MQL to SQL helps you improve or shorten the customer conversion path.
SQL / Total Leads: This ratio tells you the lead quality from a lead’s initial conversion. Knowing the SQLs to their original attraction source (SEO, PPC, etc.) helps you improve your conversion efforts by identifying those sources attracting a better initial lead allocating more marketing efforts towards those sources.
The number of your contacts that become marketing qualified leads (MQLs) is the first measurement of lead quality. Upon conversion, the marketing department designates each lead as one of the following:
Ideal customer matches or “A” leads.
Prospective leads who appear to be good matches, either by the engagement information they provided, their onsite activity, or their status as buyer decision-makers; also known as “B” leads.
Prospective leads who provided information, but whose onsite activity, information given, or other factors caused the marketing department to view them as questionable. These are “C” leads.
Contact Leads who are not good prospects. Classify these leads as “unqualified”.
This is a simplified classification system, and you can certainly develop more sophisticated designations based on lead scoring, product pyramids, or sub-categories/classifications.
As with some other conversion ratios, the contact-conversions-to-MQL ratio is a simple formula: MQL / Total Leads.
Increasing your traffic does not necessarily mean you’ll see a proportionate spike in your contacts/leads. In fact, if your marketing is driving unqualified traffic to your website, your lead conversion ratios may actually go down. In other words, increasing your number of visitors may look like you’re gaining traction but it doesn’t always translate to an increase in sales. The inbound marketer understands that they have a meaningful influence on the business outcomes. You are best served to understand your role in that process, increasing positive marketing inputs that in turn result in positive results.
As such, you should monitor your website conversion ratio very closely. Understanding your onsite conversion and comparing each individual inbound campaign’s conversion ratio helps you spot over-achieving campaigns. By identifying which marketing components are contributing to the increase in conversions, you can test and apply those high conversion points in your other inbound campaigns, often replicating your success. This in turn contributes to an increase in your overall conversion rate.
Figuring your unique visitors-to-lead conversion rate is easy. Do make sure you use unique visitors and not your total website traffic. The formula is: Number of Leads / Number of Unique Visitors
So if you have 10,000 visitors per month and 500 of them engage with you by providing contact information or by contacting you, your ratio is 500/10,000, or 5 percent.
Your overall conversion rate is a different number, figured by dividing the total number of customers by total number of unique visitors. It looks like this: Total Customers / Number of Unique Visitors
When you hear other marketers refer to a website’s “conversion rate,” this is frequently the formula to which they are referring.
Figuring your cost-per-lead is, again, a very simple ratio. Simply divide your marketing expenditures by the number of total leads.
In our hypothetical mobile phone company, the monthly budget is $100,000, resulting in 500 leads per month, so the cost-per-lead is $200. Note that your CPL will always be lower than your CPA because not every lead becomes an acquired customer.
One of the reasons you track CPL is so you can compare CPLs by source. If you, as the marketer for the mobile phone company, discovered that the CPL for SEO leads was $100 compared to $200 for PPC and $300 for social-media leads, you might begin investigating why. This doesn’t necessarily mean you should put all your efforts into SEO because you haven’t yet determined the quality of your leads from each source. Examining CPL and CPL by source is a good comparative starting point in creating inbound marketing efficiencies.
Buyer purchase path sales cycle timeline
The time customers spend on any particular purchase path ranges from mere seconds to years. Factors that affect the average purchase time include price, commoditization of product, whether the customer is a business or an individual, and the buying decision-making norms for a given industry.
After you’ve discovered the average purchase cycle by product and applied the other metrics in the Customer Conversion Chain, you may now actually begin predictive inbound marketing techniques, which considers all of the factors above to formulate future ROI.