KPIs for Digital Marketing | How to Evaluate Your Marketing Performance

Summary

This video script by Eric dives into key performance indicators (KPIs) for digital marketing, explaining the marketing funnel and its impact on customer acquisition costs (CAC) and retention. It illustrates the importance of understanding both top and bottom funnel strategies, using real-world examples to demonstrate how focusing solely on channels with lower CAC, like Google Ads, can inadvertently increase overall costs. The script emphasizes the significance of customer lifetime value in determining a sustainable CAC and provides practical insights for e-commerce teams and marketers.

Takeaways

• 📈 Understanding the marketing funnel is crucial for evaluating the performance of individual marketing channels and overall business performance.
• 💰 Customer Acquisition Cost (CAC) is a key metric, representing the advertising spend required to acquire one new customer for the first time.
• 🔄 The marketing funnel consists of three main parts: top of the funnel for awareness, mid-funnel for consideration, and bottom of the funnel for conversions.
• 📊 Different businesses may have different funnel lengths and channel placements, depending on product price and customer decision-making time.
• 📌 The top of the funnel typically has the highest CAC due to the need to reach out to a larger, unknown audience.
• 📉 Conversely, the bottom of the funnel has the lowest CAC as customers are closer to making a purchase and have shown more interest.
• ❗ It's a common mistake to focus solely on the performance of individual channels without considering how they interact and feed into each other within the funnel.
• 🚫 Simply reallocating budget from a channel with a higher CAC to one with a lower CAC without considering the funnel dynamics can lead to increased overall CAC.
• 🔄 A balanced approach is necessary, often allocating 60-75% of marketing spend to the top of the funnel to ensure a steady flow of new customers.
• 💡 Customer Lifetime Value (CLV) is essential for determining the highest CAC a business can afford while still making a profit.
• 📈 The optimal CAC can be found by analyzing historical customer data to understand how much profit can be made from a customer over their lifetime with the company.

Q & A

What are the two main goals when evaluating the performance of digital marketing?

The two main goals are to understand Customer Acquisition Costs (CAC), which is the advertising spend to get one new customer, and to evaluate customer retention and Customer Lifetime Value (CLV), which represents the total revenue from a customer over their relationship with the company.

Can you explain the concept of the marketing funnel?

The marketing funnel is a visual representation of how digital marketing works. It has three basic zones: the top of the funnel for awareness and reaching new customers, the mid-funnel for building relationships and moving customers closer to conversions, and the bottom of the funnel for conversions and purchases.

What is the significance of understanding Customer Acquisition Cost (CAC) in digital marketing?

CAC is significant because it helps businesses determine how much they should spend on advertising to acquire a new customer. It's crucial for evaluating the efficiency of marketing efforts and ensuring that marketing spend leads to profitable customer relationships.

Why is it important to consider both paid and organic channels when evaluating marketing performance?

Both paid and organic channels contribute to a business's overall marketing performance. Paid channels involve direct advertising spend, while organic channels, like search engine optimization and word of mouth, can bring in customers without direct cost. Considering both helps in understanding the full scope of customer acquisition and retention.

How does the customer acquisition cost vary across different parts of the marketing funnel?

The customer acquisition cost is typically highest at the top of the funnel because it involves marketing to people who are not aware of the brand. It's lower in the mid-funnel because these customers have shown more interest. The bottom of the funnel usually has the lowest CAC as these are customers ready to make a purchase.

What is the relationship between the top of the funnel and the bottom of the funnel in terms of customer acquisition?

The top of the funnel is responsible for bringing in new customers, which then feed into the mid and bottom of the funnel. If there's no customer acquisition at the top, there will be fewer customers reaching the bottom of the funnel, affecting overall conversions and sales.

Why should a business not solely focus on the performance of individual marketing channels in isolation?

Focusing on individual channels in isolation can lead to an oversimplified understanding of marketing performance. Channels often work together, with top-funnel channels like Facebook bringing in new customers that eventually convert through bottom-funnel channels like Google Ads.

What is the Return on Ad Spend (ROAS) and how is it calculated?

