Measuring success (and failure)

by: Scott Swanson

The following four principles drive our thinking on metrics and KPIs:

Our ability to collect data exceeds our ability to respond to it. Therefore, all KPIs must have thresholds where volatility within the threshold is ignored.
All metrics must inform a business decision. Therefore, those decisions – the levers – must be discovered before the KPI is created, not after.
Metrics that do not map to a business decision should not be tracked.
Operational effectiveness metrics do not overcome the fundamentals outlined in 1 through 3. In the case of operational effectiveness metrics (number of rivets per hour per person on the assembly line) must map to an operational decision.

With those fundamentals applied to marketing, your measurement values should look something like this:

Reach: Are we engaging with enough people?
Conversion: Are we talking to the right people?
Velocity: Are buyers acting with urgency?
Value: Will we meet our bookings target?
Return: Which investments drive revenue?

KPIs will then map to these buckets, along with how you plan to have a meaningful impact on them.

Marketing and sales funnel

In the business of selling very high value products to the few, there’s an unfortunate downside in terms of optimization: there are very few sales to measure. Because of this, it is important to measure investments (time and money) against a predetermined goal.

That’s to say, when you send a promotional email to 5,000 prospects, the success of that email shouldn’t be incremental sales, but rather against the goal of the specific campaign — which could be anything, but most often getting someone to engage further down the marketing and sales funnel which will look something like this:

0%: Prequalified (PQ): We are aware of a this suspect, but they have yet engaged with our company. Often comes from an external database or introduction.
10%: Inquiry (INQ): Suspect fills out a form on the website.
20%: Automation qualified lead (AQL): Suspect is a real person and is ultimately reachable.
30%: Marketing qualified lead (MQL): Suspect has the ability to purchase the product (works for a comapny in your total addressable market and has as a title likely to at least influence the buying decision).
40%: Sales accepted lead (SAL): Inside sales agrees to work the lead (Suspect becomes prospect).
50%: Sales qualified lead (SQL): Prospect has a desire to purchase the product (Prospect agrees that the software will likely address an existing need at the account). Agrees to meeting with a commissioned sales person.
60%: Qualified active opportunity (QAO): Prospect agrees to explore a trial or pilot period.
70%: Trial/Pilot Period: Prospect agrees to the pilot period.
80%: Business value agreed (BVA): The trial produced a positive ROI and/or the prospect otherwise agrees your product will produce the desired results and is generally in the price range.
90%: Contract terms agreed (CTA): Prospect verbally agrees to the contract terms.
100%: Closed won (CW): Contracts executed. (Prospect becomes customer.) Account is (thoughtfully and comprehensively) turned over to customer success team.
0%: Closed lost (CL): This can happen from time to time for a variety of reasons. Record the specific reasons and enforce their usage. (too expensive, didn’t see value, champion left the company, selected competitor X/Y/Z, went dark, etc. etc.)

These are obviously malleable to your own needs, but I’d strongly encourage you to define them well and early, whilst avoiding too much nuance. Benchmarking conversion and velocity through these stages is how you will measure your performance for years to come, and having this as static as possible will provide needed consistency.

Annual Contract Value (ACV, sometimes said as “Year 1 ACV”)

ACV is the projected revenue that a customer will generate on an annual basis. A simple example looks like this:

The average value of a new customer up for a 3 year subscription of your software which costs $5,000 per month or $60,000 per year.

Lifetime Value (LTV)

LTV is the projected revenue that a customer will generate during their lifetime, less the projected customer churn (or plus the negative churn²). A simple example looks like this:

The average value of a new customer up for a 3 year subscription of your software which costs $5,000 per month or $60,000 per year.
Your retention rate for new customers is roughly 90% (per year), meaning you lose 10% of your customers every year.
Leaving you with $54,000 in year 1; $49,000 in year 2; and $44,000 in year 3.
So your approximate LTV is $147,000.

² As you might expect, negative churn has the opposite effect of the above example. It counts on an effective up-sell strategy to more than make up for any lost customers, so instead of discounting your contract value over time you can expect the value of a customer to be greater than the sum of contract value.

Customer Acquisition Cost (CAC)

CAC = Sales and Marketing Costs / New Customers Won.

CAC is the summation of all marketing and sales expenses required to acquire a new paying customer. This includes loaded marketing and salespeople salaries, commissions and spiffs, tools and advertising costs, and so on.

Using our example above, assuming a total monthly sales and marketing expenses of $300,000 and acquiring 10 new customers in a given month, the calculation would look like this: $300,000 / 5 new customers = $60,000 CAC.

LTV : CAC Ratio

The Lifetime Value to Customer Acquisition Ratio measures the relationship between the lifetime value of a customer and the cost of acquiring that new customer.

A generally accepted rule of thumb for a target LTV:CAC ratio should be about 3:1. The value of a customer should be three times more than the cost of acquiring them, and even more generally your marketing and sales programs should be at least as effective to recover the cost of acquiring a customer within the first 12 months.

Other terms to be familiar with:

MRR: The Monthly Recurring Revenue (or run rate) at the end of each month.
ARR: Annualized recurring revenue for the coming twelve months.

Warning: vanity metrics

Wouldn’t it be interesting if…

If this comment isn’t immediately followed up with the question, “why?” or “what action will we take knowing that?” then your focus can and will quickly get misdirected. You can spend a huge amount of time setting up dashboards and reporting on metrics that provide very little value.

When building a data driven marketing organization, it’s easy to pay attention to numbers simply because someone once asked about it, or just because they’re easy to get, but resist this temptation.

Here’s a quick list of metrics to largely ignore at the executive level:

Website visitors: The goal of marketing and sales is revenue and the quantity of website “hits” has nothing to do with that. An anecdote for this is focusing on rates: “If 100% of our website visitors turned into customers then 25 visitors a month means we’re blowing our revenue targets out of the water.”
Impressions and click through rates: This will be important to whomever is managing your advertising because click through rates are often how ad networks define success, but it’s nothing to focus on at an executive level.
Time on site and bounce rates: These metrics can be indicators of content quality and your content marketer or writer should spend time looking at them to determine whether or not people are engaging with what you’re producing, but again, at a high level these should be ignored.
Followers: Having spent my time in b2b marketing, I’m not an advocate for social media as anything more than a paid advertising channel. Not to say there isn’t value in it, I’ve just never seen a correlation of Twitter followers to new opportunities.

Instead, focus on “cost per”, conversion rates, and velocity. A few examples of what’s important and why:

Cost and quantity of qualified leads: It’s the growth marketer’s job to deliver and develop qualified prospects so producing them at a predictable rate and at an acceptable price is a leading indicator of future success.
Customer acquisition cost: It’s important to not only understand what leads cost, but how leads of various sources, demographic differences, etc. perform in the funnel from start to finish.
Time from lead to opportunity: Is your inside sales team and outside sales team working together with urgency across all lead types? Or are they focused on the easy ones and ignoring the hard ones?
Lead to opportunity rate: Are your salespeople converting marketing sourced leads at the same rate or better than sales developed leads? Do some sources or pieces of content perform better than others?