Study Notes #10

Optimizing Marketing Funnel

Identify what level of the funnel your customer loss is the greatest.

• If you’re losing many of them in the early stages of awareness, you need to focus on the types of ads you’re creating, or the ad platforms you’re choosing to reach your potential customers.
• If you’re losing many of them at the conversion stage, you need to look at your website or online app. It’s possible the site is not easy to navigate, and that’s why not many customers are converting to paid customers.

Example:

1 – Conversion rates based on impressions

Basically, at each touchpoint, we’ll divide the number of people at each touchpoint divided by the total number of customers.

• 43 percent roughly of the people who saw the actual ad, downloaded the brochure
• 19 percent of the people who saw the actual ad arrived on the site, added items to the cart
• ~8 percent of the people who saw the actual ad actually purchased the item

2 – Conversion rates based on each touchpoint

Another metric is to calculate the conversion rates based on the Call to Action at the previous level in the funnel, as opposed to the initial impression number as we did above.

So now we divide by the number of people who actually took the call to action of the previous step.

• 43 percent of that matches what’s in the conversion rate based on the impression.
• 45 percent of those people who downloaded the brochure added their items to the cart.
• 39 percent of those people actually purchased the item.

Visualizations

• useful tool when you want to engage the stakeholders, such as the executive team, around what the conversion rate data is telling us.
• line charts like this can allow you to indicate whether specific customer-facing tools and methods are showing a higher success rate in converting leads to paying customers.
• allows the marketing and growth team to identify these successful tools and campaigns or failed ones as well, and plan future efforts to maximize conversions.

CPA vs CAC

• CPA – is focused on the marketing and sales cost, including overhead and salaries, with a focus on sales leads—not actual paying customers
• CAC – is focused on actual new customers who have made a purchase

Interpretation of CPA

• provides insight into whether or not the marketing campaigns are successful from a business perspective.

• Cost Per Acquisition (CPA) = (Marketing and Sales Cost)/ number of new leads customers
• CPA is referring to marketing + sales costs (overhead, salaries) in the numerator and includes only leads (non-paying customer) in the denominator.
• Here “acquisition” refers to a non-paying customer.

Lifetime Value

These are your high-value customers and you want to bring in more of them.

Your goal should be for every dollar spent on marketing efforts. It should provide a higher rate of return and generate revenue multiple times over.

• Purchase Cycle: The time increment adopted for business calculations

• Total Sale Revenue Per Cycle: Revenue earned from a customer per purchase cycle
• Number of Sales Per Purchase Cycle: Number of times customer buys during the purchase cycle
• Cost Per Acquisition: (Cost of marketing and sales)/ number of new leads
• Expected Retention Time: Amount of time (measured in purchasing cycles) you expect to retain the customer.
• Average Sale Revenue: (Total customer revenue/ Number of purchases in the cycle) OR Average revenue received from the customer per transaction during the cycle
• Profit Margin Per Customer: ((Average Sale – Average Cost of Sale) / Average Sale)

Formula:

Lifetime\medspace Value\medspace = \frac {Average\medspace Sale\medspace *\medspace Number\medspace of\medspace Repeat\medspace Sales\medspace *\medspace Expected\medspace Retention\medspace Time}{Average\medspace Sales}

• Purchase Cycle 1
• Total Sales Revenue per Cycle 70
• Number of Sales per Purchase Cycle 1
• Cost of Acquisition 25
• Expected Retention time 364
  • #years x 52 weeks
• Average Sales Revenue 70
  • 70 / 1 transaction per cycle
• Profit Margin Per Customer .64
  • (70-25) / 70
  • Note: COA is used as Cost of Sale since the calculation for COA includes the average cost of sales
• LTV calculated to be $16,380
  • 70 x 1 x 364 x.64

It's also worth mentioning that LTV x Profit Margin Per Customer isn't a continuous measure. This means that we don't use that measure to judge the profitability of our company. But how efficient our company is in spending to acquire new customers.

Check out the following websites to read up on additional ways to calculate Lifetime Value:

1. Multiple ways to calculate LTV – Article on how to calculate lifetime value and how to use LTV to help solidify your marketing budget
2. Identifying your High-value customers – Article on how to calculate lifetime value to market to high-value customers. This article will help you identify some of your most valuable customers so that you can focus on maximizing return on your marketing investment.
3. Using Cost of capital – Article on some of the pitfall and cautions around relying too heavily on lifetime value metrics. The LTV formula can be an effective tactical tool for monitoring and comparing like-minded variable market programs, especially across multiple channels. But like any model, its proper use is entirely dependent on the assumptions used in that model.

QUIZ QUESTION

Calculate the Lifetime Value for Smoothie Rocks given the following information. An average purchase cycle of 2 weeks, with total sale revenue of $8 per order. The average customer makes 5 orders per purchase cycle. The Cost per Acquisition is $7.50 and we expect to retain the customer for 3 years.

Given:
LTV=n

Average Purchase Cycle = 2 weeks
Total Sales Revenue = $8/order
Number of Sales Per Purchase Cycle = 5 orders/customer
CPA = $7.50
Expected Retention Time: 3 years

Interpretation:

Based on the LTV of $195, we believe Smoothie Rocks should not spend more than $195 on the most loyal customers. These customers will continue to bring value to Smoothie Rocks.

If Smoothie Rocks spends more than $195 on their customer, Smoothie Rocks will likely have a loss in the long run because the customers will not stay loyal customers long enough for Smoothie Rocks to recoup the money spent to get these customers.

One thing business analysts sometimes trip up on are the assumptions they make about the data.

