5 Business Metrics You Need to Build a Successful Advertising Strategy

Advertising strategy does not exist in a vacuum. Advertising strategies must be built to achieve business goals, and therefore, they must be aligned with business strategy. In this blog post, I’ll explore five crucial business metrics that you need to be familiar with to connect your business and advertising strategy. These metrics include Lifetime Value (LTV), Cost of Goods Sold (COGS), Time to Close (TTC), Customer Acquisition Cost (CAC), and Marketing Efficiency Ratio (MER). If you are planning on starting to advertise soon, you need to have a handle on these metrics for your business. If you are running ads now, but you don’t know these metrics, drop everything and figure this out. 

Lifetime Value (LTV)

Lifetime Value (LTV) is the measure of a customer's total revenue contribution to your business, from their first purchase to the present. Understanding LTV is crucial because acquiring customers is the primary goal of advertising, and knowing a customer's worth helps determine your acquisition budget.

LTV can differ significantly from the initial purchase amount, especially for businesses relying on multiple purchases or using a subscription model. For instance, if a subscription costs $100/month and customers maintain the subscription for an average of 4.5 months, each customer's average worth is $450.

Even for businesses focusing on one-time purchases, it's essential to calculate LTV, as a small percentage of repeat customers can significantly impact LTV and influence advertising strategy.

Cost of Goods Sold (COGS)

COGS refers to the direct costs associated with producing and delivering a product or service. Knowing this number helps you determine your gross margin, which determines how many ad dollars you can spend to profitably acquire a sale. 

Additionally, consider your business's cost structure. Businesses with high fixed costs and low variable costs can afford to spend more on advertising to acquire new customers in certain situations. Airlines are a good example of this. The cost of flying a plane from New York to Chicago is the same whether there are 3 people or 200 people on the plane. If the break-even point for the airline is having 100 passengers on a flight, the airline will be willing to spend a lot to acquire passengers 101-200 because every incremental passenger contributes to the bottom line. Even spending $99 on a customer paying $100 would add $1 to net profit. 

If you have a business model with high variable costs, you need to ensure that your advertising spend is generating a positive return on investment for each sale. A good example of this could be a service business like a landscaping company. The company may average 50% COGS on every project they do with labor and materials so the advertising strategy needs to account for that. 

These examples are simplistic, but they illustrate how COGS and cost structure can impact advertising strategy.

Time to Close (TTC)

Time to Close (TTC) or average sales cycle refers to the time it takes for a lead to become a customer. Considering TTC when developing your advertising strategy is important because it affects cash flow and revenue projections. Understanding your TTC allows you to set realistic revenue targets and adjust your advertising strategy accordingly.

Knowing your average sales cycle is crucial for budgeting and forecasting. A three-month sales cycle requires generating enough leads in the current quarter to meet sales targets in the following quarter.

Evaluating the ROI of your campaigns effectively also depends on your TTC. For instance, if you have a three-month TTC, you should wait at least that long to assess revenue from leads generated by a campaign.

For businesses with a short or non-existent sales cycle, such as e-commerce, it's still vital to consider the time between repeat purchases, as this impacts the timeframe for ad campaigns to generate returns and affects cash flow planning.

Customer Acquisition Cost (CAC)

CAC measures the cost of acquiring a new customer. This metric is a direct indicator of advertising effectiveness more so than surrounding business circumstances. By understanding your target CAC, you can evaluate your ad spend and make adjustments. But even if you haven’t started advertising yet, you still need to have a benchmark target CAC.

Your target CAC should result from measuring your LTV, COGS, TTC, and other business fundamentals. Some companies need to be profitable with every sale. Maybe your customers are worth $2000 and you need to consistently spend $200 or less to acquire each one. In more rare cases, companies are happy to operate at a loss in order to eat market share. Amazon is famous for doing this in multiple product categories.

The general rule of advertising is that the higher you are willing to pay for a customer, the more you can scale your campaigns. Aligning media buyers and business leaders on a target CAC ensures that advertising campaigns can find the most effective line between scale and efficiency.

Marketing Efficiency Ratio (MER)

MER measures the effectiveness of your overall marketing and advertising efforts. Calculated by dividing your total revenue by your total advertising spend (MER = Revenue / Ad Spend). MER is a crucial metric for C-suite executives as it provides a top-down measurement of revenue generation efficiency.

However, due to its broad nature, MER should be measured over long time horizons. I wouldn’t recommend assessing MER formally more than quarterly. Since many factors can impact MER, predicting it precisely is difficult.  Technically, a higher MER means that your ad spend is generating revenue more efficiently. However, some businesses may benefit from increasing ad spend to generate more total revenue and profit dollars, even if it makes their MER lower.

There's no one-size-fits-all approach to determining your ideal MER. Establishing benchmarks and goals for your target MER will help dictate your overall ad budget, target CAC, and ad spend optimization.

Segment Your Data

One final note on using these metrics in your business: if you have unique product categories or go to market motions, make sure to measure the performance of those segments individually!

For example, a software company may have an inbound marketing motion for small and midsize companies to self-serve purchase a software subscription and a separate sales motion focused on acquiring large enterprise accounts. The LTV for smaller self-serve companies may be $5,000, while for enterprise clients, it could be $75,000. Measuring these groups together could lead to an inaccurate LTV, causing you to overspend on acquiring small/midsize accounts and underspend on enterprise clients. It's essential to assess the performance of different business segments individually and adjust your advertising strategy accordingly.

Conclusion:

By aligning your advertising initiatives with your broader business strategy, you can make data-driven decisions that maximize your return on investment and drive sustainable growth. Additionally, it's important to segment your data to focus on distinct aspects of your business, allowing you to optimize your advertising budget and achieve superior results. 

If your advertising team doesn’t understand these metrics and how they need to influence day to day media buying, your advertising won’t be optimized towards your goals. Reach out if you want help measuring these key metrics or developing an advertising strategy that aligns with them.