Business Indicators: KPI ROI Metrics Traction
Any marketing action you have to take to improve your business machine needs to have a return on your investment, otherwise it’s like speeding up without getting into gear, you consume fuel without going anywhere.
ROI is just that, it indicates the return on investment of a marketing action, and it is one of the KPI’s (Key performance Indicators) used to calculate the profitability of an investment.
Even an SEO campaign is evaluated this way, because if it has been effective it has turned visitors into buyers.
The sales cycle consists of 5 basic steps:
- Awareness, or knowledge of the brand that in SEO means finding the site through a search engine and discovering products and services
- Research, in other words; refining the knowledge of the brand, to analyse it and look for more information
- Preference, search for information online, on other websites (brand reputation, buzz marketing …) to confirm the final decision
- Purchase, the decision has been made and the purchase is finalised
- Loyalty/advocacy, the user is satisfied, so he goes back to make new purchases (loyalty) and speaks well of the brand with his social network (advocacy)
Once you understand how the sales cycle works (and how it must be set up), you need to learn how to calculate your ROI.
The formula is: ROI = LTV – CAC
LTV stands for Lifetime Value of customer and CAC for Cost per Acquisition, that is, the economic value that the customer has brought you, from which the expense that has been incurred to acquire the customer is to be deducted.
The lifetime value of customer (LTV) is made up of several factors:
- Number of purchases per year (PY)
- Average cost incurred (Ac)
- Number of years as a customer (Y)
- Average margin for each purchase (M%)
Therefore a user who has made 5 purchases, with an average cost of $70, and who is a customer for 4 years and produces a 10% average margin, will have an LTV of $140.
he LTV formula therefore is: LTV= (AY*Sm*Y)*M%
CAC depends on:
- Cost of Acquisition with SEO (SCAC)
- Base Cost of Acquisition (BCAC)
The SEO Cost per Acquisition is the same as the cost of the SEO campaign compared to the total of the acquisitions obtained. The basic costs are the fixed costs, such as the cost of the domain, site maintenance, and so on.
For example, if your SEO campaign costs $4,000 per year for 4 years ($16,000) but has brought you 400 new customers, it means that each new customer has a $40 SCAC, plus $20 fixed costs. The total CAC is therefore $60.
It means that the ROI of this campaign is $80.
The data so far reported corresponds to those of a good customer who buys regularly and who spends good amounts of money. A great customer is one who doubles the ROI figure since he has been a customer for a long time and spends more and more often.
All these calculations that might seem complicated but in reality are rather simple, allow us to understand two fundamental aspects:
- 1. It is imperative to mathematically calculate with real data if an SEO strategy is working. You have to understand if you are bringing in customers, what these customers do and compare the data with other types of marketing. If the ROI for an AdWords campaign is $20, and that of an SEO campaign is $80, it’s clear that there is a mistake somewhere (in the AdWords campaign settings or when choosing this form of advertising).
- 2. SEO will bear fruit in the long run, the same calculations made a year after the start of the campaign would not have the same results, because it takes time and patience, commitment and professionalism are needed to turn a good customer into a great customer and a good SEO campaign into a great SEO campaign.
Most of these indicators (Metrics) are fundamental to understanding whether your business is creating sustainable value for itself and for your customers and they are required by Investors in Business Plans and Pitches (elevator and deck).
You can try everything to accelerate, but always calculate your ROI, because you have to soon understand if what you are doing is helping you get ahead or not.
Other Financial and Business Metrics:
- Bookings vs. Revenue
- Recurring Revenue vs. Total Revenue
- Gross Profit
- Total Contract Value (TCV) vs. Annual Contract Value (ACV)
- Gross Merchandise Value (GMV) vs. Revenue
- Unearned or Deferred Revenue … and Billings
- Active Users
- Month-on-month (MoM) growth
- Churn rate
Cumulative Charts (vs. Growth Metrics)
- Chart Tricks
- Order of Operations
- Total Addressable Market (TAM)
- ARR ≠ Annual Run Rate
- MRR churn
- Average Revenue Per User (ARPU)
- Gross Margins
- Sell-Through Rate & Inventory Turns
- Network Effects
- Economies of Scale (“Scale”)
- Net Promoter Score (NPS)
- Cohort Analysis
- Registered Users
- Active Users
- Sources of Traffic
- Customer Concentration Risk
- Truncating the Y-Axis
- Cumulative Charts
- Private Alpha with a substantial waiting list and first positive comments for the service
- Public beta with steady and constant growth
- Public beta with vertical growth
- Exponential Growth (viral)
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