Return on Ad Spend (ROAS) is a metric that measures the efficiency of advertising efforts. It is calculated by dividing the total revenue generated by the ads by the total advertising spend, providing a ratio of how well ads are driving revenue.

How can a business determine the highest Customer Acquisition Cost (CAC) it can afford while still making a profit?

A business can determine the highest CAC it can afford by analyzing the Customer Lifetime Value (CLV). If the CLV is higher than the CAC, the business can afford to spend more on acquiring new customers, as the profit will be made back over the customer's lifetime.

What is the role of customer retention in evaluating the effectiveness of a marketing strategy?

Customer retention is crucial as it helps in understanding the lifetime value of a customer and the overall profitability of a marketing strategy. Retained customers are more cost-effective as they contribute to revenue without requiring additional acquisition costs.

Outlines

00:00

📈 Introduction to Digital Marketing KPIs

Eric introduces the video's focus on key performance indicators (KPIs) for digital marketing. He outlines the plan to discuss the marketing funnel, performance evaluation of each channel, understanding overall marketing performance through dashboards, and determining the budget for marketing. The video targets e-commerce and marketing teams, including startup founders and finance executives. It emphasizes the importance of customer acquisition costs (CAC) and customer lifetime value (CLV), explaining that CAC is the cost of advertising to gain a new customer, while CLV represents the total value a customer brings over their relationship with the company.

05:01

💰 Understanding Customer Acquisition Cost (CAC)

The paragraph delves into the concept of customer acquisition cost (CAC), defining it as the total advertising spend required to acquire a new customer. It explains why CAC is crucial for digital marketing, using the analogy of a grocery store to illustrate the long-term value of a customer. The importance of CAC is further emphasized through its impact on the profitability of marketing efforts. The discussion also touches on the expected CAC at different stages of the marketing funnel, noting that top-of-funnel channels typically have higher CAC due to targeting cold audiences, while bottom-of-funnel channels have lower CAC as they target customers who are ready to make a purchase.

10:02

🔍 The Impact of Channel Interactions on CAC

This section uses a case study approach to demonstrate the interplay between marketing channels and their impact on CAC. It warns against the oversimplification of cutting spend on channels with higher CAC without considering their role in the funnel. The example shows how reducing Facebook ads, which are top-of-funnel, and increasing Google ads, which are bottom-of-funnel, can inadvertently increase overall CAC. The narrative highlights the importance of understanding how channels complement each other and contribute to the overall marketing performance.

15:03

📊 Analyzing Marketing Performance with Dashboards

The paragraph introduces the use of digital marketing dashboards to analyze the performance of paid and organic channels. It explains the metrics used to evaluate these channels, such as return on ad spend (ROAS), customer acquisition cost, and total revenue. The discussion includes a hypothetical scenario where adjusting the budget allocation between Facebook and Google ads affects the overall performance metrics. The importance of not isolating channels but considering their collective impact on CAC is reiterated.

20:04

🔄 Balancing Paid and Organic Marketing Channels

This section discusses the importance of including organic customers in the analysis of marketing performance. Organic customers, who convert without the need for paid advertising, are crucial for understanding the full scope of a business's marketing effectiveness. The paragraph introduces the concept of a blended ROAS and a blended CAC, which take into account both paid and organic transactions to provide a comprehensive view of marketing performance. The emphasis is on achieving the lowest overall blended CAC by understanding the role of each channel in the customer journey.

📉 Determining the Optimal CAC through Customer Lifetime Value

The final paragraph focuses on determining a good CAC by analyzing customer lifetime value (CLV). It explains that the highest profitable CAC can be identified by understanding how much gross profit a business can expect from the lifetime purchases of an average customer. The calculation of CLV is outlined, using average order value (AOV) and gross profit margin to estimate the total profit from a customer. The discussion concludes that knowing the CLV allows businesses to set a reasonable CAC and make informed decisions about marketing spend.

Keywords

💡KPIs

KPIs, or Key Performance Indicators, are quantifiable metrics used to track the success of a business or marketing strategy. In the video, KPIs are essential for evaluating the performance of digital marketing campaigns, with a focus on understanding customer acquisition costs and customer lifetime value. The script discusses how to use these KPIs to assess each channel's effectiveness and the overall marketing performance of a business.

