The 3 Business Performance Metrics That Matter in Web Marketing (Hint: Traffic & LTV Don’t Matter!)

keep-it-simpleKISS.

Keep-It-Simple-Silly (or Stupid depending on your mood that day).

It’s an expression most of us are familiar with from grade school.

But as I’ve gotten older, I’ve repeatedly noticed that few people practice it, in life, much less in business.

We’re constantly rushing to add more complexity into our lives in the hope that it will make us healthier, sexier, wealthier, and overall: better. One more box to “checked off.”

But it doesn’t seem to work–not in my experience and definitely not in marketing.

That’s why I hope as you read this article, and even if you don’t agree with it’s conclusions, think hard on the underlying point that “Simplicity is the key to brilliance” (a quote from Bruce Lee). Or at the very least it’s your key to better business decisions.

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So what are the top three metrics you should focus on in your online marketing campaigns and marketing systems–and just as importantly, what are they not?

#1 – Qualified Leads Generated

always-be-closing-lead-generation

Traffic and reach and even email opt-ins do not make the cut here.

Something like website visitors or the number of followers you have on Twitter is a vanity metric. It’s usually a number that only serves to “feed your ego,” as a friend put it in a recent Forbes article (“I have over 700 followers on Twitter!”).

Traffic is excluded also because even though it’s people visiting your website, it has little bearing on the business’s bottom line because who knows how much of that traffic is from your target market.

These vanity metrics aren’t completely useless. For instance, I can’t say “If I had 50k followers on Twitter, AutoGrow would not generate more revenue.”

It’s likely it would. But that doesn’t mean I should focus on it as a barometer of how effective our marketing campaigns are.

No, for our first key business performance metric we need to look further down in the funnel.

Even beyond emails opt-ins, to the number of qualified leads generated.

A qualified lead is defined differently for every business. Surprisingly, there an “official” definition of a qualified lead according to the Canadian Marketing Association and Google.

Names and addresses of individuals who have taken a positive action to indicate genuine interest in a given type of offer.

For AutoGrow, I might define a qualified lead as someone who has been on our email list for a while and then submitted a form for a quote on designing a new website that works better to sell their product or service.

Note that there are two types of qualified leads. One kind is where it is a one-to-one sale (like what Joe Appfelbaum alluded to in our recent interview). In that case, you are trying to understand if the potential client has goals that match your firm’s ability and that you are also within the client’s budget range.

The other kind is what I’m talking about here and it comes before any type of direct sales process.

Another example of a qualified lead could be someone who signs up for our free e-course autoresponder and then buys our ebook on converting more customers on a shoe-string budget.

If someone is willing to spend money on our book, they’re more likely to be interested in our other products and services, especially if they’re around the same price range.

Moreover, qualified leads generated is the first metric you should be looking at because it confirms which and how many people are directly engaged with your offers (i.e. by making a purchase) or even indirectly engaged (i.e. by consistently opening your email newsletters and browsing your website’s content).

How does the qualified leads metric affect your business decisions?

It’s an indication of what your near-term sales are likely to look like. For example, if on average you convert 1 out of 10 leads within 4 weeks, then if you have 20 leads this month, you’re likely to make 2 sales by next month.

That’s an obvious example.

But to be clear, a shrinking rate of qualified leads tells you one of two things:

  1. You traffic source is sending less volume or less quality traffic, so it’s time to invest more in developing it (i.e. spend more on ads) or…
  2. Focus on converting and qualifying more leads  (consider lowering barriers to qualification (not necessarily prices) and/or adjusting your follow-up sequence).

Why aren’t email sign-ups included here?

As tempting as it was to include email sign-ups in this list of key metric, I have to be honest and admit that although the most valuable of the vanity metrics, email list opt-ins are still a vanity metric.

This simply means that it is more practical to track qualified leads rather than email sign-ups because this way you’re forced to say to yourself, “Ok, I have 10,000 people on my email list but how can I root out the ones who are likely to actually buy from me?”

Again, the point of this list is to get you to pay attention to the top metrics that really matter and that will focus your marketing efforts on the right parts of your sales funnel.

Do you know your “ABC’s” yet? If not, watch this video… (NSFW, some cursing)

#2 – Paid Conversions

credit-cards-paying-customers

This simply means, how many people actually bought something from you?

It overlaps slightly with the previous metric because someone who buys a product can often be a lead for a higher-end product or service in the future. In general, it’s the total number of unique purchases.

I won’t spend too much time on this metric because:

  1. It’s fairly self-explanatory as to it’s importance
  2. Anyone who wouldn’t put this on their list of key metrics would probably disagree anyway with my previous point that you should focus on qualified leads over vanity metrics like Facebook Likes and website visitors.

One thing I will say here though, is to setup your metrics dashboard or tracking system so that paid conversions can be broken down and categorized on a spectrum.

For example:

  • What was bought?
  • When was it bought?
  • What purchase would naturally precede it?
  • What purchase would naturally proceed it?(i.e. an ebook flows into a consulting project)

This is most relevant to businesses that have a range of at least 3 or more offers (if you’re not familiar, range simply means “A complete portfolio of products that a company manufactures and/or markets.”).

How do you use this metric to make decisions?

Generally, look at your sales conversions on a month-to-month as well as a month-to-previous-year-month basis. This serves as a barometer to indicate growth or stagnation in the business’s ability to market and sell.

A slowing rate of sales indicates either seasonal changes, or if it persists, a deeper problem with your marketing initiatives. In the case of the latter, what you’re doing probably isn’t working and it’s time to add a new marketing channel to the mix or re-evaluate your sales process.

