How Do You Know If Your Marketing Is Working?
Seven numbers settle it: what a customer costs, what a customer is worth, and how fast the money comes back.
By Lance Wagner · Published · Last Updated
How do I know if my marketing is working?
Marketing is working when a customer costs you less than a customer is worth, and you get the money back fast enough to keep going. Seven numbers tell you that: cost per lead, customer acquisition cost, lead to customer rate, average purchase, lifetime value, gross margin, and payback period.
Marketing is working when a customer costs you less than a customer is worth and the cash comes back fast enough to keep spending. Seven numbers show you that.
Most owners judge it by whether revenue moved last month, which is wrong in both directions. You can pull all seven of these in an afternoon.
1Cost per lead
Marketing spend divided by leads. It's the fastest read on whether your ads and content are pulling their weight.
It's also the most abused number on this list. A cheap lead that never buys is not a bargain. Use cost per lead to compare channels, not to declare victory.
2Customer acquisition cost
Marketing spend divided by new customers. This is the number that matters, because it accounts for everything that happens after the form gets filled out.
If your cost per lead is great and your acquisition cost is terrible, you don't have a marketing problem. You have a follow-up problem.
3Lead to customer rate
What share of leads become paying customers. Most small businesses have never calculated it.
Once you do, you can tell the difference between not enough leads and not enough closing. Those two problems have completely different fixes and only one of them costs money.
4Average purchase
What a typical transaction is worth. Simple, and easy to move.
An add-on, a bundle, or a better default option changes this number faster than any ad campaign will.
5Lifetime value
Average purchase, times purchases per year, times how many years someone stays, times your gross margin. Use gross profit, not revenue. Revenue-based lifetime value flatters everybody.
This is the ceiling on what you can afford to pay for a customer. Without it, every budget conversation is a guess.
6Gross margin
What's left after the cost of delivering the thing. It decides how much room you have to buy demand.
Two businesses with identical revenue and identical ad spend can be in completely different situations. Margin is why.
7Payback period
How many months it takes to earn back what you spent to win a customer. This is the number that decides whether you can grow without running out of cash.
A 3:1 lifetime value to acquisition cost ratio with a 24 month payback will still put you in a bind. Fast payback is what lets you reinvest.
The short version
- Aim for lifetime value at least three times your acquisition cost.
- Use gross profit, not revenue, when you calculate lifetime value.
- A low cost per lead with a low close rate is a sales problem, not a media problem.
- Shorter payback beats a bigger ratio when cash is tight.
- Payback period, not the ratio, decides how fast you can reinvest.
Questions people ask
- What is a good customer acquisition cost?
- A good acquisition cost is one third or less of a customer's lifetime gross profit. There is no universal dollar figure. A dentist can pay several hundred dollars for a new patient. A coffee shop cannot.
- What is a good LTV to CAC ratio?
- 3:1 is the common benchmark. Below 2:1 you are buying growth you can't afford. Above 5:1 you are usually underinvesting and leaving demand on the table.
- How long should CAC payback take?
- For most local businesses, under six months. Longer payback is workable if you have the cash to float it, but it slows how fast you can reinvest.
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