💡Marketing Funnel

The Marketing Funnel is a model that visualizes the customer journey from initial awareness to making a purchase. It is divided into the top, middle, and bottom sections, representing awareness, consideration, and conversion phases. The video script uses the marketing funnel to explain how different marketing channels work at each stage to attract and retain customers, emphasizing the varying customer acquisition costs associated with each part of the funnel.

💡Customer Acquisition Cost (CAC)

Customer Acquisition Cost (CAC) is the cost associated with convincing a new customer to make their first purchase. It is a critical metric in digital marketing, as it helps businesses understand the efficiency of their advertising spend. The video script discusses how CAC varies across different stages of the marketing funnel and the importance of considering CAC in relation to overall marketing strategy.

💡Customer Retention

Customer Retention refers to the strategies and efforts made by a company to keep its customers coming back. In the video, retention is highlighted as important for understanding the lifetime value of a customer. The script explains that by focusing on customer retention, businesses can increase the customer lifetime value, which in turn justifies a higher customer acquisition cost.

💡Customer Lifetime Value (CLV)

Customer Lifetime Value (CLV) is the total worth of a customer to a company over the entire duration of their relationship. The video script explains how CLV is calculated by considering the average order value, the gross profit margin, and the expected number of purchases a customer will make. Understanding CLV helps businesses determine a reasonable CAC and make informed marketing decisions.

💡Digital Marketing Dashboard

A Digital Marketing Dashboard is a tool that aggregates and displays key metrics and data related to digital marketing performance. The video script mentions using such dashboards to monitor and evaluate the overall marketing performance of a business, including both paid and organic channels, and to understand the return on ad spend (ROAS) and customer acquisition costs.

💡Return on Ad Spend (ROAS)

Return on Ad Spend (ROAS) is a metric that measures the revenue generated from advertising compared to the cost of that advertising. The video script uses ROAS to illustrate the efficiency of different advertising channels, such as Facebook and Google Ads, and to demonstrate the impact of reallocating marketing budgets on overall marketing performance.

💡Top of the Funnel (TOFU)

Top of the Funnel (TOFU) refers to the initial stage of the marketing funnel where the goal is to create awareness and attract new potential customers. The video script discusses how TOFU channels typically have higher customer acquisition costs because they target cold audiences who are not yet familiar with the brand.

💡Middle of the Funnel (MOFU)

Middle of the Funnel (MOFU) is the stage where potential customers start to engage more deeply with a brand, often through educational content or offers. In the video, email marketing is used as an example of a MOFU strategy, aiming to nurture relationships with customers who have shown initial interest.

💡Bottom of the Funnel (BOFU)

Bottom of the Funnel (BOFU) is the final stage of the marketing funnel where potential customers are ready to make a purchase. The video script explains that BOFU channels, such as Google search ads, have lower customer acquisition costs because they target customers with high intent who are actively searching for products or services.

💡Organic Customers

Organic Customers are those who find and engage with a business without being influenced by paid marketing efforts. The video script mentions organic customers as an important part of the marketing funnel, contributing to the overall revenue and customer base without incurring advertising costs.

Highlights

Introduction to the importance of KPIs in digital marketing and the marketing funnel.

Two primary goals in evaluating marketing performance: customer acquisition costs (CAC) and customer retention with lifetime value.

Explanation of the marketing funnel's top, mid, and bottom sections and their respective roles in customer engagement.

The significance of understanding CAC by channel and its impact on overall business performance.

How different businesses may have varying funnel lengths depending on product price and customer decision-making time.

Example of marketing channels mapped to the marketing funnel for an e-commerce business with a low average order value.

The concept of Return on Ad Spend (ROAS) and its calculation as a key metric for ad efficiency.

Common misconceptions about channel performance, such as the oversimplification of cutting Facebook ads in favor of Google Ads.

The impact of channel interdependence on overall customer acquisition costs and the importance of a holistic view.

Demonstration of how reallocating marketing budgets can inadvertently increase overall CAC and decrease ROAS.

The role of organic customers in the marketing funnel and their contribution to overall business performance.

Introduction of a digital marketing dashboard that includes both paid and organic transactions for a comprehensive view.