#3 – Cost of Customer Acquisition vs. Year Long Value (NOT Life-Time Value)

went-for-broke-cartoon

The final metric that’s most important for you to pay attention to is the ratio of Cost of Customer Acquisition vs. Year Long Value.

Cost of acquisition is simply “how much do you have to spend to acquire one new paying customer?”

For instance, not too long ago I watched a video with the CEO and founder of one of the largest email marketing software companies. She explained that their average cost of acquiring a customer was about $450 and according to her, this was an acceptable number because it was less than the life-time value (LTV) of the customer.

Now, I’m confident I’ll get the most objections to this third metric since thought-leaders in the metrics space have all been shouting for the last several years “LTV! LTV!” So allow me to explain…

LTV is the value that a customer brings to your company for the WHOLE TIME that they are with you. It can be 6 months, it can be 10 years.

So, by the irrational reasoning of the startup-y marketing / growth-hacking industry, is as long as X is less than Y, it’s a good deal! Right?

Here’s a ridiculous example to prove why it isn’t.

If you bring my business $1000 for the lifetime that you’re “with me” as a customer, by that logic I’m willing to spend up to $999 to acquire your business (and let’s be generous and assume that these examples include the cost of servicing you for the time that you’re with us).

So, it’s not much, but I’m making a profit right? If the time-span for the lifetime (i.e. the “pay back” period) is 20 months, my business is actually losing money when you factor in inflation.

More over, let’s assume that I don’t get the full revenue-value from our relationship all at once as is the case with most service businesses (who will often do more than one project with a client), and especially SaaS companies (they are paid month to month).

If I’m getting $500 over the course of 2 projects on average, my company is still at a loss until 10 months later when we start that 2nd project. For a SaaS company, it works the same way.

This whole idea of spending some amount of money as long as it’s below your target customer’s average LTV is insane and unpractical.

For a company like mine where our design and development projects are 4 and 5 figures, and we’re getting a large chunk of that total amount upfront, spending $400-$800 to acquire a client is very reasonable because the pay-back period is short, even if we don’t get it all back with the first down payment.

Risk is low!

However, for a company that takes a loss on the front-end, like a SaaS business where they are getting paid $20-$50 per month at a time, the risk is much higher because nowadays it’s very acceptable to take that upfront loss and recoup it over time.

But this is impractical. Here’s further proof:

  • Month 1   Spend $1000 Acquire 2 customers
    • Revenue is $40 / month
  • Month 2   Spend $1100 Acquire 2 more customer
    • Revenue is $80 / month
  • Month 3   Spend $1200 Acquire 2 more customers
    • Revenue is $120 / month
  • Month 4   Spend $1500 Acquire 3 more customers,
    • Revenue is $180 / month
  • Month 5   Spend $1500 Acquire 3 more customers,
    • Revenue is $240 / month
  • Month 6   Spent $1500 Acquire 3 more customers,
    • Revenue is $300 / month

Total spent: $7800

Total earned: $960 — obviously still many months away from getting a return on investment (assuming you don’t continue increasing the amount spent on marketing), even if you cut the cost of customer acquisition in half.

If you want to understand the problem in greater depth, check out this article from Jason Cohen.

So what’s the solution?

The solution is to limit your analysis of this metric to one year value or less (YVL) as a general rule of thumb.

There are so many factors outside of our control and banking on a pay-back period any longer than that is unreasonable and puts your business at risk for the long term.

Segmentation and deeper understanding of how the COCA vs YVL ratio impacts your marketing

The cost of acquiring a customer (COCA) vs. YVL serves to show you over time how efficiently you’re able to acquire customers compared how effectively your business is able to service them.

One tip is to have this metric segmented by source.

What is the cost of acquiring a customer from Google vs. Facebook? And how does their YVL differ?

By segmenting you can see which marketing channels give the best pay-back periods and profit and make a decision on where to invest more.

In addition, over time, if the ratio moves towards a 1:1 relationship, you can observe this and make a decision to either cut out certain channels, remove offers, or increase your range of products or services.

Conclusion

For help with tracking these metrics, especially for the last point, check out tools like KISSmetrics or Mixpanel. Integrating with them can take some time and is highly technical if you’re not a programmer.

Until you’re at a point where your business is making at least 100-200k annually, I recommend just limiting yourself to the Goals feature in Google Analytics, manual spreadsheet tracking, and/or data from other apps and websites to save yourself time and headache.

lead-tracking

To review:

  • Traffic, Followers, Likes… and even total email opt-ins can be considered vanity metrics.
  • Vanity metrics have a role to play, but they are less important in understanding the flow of customers and cash into your business as a direct result of your marketing campaigns.
  • Qualified leads generated is a far better way to understand and predict near-term growth or stagnation.
  • Knowing the quantity, revenue, and rate of paid conversions is also an essential metric for understanding the impact (or lack of impact) that your marketing efforts are having.
  • Finally, don’t believe the hype around LTV. Focus on acquiring customers at a price that has a reasonable pay-back period with a reasonable gross profit margin.

So do you agree with my top choices in marketing metrics to focus on? Why or why not? How would focusing on these metrics impact your business month-to-month?

PS – If you liked this article, consider subscribing to our newsletter below and sharing it with your friends and fans on Twitter, Facebook, Google+, and LinkedIn.

Image Credits:

http://www.andertoons.com/sales/cartoon/2920/heres-where-we-went-for-broke-and-heres-where-we-went-broke

http://blog.chargebee.com/5-great-ideas-convert-trial-users-paid-customers/

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