Sales Metrics

• Business to Business (B2B): When one business makes a business transaction (goods or services) with another business. Often takes place when one business is providing source materials to the other business to in turn finally sell it to the consumer.
• Business to Consumer (B2C): When a business sells products and services to the final consumer.

Sales can not only focus on the end customer such as the consumer, but also a company that will likely generate customers.

Sales Funnel

Sales Pipeline

• also known as the sales funnel
• tracks the number of incoming leads or prospects

Qualified leads

• qualifying process whereas the sales team qualifies the leads, which means they are checking to see if the product offering is within the lead’s budget, ultimately in order to identify the ideal buyer and confirm their viable lead.

Closing deals

• Bookings is a very important metric for tracking the success of the sales team.
• Close-ratio is the ratio of closed deals to leads from the sales pipeline.

Sales metrics – measures the performance of the sales team (internal)

Marketing metrics – measures the behavior of individual customers (external)

New Vocabulary

• Sales Lead: A sales lead refers to the number of potential customers who have shown interest or have been identified by the sales team member as being potentially interested in the product.
• Qualified Lead: A potential lead who has been vetted by the sales team as meeting key requirements of an ideal buyer. Sales teams check to see if the product offering is within the lead’s budget that will make them a viable buyer.
• Booking: Booking is a closed deal when the qualified buyer has committed to making the purchase. It is a key metric for tracking the success of the sales team.
• Sales Pipeline: Refers to the collection of steps a sales representative takes while navigating incoming leads or prospects through to making the final purchase. It is also used to track how well individual sales representatives are meeting their sales quota.

Additional Resources to learn more about Sales Metrics

• Matrix Marketing Group: How can sales pipeline management metrics be effective to help win more sales. How can you improve something without benchmarks, ratios, and KPI’s?
• InsightSquared: Shattering conventional wisdom, old wives’ tales, perpetuated myths and lies related to sales-pipeline-to-quota provides

Total Bookings

• Bookings are the most important sales metric. 
• Booking is a won deal that is signed or where the purchaser is committed to buying the product. 
• Once you have the sales bookings value, you can track it across specific time periods and even product lines.

Total Bookings is the sum of all closed deals

Average Deal Size

• the average deal size in dollars of all of the won deals. Reminder, a won deal is when the account buyer has committed to making the purchase

Formula

Average\medspace Deal\medspace in\medspace Size\medspace = \frac {Total\medspace \medspace Sale\medspace Value\medspace of\medspace Deals\medspace or\medspace Orders\medspace in\medspace Dollars}{Number\medspace of\medspace Orders\medspace over\medspace a\medspace Specific\medspace Period}

Interpretation of Average Deal Size:

• keep an eye out on the size of the deals you are winning, as any deal that is above this average deal size may involve more risk.
• The win rate for such sale prospects that are higher than the average deal size is usually low, but that doesn’t mean your sales rep shouldn’t pursue it.
• If you see the historical data shows your average deal size is increasing, your sales team can explore and go after lead generation efforts for larger deals.
• It is also a reminder for the team to understand what is bringing these larger deals into your pipeline.

Average Time to Close

• the average number of days it takes a member of the sales team to close the deal from the prospect stage to a closed deal.
• can be calculated for each sales team member, product, or lead source.
  • Lead Source – refers to whether the prospect inquired through the website or had an inbound inquiry. Outbound methods refer to cold-calling through email lists or phone calls. This means the customer has lower intent to purchase, to begin with, and this lengthens the time to close the deal.

Terminology

• Sum of Total number of days from the first contact to closing the deal for all closed deals
• The average number of days for typical Sales Cycle = Sum(Total number of days to close the deal) for all closed deals / Number of closed deals

Formula

Step 1. Sum (Total number of days from the first contact to closing the deal) for ALL closed deals.

Step 2. The average number of days for typical Sales Cycle = Sum (Total number of days from the first contact to closing the deal) for ALL closed deals / Number of deals

1. Calculate the number of days from the first contact to closing the deal for EACH closed deal
   • This is 720 = 150+180+210+180
2. The average number of days for a typical Sales Cycle = Sum of number of days for all sales combined / Number of deals(accounts)
   • This is 180 = 720 / 4

Review

Growth Metrics

• Growth for a website or app is counted in the number of users.
• Are we seeing the number of people actually using the site increasing or decreasing?
• If you see your website use as high, are they unique users or the same people coming back?

An important aspect of growth is not just whether you have users but whether they continue to actively use or engage with the website.

Engagement Metrics

• used to define the number of active users within a specific time period (ranging from daily, weekly to monthly).

Stickiness

• Stickiness = Daily Active Users/ Monthly Active Users
• It is a useful KPI for management and investors. It tells the management what is their company’s growth rate. Investors want to know if this online app or website has the potential to make money in the future. For example, if the plan is to introduce advertising into the app, the potential valuation will depend on whether the app has a large number of users that keep coming back to it.

Criticisms of Stickiness

It is important to note that there are also criticisms of some of these metrics. Let’s review those for a moment:

1. One argument is that stickiness doesn’t tease out the depth of engagement. It does not give much detail on what the users are doing. If the metric is based solely on whether users logged in, then it doesn’t tell you if the user is just viewing, or using a website feature. When you are analyzing your website’s engagement levels for a specific feature of your website, stickiness cannot help you distinguish between engagement levels for specific features.
2. In the start-up phase, not too much emphasis should be placed on this metric. It does not give an accurate metric of a reliable count of MAU because companies are in the marketing stage to get their name out.
3. Stickiness is not a useful metric when the app is not meant to be used monthly. For e.g., for a travel app where you need to book your flights for travel but since most people travel only a few times a year – at least for non-business purposes, this metric does not serve its purpose well.