Calculation of blended ROAS and CAC, incorporating both paid and organic customer data for a more accurate performance assessment.

The significance of customer retention and lifetime value in determining a sustainable CAC.

How to calculate Customer Lifetime Value (CLV) and its role in justifying marketing spend and CAC.

Strategic allocation of marketing spend across the funnel, with a focus on the optimal balance between top and bottom funnel investments.

Conclusion emphasizing the importance of understanding channel interactions and customer lifetime value for effective digital marketing strategy.

Transcripts

hey everyone eric here today

we're going to break down the most

important kpis for digital marketing

first we'll review the marketing funnel

and how to evaluate the performance of

each individual channel

then we'll discuss how to understand

overall marketing performance for a

business

using simple digital marketing

dashboards and finally we'll talk about

how much a business can afford to spend

in marketing

okay let's get started so when you're

thinking about marketing

there's ultimately two goals that you

have when trying to evaluate the

performance

the first is something called the

customer acquisition

costs and we're going to talk about what

this is but it's basically the

advertising that you spend to get

one new customer to buy for the first

time so we're focused on this metric of

course

overall for our business but also by

each individual channel

the second thing you're trying to

understand is customer retention and

customer lifetime value

so this basically represents how many

times

the average customer buys over the

lifetime of their relationship with the

cut

with the company so most customers will

buy a series of times

over and over and over again so you're

trying to basically understand

um how much one customer will be worth

in the future

after they buy so this video is

basically for

anyone who's running an e-commerce team

or a marketing team

so people like startup founders digital

marketing and finance

executives who are trying to understand

um how

each element of the digital marketing

funnel is performing

but also how the overall business is

performing

so let's jump into part one which is

the longest part for this video and it's

understanding customer acquisition cost

overall and by channel so let's start

out with um

talking about the best way to visualize

how digital marketing works

which is basically something we call the

marketing funnel and so this is kind of

what it is right here this is supposed

to be a funnel

so with a funnel things come in the top

and then a very small amount

uh comes out the bottom so there are

three

um basic zones or sort of

elements to the funnel there's the top

of the funnel

which is generally where we do things

related to awareness

so we're reaching new customers for the

first time

so uh and then you have the mid funnel

which is

so these basically these new customers

that you contacted for the first time

then basically you try to get them into

the mid funnel which is where they are

figuring out if they want to buy so

you're building relationships with them

moving them closer to conversions so

this is what we call the consideration

phase for the customer

and then the bottom of the funnel is

conversions which are purchases

so this is where we try to entice them

to purchase sometimes with discounts

sometimes with

just making it really easy we try to

remove the friction for them to finally

make that purchase and so the the funnel

itself represents the process

of getting people from prospects who

don't know about the company

to purchasers which are clients of the

company

and so funnels are really really

different depending on the business it

also

depends for instance a business with a

very high price

may have a very long funnel where the

customer needs to think about it for

many months before they buy but

a business with a very low price product

it could be that

most of the conversions happen

immediately basically that the the

the top of the funnel and the bottom of

the funnel are not very far apart

okay so here's an example of

marketing channels by funnel and this

would be for like an e-commerce business

with a relatively low

average order value and again any of

these channels could be in any part of

the funnel it depends on

what the business is what it's selling

how it wants to use these tools but

let's say we're

an e-commerce business with a low-priced

product top of the funnel

for a lot of these small businesses is

just facebook ads that's where you're

gonna find people

who don't know about your product and

you're gonna get in front of them and

try to start interacting with them

this could also be any awareness related

stuff because remember the top of the

funnel's awareness so this could be

events this could be pr this could be

television

etc so you're trying to hit those new

people for the first time

and then for our example business let's

say mid funnel is email so let's say

that first time you're able to capture

their email somehow

and so now you're sending them

information about the company maybe

you're telling your story

maybe you're sending them discounts

whatever so you're trying to move them

closer in to do a conversion and then

for a lot of businesses bottom of the

funnel

is google ads and the way that google

ads work

is there's a lot of different types of

google ads but the main ads are

called search ads so people either

search for

your company itself the name of your

company or

your exact product maybe not the name of

your company but they're searching for

your product

so then you show them an ad to try to

either to try to bring them to the

website so these people

have uh are called like high intent

customers because they're at the bottom

of the funnel and they're already

trying to buy what you're selling so

these are kind of bottom of the funnel

activities and again there's a lot of

different channels that would be at the

bottom of the funnel but think about

that's the moment of conversion you're

trying to find that customer

so again i just want to redefine

customer acquisition cost this is for

sure the most important metric

in all of digital marketing so customer

acquisition costs we call it cac

it's the total advertising spend to get

one new customer to buy for the first

time

and so why is that important

well if you think about a customer let's

say a really simplistic

