By far, Facebook™ marketing is the most sought after way to generate leads within digital marketing. But no matter what channel you choose, you can use your KPIs to forecast both budget and ROI-based success.
KPIs or Key Performance Indicators are just that: everyday metrics and real math your business generates you can use to show both current performance and your Facebook™ marketing budget to increase your bottom line.
Many marketing consultants erroneously will tell you to blanket allocate 4% to 8% of your gross toward advertising – no matter what your vertical or level of current success. Don't do that. It's just bad advice.
KPIs You Need to Know
CPA – Cost per Acquisition (or Customer Acquisition Cost (CAC)), is simply the amount of money you spend to acquire a new customer. You need to add all costs: sales team, back office, advertising, other marketing. Just because you get a referral lead, doesn’t mean that’s a free lead. Your sales team may have to do an exploratory call, a review, estimate or proposal; these are all costs you'll incur before the customer hands you money.
CPL – Cost per Lead, is calculated by dividing CPA by close ratio. Thus, if your CPA is $1,000, and it takes 4 leads to get one sale (25% close ratio), your CPL is $1000 ÷ 4 = $250.
Bear in mind CPL will vary by marketing channel. It will vary between Facebook™ and Adwords™ because each channel will capture leads at various stages in the buyer’s journey.
Also, it’s easier to close a “warm” referral lead than it is a “cold” lead coming from PPC–additionally, leads coming from organic (SEO) search may be slightly easier to close.
Actual CPL will depend on many factors, including at what point the lead enters a funnel.
AOV – Average Order Value, is simply the average purchase price or total order value in a given time period.
LTV – Life Time Value. The LTV KPI basically denotes the value of a customer over time, especially if they make repeat purchases. The way we like to calculate LTV is simply to take the average purchase price (AOV) and multiply it by the average number of periods multiplied by the average customer lifespan. To drill down and factor in churn rate, check out Hubspot’s approach.
Thus, if a customer spends $100 per month, and remains a customer for 5 years, that customer’s simple LTV is $60,000.
Gross Margin, is AOV divided by your landed cost. Thus, if you sell an item for $100 that you paid $20 for, your margin is 80%. This is an important KPI because if you are selling low cost products at a low margin, you won’t have revenue for a marketing investment or it will take you much longer to achieve positive ROI.
Gross Revenue, is calculated by multiplying total sales over a period by Gross Margin. Thus, if your total sales in a month are $100,000, with an 80% margin, your revenue is $80,000.
ROI – Return on Investment. The all-telling KPI showing marketing efficiency. Calculated simply by dividing net return of investment by cost of investment. ROI can be expressed as a ratio or percentage, or sometimes as ROAS (Return on Ad Spend).
While we like to look at other things like branding, USP, product to marketing and prior promotional success or failure, the KPIs above are enough to help develop a picture of what it would be like to more forward.
Sample Business Case Study
Let’s look at one case example, a dental practice. You easily can use the following sample case plan if you're in a like industry such as a med spa, chiropractor, PT practice, and really anyone in the service sector trying to build a dedicated client base.
Sample Dental Practice:
- Annual revenue of $500,000, a gross margin of 30%, yields a gross revenue of $150,000. The owner of the practice wants to add about 300 new active patients first year.
- 10 year LTV, per patient is $3,840, but one year LTV is $384 [source: ADA U.S. Dental Expenditures, 2017].
- Industry typical close ratios from our experience are very high, so let’s state 75% for this example.
- We're using a ballpark CPL of $100—a 75% close ratio yields a $133 CPA.
Making the KPIs Work:
The cost to acquire 300 new patients is factored at $133 CPA x 300 = $39,900. But we need to factor in the close ratio of 75%, yielding a need for 400 leads to get the 300 new patients, equating to about a $3,300 ad spend per month (33 leads x $100 CPL).
But CPA is only one KPI. What should be of interest to you is making money, and how much time it will take to see a nice return (ROI).
Let’s chart this for ROI over two years. We're also adding "wiggle room" by upping the budget to $5,000 / month to give plenty of latitude to hit our goal of producing 40 leads / month (30 new patients per month).
Looking at the chart, you can see that LTV-based initiatives take time to gain traction but the long term gains can be very rewarding.
The chart displays a typical uphill waterfall graph. The data shows about a 9-month cost recovery (time before profit) to begin producing positive ROI for our PPC advertising initiative, with solid return developing about year one.
The Numbers at a Glance:
|ROI - 12 months: (dollars)||$14,880|
|ROI - 24 months: (dollars)||$168,000|
|ROI - 24 months: (ratio)||2.4 (w/o tactics)|
|Investment required:||$10,000 (aprox.)|
KPIs can drive the time frame before results. High AOV initiatives often provide quick wins at predictable ROI, whereas LTV-based initiatives often require the long game to produce ROI that increases over time.
Note: You most likely cannot "live test" any marketing channel for a short term to judge its success potential because such a "test" will lead you to conclude, "advertising doesn't work."
These real numbers help destroy the growth-killing myth that falsely states all businesses can make a fortune in a few months with Facebook™ marketing, even FB performance marketing. Some can, but many will have to play the long game.
Additional Marketing Tactics: How to Drive Even Higher ROI
ROI is the single KPI that separates good marketing agencies over so-so ones. Once you have a good set of campaigns, there often are additional tactics you can employ to gain even more bang for your buck.
- Hook, creatives, targeting — if all the soft stats relating to good digital advertising were to increase, CPL would drop, further raising ROI.
- With our example case, most dental practices will acquire a spouse or entire family—basically BOGO marketing, with a potential to more than double ROI.
- It’s possible to focus campaigns on high value products, again in my example, implants, causing ROI to drastically increase.
- Other channels can be added, such as email marketing to build loyalty or referral sales, SEO to build domain authority, and Inbound marketing to convert organic traffic to new business and, in the long term, build your brand affinity.
- For B2C companies, there may be huge wins by leveraging local marketing demographics. For example, Holly Springs, NC, sees an average net growth of 500 new people each month. For companies hoping to engage these newcomers, doing "moving intent" targeting would be crucial.
KPIs don't lie. As you should now know, they can be a very accurate probability indicator for success.
All good marketing plans require three things:
- A burning desire to grow your company.
- Good product to market viability, including things such as branding, USP, conversion paths.
- A willingness to invest. Those who view marketing as an expense, often with miss the ROI potential an investment produces.
If you'd like to know more, get additional help, or get an individual discovery for your business, please click the link below, and get growing!
Editor's Note: This post was originally published in January 2018 and has been significantly updated for accuracy and comprehensiveness.