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Back to Basics: What are KPIs?

In our continuing Back to Basics series, this week we are covering KPIs. Every marketer has initial business goals in mind for a particular marketing campaign: find a target audience, generate revenue, build a following, increase brand awareness.  But what hard numbers will you use to measure those goals? And how do you track your success over time? Key Performance Indicators, commonly referred to as KPIs, are a benchmark for success or failure for any given campaign. What are KPIs? Let’s review some Key Performance Indicators and what they mean for your business strategy.

Click Through Rate (CTR):

Click-Through Rate is just that – the percentage of customers who click on an ad. The number is found by taking the percentage of people who view your ad (impressions) and then dividing it by the percentage of people who actually who actually click the ad (clicks)

(Total Clicks on Ad) / (Total Impressions) = Click-Through-Rate

Conversion:

A conversion is an action that you wish for users to complete, and can include a purchase, clicking on an advertisement, or filling out a form.This action has been defined as valuable to your business. For example, if someone goes to your website and purchases a pair of shoes, it is considered to be a conversion, as they have converted from a prospect to an actual customer.   

Conversion Rate:

Similar to conversions listed above, a conversion rate is simply a percentage of the users who took your desired action, rather than the total number. For example: A shoe website is visited by 10,000 people during the month of May. During that month, 3,000 users ended up purchasing something from the site.

(Users who converted) 3,000 / (Users who visited website) 10,000 = 30%

Impressions:

Impressions define the total number of ads displayed to consumers. (Whether or not the ad is clicked or is in view is not taken into account.) In most cases, these are measured by CPM (cost per mille) where mille represents 1,000 impressions. For example, an ad may have a CPM of $1.50 meaning that the advertiser pays $1.50 every time the ad is seen 1,000 times.

Pageviews:

Each time a user enters your web page. Sometimes, one visitor can rack up a number of different page views, so businesses look for unique pageviews which log the number of different users who are entering their site.

Return on Investment (ROI):

Return on Investment refers to the revenue generated by investing money into an aspect of a company’s operations (campaign) in relation to the cost of that investment. In other words, how much did you put into your marketing efforts compared to how much you are getting back?  ROI is usually expressed as a percentage and is typically used to compare a company’s profitability or to compare the efficiency of different investments.

For example: A company invests $3,000 into their new product and advertising efforts. After two months they make $5,000 back in profit. The net profit would be $2,000 and the ROI would be calculated as follows:

(Net Profit) $2000 / (Amount Invested) $3,000 x 100 = 66%

Customer Retention Rate:

Customer Retention Rate refers to how many customers you have that continue to be your customers, and is good reflection of how good your customer service is and how quickly you can grow your business. Many subscription companies, like Netflix and Amazon Prime look to calculate this because it is a clear indication for how customers are enjoying their product/service.  It can be measured monthly, quarterly, or annually, depending on your business objectives. To calculate your customer retention rate, you need to know three key pieces of information:

  • # of customers at the end of a period (CE). We will make this 220.
  • # of new customers acquired during that period (CN). We will make this 40.
  • # of customers at the start of that period (CS). We will make this 200.

(CE) 220 – (CN) 40 = 180; / (CS) 200 = .9; .9 x 100 = 90. This means your customer retention rate for the period is 90%

Churn (Customer Turnover Rate):

Churn, or Customer Turnover Rate, is a measure of customer attrition, and is defined as the loss of a customer or client. To find out your customer turnover rate, you take all the customers you have lost in a certain amount of time, and divide it by the total number of customers you had at the beginning of that time. So if you had 300 customers at the beginning of the month and only 250 at the end of the month, the customer turnover rate would be:

(Customers BOM) 300 – (Customers EOM) 250 / (Customers BOM) 300

300 – 250 / 300 = 16%

Lifetime Value (LTV):

In marketing, customer lifetime value is the prediction of the net profit attributed to the entire future relationship with a customer. It measures the customer’s worth over a specific period of time. The Customer Lifetime Value is calculated by subtracting the cost of obtaining and serving the customer from the revenue that was actually gained from the customer, while taking into account statistics such as customer expenditures per visit, total number of visits, and so on, and can be broken down to figure out the average customer value by week, month, year, etc. If looking for a simple calculation you can do the following:

  • Determine the average revenue per customer month
    • Total Revenue per customer / # of months since customer joined
  • Multiply average revenue found by 12 or 24, depending on if you want a 1 or 2 year CLV.   

Key performance indicators are important for a number of reasons. They keep companies in focus of their goals, they define what success looks like, and they encourage accountability. They help many businesses today to stay aligned with their objectives, and ultimately their organization. Without KPI’s, companies would have nothing to base their success off of.