in-person business like a grocery store

let's say

you get a customer they come to the

grocery store for the first time

um that customer if they have a good

experience will probably go back to that

store

many many times dozens and dozens of

times could be for many years

and so all of those additional times do

they need to be advertised to to come

back over and over again no

no basically all of the advertising and

marketing

is focused and almost all of it will be

spent

to get people to come to that grocery

store for the first time to have that

first experience and it's the same with

any business

basically you know almost all of the

paid marketing happens to try to get

people to make that first purchase

some marketing will go to returning

customers et cetera but

most of it is going to go to that first

purchase so that's why we are so laser

focused on something we call customer

acquisition cost so customer acquisition

costs

expectations so let's think about the

funnel so

the top of the funnel is always going to

have the highest customer acquisition

cost

and that's kind of obvious because let's

say you're marketing to people who don't

know about your brand

well you're going to have to market to a

lot more people to get

one of them basically through your

funnel or to get one of them to purchase

because

these people are cold they don't know

who you are so you're going to have the

highest what's called

cac at the top of the funnel mid funnel

kind of a little bit lower because these

people are already

sort of have moved closer to the

business they've shown more interest

and then bottom of the funnel is going

to have the lowest customer acquisition

cost

because these are the very few customers

who you've gotten all the way through

your funnel

and are basically ready to buy and

you're just trying to push them over the

edge so they can buy

so these different parts of the funnel

are not really comparable to each other

but generally you'll see

on top in top of the funnel marketing

channels you'll see very high customer

acquisition costs

and bottom of the funnel funnel channels

you'll see very low customer acquisition

costs and this is natural and this is

what you should expect

so let's talk about uh let's say let's

call it a case study but i'm going to

call it

a very common situation in e-commerce

that i see at almost every single

company so

let's say you're looking at your

marketing channels and

whoever's looking at this the head of

finance or the founder or whatever

they're not thinking about the funnel

they just look at facebook

and they're like wow our facebook ads

are crazy expensive we're losing money

on each order

that we are able to get through facebook

advertising

but then google is crushing it every you

know the cost customer acquisition cost

is

super super low on every order we're so

profitable

quest so the question is should we turn

facebook ads

off and increase budgets for google ads

and many companies do this and they find

out

that it's not as simple as that because

facebook

complements google facebook's at the top

of the funnel google's at the bottom of

the funnel but if you don't think about

how

one channel feeds the next it's very

easy to jump to this oversimplified

conclusion

and think okay let's turn google spend

up and facebook spend

down and let me show you sort of how

that plays out in real life and this is

i've seen the same thing over and over

and over again so it's pretty

pretty obvious what's going to happen to

me now but let me just show you all

so here's an example dashboard which

looks at our

paid advertising channels so

i i specify to say paid because paid are

channels where you

you pay money to do the advertising but

there's also organic channels which

are places that you do marketing for

free so that could be through search

engines that could be through

email that could be other stuff but

we're just looking at our paid channels

of facebook and google because these are

basically the advertising channels that

make up

75 or more percent of all the

advertising of

almost all companies so these are kind

of the most important

so first off roads you'll see me talk

about roads roads is

is a an acronym for something called

return

on ad spend and how you calculate this

is you look at the total revenue

that you get from those ads and you

divide it by the spend

so here row as is just the 12

500 in revenue that you drove through

facebook ads

divided by the 5 000 that you spent on

facebook ads so it's a ratio of how

efficient

your ads are driving revenue so let's

say we have this business

in january we spent a total of seven

thousand five hundred dollars

we drove twenty eight thousand dollars

through facebook and google

the paid row as was three point eight

we drove 180 purchases

through facebook and google and the paid

customer acquisition cost is the spend

divided by those paid purchases

so it costs us 42 on average to get

someone to buy

between these two channels but if we

zoom in on the channels

you see we spend five thousand on

facebook the paid raise is only two

point five

and the paid realize on google is six

point four

and we spent only two to 2500

and you see that the customer

acquisition cost on facebook is 59

and on google it's 26. and i'm trying to

illustrate this

situation here that i see very commonly

and so

um the founder says okay let's cut back

facebook spend and let's

boost google spend without realizing

that

uh the google client the clients that

are being converted

um through the google channel a lot of

them actually come

through facebook so what we do is we cut

facebook spend back

from five thousand to four thousand and

you see the paid row as stays

exactly the same and then

we increase google we increase it from

2500 to 5000

and you see that the paid rep goes

up goes to 25 000 but the row as goes

from 6.4

to 5. and if you look at our overall

paid customer acquisition cost the total

purchases

divided sorry the total spend divided by

the total purchases

it actually went from 42 to 50.

so even though in this situation we cut

back the channel

that had a worse row as and we boosted

the channel that had a better row as

our overall customer acquisition cost

went up which is a bad

thing so what they do in february is

they make the same mistake they say well

look

google's still outperforming facebook by

a lot let's

spend even more on google let's increase

it from 5000 to 7 500

and let's cut facebook back even more to

3 500.

so what you see on facebook is you'll

have the same paid row as

because facebook is the top of the

funnel nothing feeds facebook facebook

is its own

um channel finding new clients but

google

again the paid rewards drops from five

to four

so you drive a little more revenue but

now

your customer acquisition cost whereas

on facebook it's been

even going down a little google it went

from 26

now 47 now 57

and you're paid roas is higher on google

than facebook

so you keep thinking well we should just

allocate more money to google because it

has a better return

than facebook and now your overall paid

customer acquisition cost

has gone up to 55 from 42. so

again this is why you can't look at each

channel

and compare it to the other channels and

say okay

you know if google is working better

than facebook let's spend more on google

you need to understand that facebook

brings

customers into your funnel and if

there's no customers coming into your

funnel

at the top then there's fewer customers

that are going to be getting to the

bottom of your funnel

so the fewer customers you have coming

into your funnel the fewer customers you

have going out the bottom of your funnel

so again this is obviously you know you

could keep going down this path until

your customer acquisition costs are

terrible and again i've seen that happen

many times

and so the top of the funnel should have

a higher cac

and it can't be compared one to one to

the bottom of the funnel cac what you

should be focusing on

is the overall cac of the channels

combined

and figuring out how you can get that to

the lowest number possible

and a lot of times it's actually a

matter of spending more

at the top of the funnel because that

pushes

the cac for channels at the bottom of

the funnel even lower

now that we've talked about paid

channels this is a you know a simplified

kind of uh digital marketing uh

dashboard

that you can build and if you had other

pay channels you could kind of add them

in here but these are the main metrics

you want to be focused on

so what about organic customers so those

are customers that buy for free

so meaning we didn't do any paid

advertising to them so those could be

coming through search engines

word of mouth email etc so they they

came in to the website and they bought

something but we didn't spend any money

to get them there

so those are obviously part of your

funnel too those are conversions

and we need to build a digital marketing

uh we need to build digital marketing

kpis that include those so

here's an example marketing dashboard

that shows overall performance so

paid and organic transactions so let me

kind of

walk you through how this works

and in up above in this dashboard you

see i said paid cac paid purchases paid

rev paid row as right

now i'm saying blended blended means

paid

and organic so it basically means all so

all transactions so we have blended row

as

blended customer acquisition cost so

this is our overall performance

so in this situation

we have the numbers from above we have

the 7

500 9 000 11 000 so we have our

our advertising spend coming through um

but you see that our our revenue here 3

800

and this is 2 our revenue is higher and

it's because there's revenue coming in

that's outside of what we do

on facebook and google and those are

that's our organic revenue

so in this situation if we look at our

blended row as it's our

total revenue divided by spend so that's

5.13 whereas up above is 3.8

so again this brings in all of our

channels all of our customers

and then to calculate our blended cac

which is

critical we need to look at

both our new clients and our returning

clients

so again customer acquisition cost is

the cost to get a new client to buy for

the first time

so to calculate this you're going to

take

total new clients divided by total spend

and that's going to give you a blended

customer acquisition cost of 20

and some of these new clients are coming

through organic channels some are coming

through paid

and then you have um a customer

acquisition cost

here that goes it's uh 9 000 divided by

400

and you see it's going up because we are

sort of um

you know reallocating money to google

and it's not working because we have

sort of shut off the top of the funnel

which ends up

not working and here you see we have our

returning clients

returning clients are not included in

the customer acquisition metric

but the this is how you understand your

lifetime value so what is your customer

retention

how much of that revenue is coming back

um

and from customers who are coming back

for free we're not doing any advertising

they're just coming back because they

like us and they're buying and

obviously this is a huge focus so you

have on one hand your customer

acquisition and on your other hand your

customer retention those are the kind of

two main areas of marketing

so the overall takeaway let me just zoom

out a little bit

is that um to optimize

the lowest overall blended cac which is

this

you need to understand how each channel

moves

people through the funnel you can't just

compare

one channel to another if they're doing

something that's completely different

so a rule of thumb this is what i've

seen at most

sort of e-commerce businesses that at

least

60 to 75 percent of marketing spend is

usually spent at the top of the funnel

and that last maybe 25 percent

is spent at the bottom of the funnel and

again you know it each business is going

to depend but

what i'm basically trying to show you is

that prospecting although it looks

expensive actually a lot of times lowers

your overall

customer acquisition cost for your

entire business

and gets you the optimal performance so

keep that in mind when you're optimizing

your business or building your

e-commerce team

okay so now that we have this cac right

20 23

you know 29 how do we know what is a

good cac

so this is where you need to start

looking at customer retention

so part two and this is short but i'm

going to just give you

an idea of how to start thinking about

this for your business or for a business

that you're looking at

so the core question is what is the

highest cac

where we can still make money on a

customer

so this whole discussion is around

customer retention customer lifetime

value

so the highest cac where you can still

make money

you can only answer that by analyzing

one metric and that's customer lifetime

value

so the customer lifetime value is the

total gross profit

that we expect to make from the lifetime

purchases

of the average customer so

example let's say our average customer

spends 185 dollars on an

order so that's the average order value

which is called the aov

and let's say our gross profit margin is

65 percent so the gross profit on our

first order

is that 185 dollars times 65 percent

so 120 dollars that's basically the

profit we make

on that order that comes back to the

company okay

can we run our business with a 150

dollar

customer acquisition cost can we spend

150

on this customer who on their first

order

we make 120 well we would be losing 30

on that first order right because we

spent 150 and we only made 120.

so can we run our business like this

there's absolutely no way to know the

answer to this question

without understanding the customer

lifetime value

so the customer lifetime value

calculation

is um relatively simple

um once you sort of see what we're after

so

let's say looking back historically at 3

000 customers

that let's say for the first time

purchased a couple years ago

we look back at all their data and we

see that the average customer

so of those 3 000 over their lifetime

purchased

2.7 times so

our customer lifetime revenue sorry

let's say 2.6 little typo

so our average customer lifetime revenue

is 2.6

times 185.

so that equals 481 in revenue

so our average customer lifetime value

again which is the gross profit

is that 481 the lifetime revenue times

the gross profit margin

so that's 313 dollars so that's what we

expect to make

on in profit on each customer so

if you know this information can we

spend 150

to acquire a brand new customer yeah

absolutely yes because we're going to

make over 300

over our lifetime with that customer

so we will lose money on the first order

but we'll make it back

and become profitable on their

subsequent orders

so once you understand this you can kind

of understand what is a reasonable cac

where can we go with our marketing and

you know how much can we really spend as

a business

on digital marketing

all right well i hope you learned a ton

in this video about how to understand

the most important kpis for digital

marketing

in real life situations by the way in

the description below you can download

this excel file for free if you want to

use it for yourself

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