On-target earnings (OTE)

On-target earnings (OTE), also known as on-track earnings, refer to the expected total pay an employee can get after achieving all required goals. It is then added to their base salary. In sales, OTE is commonly a motivating compensation for sales employees to reach their quotas, which consists of a base salary and a commission.

OTE formula

Let’s consider an on-target earnings example:

If your sales rep’s annual base salary is $60,000 and their on-target commission is $35,000, their OTE will be $95,000, provided they hit all sales goals.

OTE = $60,000 + $35,000

OTE = $95,000

Importance of counting OTE

There are several reasons companies use OTE as a sales compensation model:

  • Team member motivation. Having a clear understanding of what goals a sales team should hit to get rewarded for their efforts, they feel more motivated to work harder and achieve better results.
  • Higher productivity. Stimulated to get a decent bonus for their work, sales reps put more effort into fulfilling their tasks, which raises their productivity.
  • Company’s growth. Feeling more encouraged to do a quality job, team members contribute to the business’s performance growth in general. 

What is pay mix and how it relates to on-track earnings

To calculate OTE, you should first determine a pay mix, i.e., a ratio of a base salary to variable pay (commissions). Say, if your pay mix is 75/25, it means your base salary makes 75% of the mix, while the commission is 25%. 

What determines pay mix

There are several factors that influence the pay mix ratio:

  • The sales position. Sales roles differ. A sales rep and a sales manager will have different job responsibilities and hence a different compensation ratio. Some positions require a more aggressive approach, which should be reflected by a higher pay mix.
  • The length of the sales cycle. Longer sales cycles require more effort and motivation, so the pay mix should be higher in this case. By contrast, companies with a shorter sales cycle may have a lower mix because the sales team will close more deals in any given period. 
  • The product/service complexity. The more complex your offer is, the higher possibility you’ll wish to employ a sales rep who will be an expert in your industry, brand, and solution. Therefore, you’ll need a higher pay mix for motivating compensation.
  • Company philosophy. One company may choose a high-degree of incentive in the mix to motivate sales reps, while another might use a conservative mix to mitigate risks. So, you need to understand what works better for your business and determine your pay mix correspondingly. 

Let’s consider several pay mix ratio scenarios:

  • 0:100 –  Choosing this ratio, you push your sales reps to work independently and count only on commission. That’s not the best option since it will be rather stressful for them, which you’ll find hard to manage. If you still want to adopt it, you’d better arrange weekly payouts of commission to keep sales reps feeling rewarded.
  • 50:50 – Such a ratio is good for the start. Your sales representatives will count on fixed pay and feel motivated enough to sell as they will get a considerable amount of commission. 
  • 90:10 – This ratio presupposes a small variable pay, hence little motivation for your sales reps to do their best closing sales. 

When to consider a higher variable component of a pay mix

A higher variable component (percentage of commission) is recommended in cases when:

  • The sales job is connected with pursuing new accounts.
  • The selling is primarily direct.
  • The price of the product or service is rather high.
  • Internal career opportunities are overall limited.

When to consider a lower variable component of a pay mix

A lower percentage of commission is advised if:

  • The sales position is not directly concerned with closing deals (e.g., a sales manager).
  • The selling is primarily indirect.
  • Your company is a startup.
  • Internal career opportunities are relatively high.

How to calculate on-target earnings

Now that you understand how to determine a pay mix, you are ready to calculate OTE. We recommend to divide this process into four steps: 

1. Establish your employee’s base salary

You won’t be able to count OTE salary without establishing a base salary for your sales reps. This sum should compensate them enough for the quality of work they’ll do and match the standards of living so that they’ll have a decent income. A good piece of advice is to consider the average salary for the position that pertains to your country and industry.

Average salary of a sales representative in the USA
Source: U.S.News

2. Figure out the sales quota for your salespeople

Now it’s high time to determine the quota your sales reps will need to hit to earn a commission. It’s recommended to base sales OTE on one-fifth of the annual sales quota or 6 to 8 times the sales quota. You can also base it on a salespeople’s work experience. 

 3. Align commission with team goals 

The commission part of OTE usually depends on the projected goals you want your sales team to meet. For example, it may be boosting revenue or increasing the amount of monthly closed deals by 8%, and so on.

Determine how difficult it will be to hit these goals and how long it may take. Align the commission with the complexity of achieving projected tasks.

4. Add the base salary together with the commission 

Once you have determined the base salary and commission, add them together to get your OTE. 

Wrapping up

Motivating your sales team is an effective way to boost your business’ revenue and ensure constant growth. On-target earnings come up as encouraging sales compensation that stimulates your sales reps to work hard and achieve the company’s goals. 

What you should always keep in mind is that OTE you offer to your salespeople must be simple enough to understand and agree to. Therefore, before coming up with a pay mix and an OTE strategy for all sales roles in a team, think well about the specifics of your sales process, the maturity of your product or service, and your company’s philosophy. 

And when it comes to an effective sales strategy, Snov.io tools and guidelines are always in an on mode to help you build it from scratch. 

email finder

Unit economics

All companies work around their business model, i.e., a set of strategies directed at achieving their organizational goals. Yet, no matter what strategies are in the act, the building blocks of any business are always the same: costs and revenues. That’s what unit economics deals with.

What is unit economics?

Unit economics is a method applied to analyze a company’s cost to revenue ratio in relation to its basic unit, hence the term. 

The “unit” in unit economics is a company’s core element measured to understand the source of its revenue. For SaaS businesses, as a rule, such a unit is a customer. Thus, unit economics for them boils down to the calculation of profit and loss per client.

Importance of unit economics

The understanding of unit economics helps companies:

  • Get a clearer picture of their business processes. Adopting unit economics is the first step for the company’s management, investors, and other stakeholders to analyze its financial performance.
  • Forecast profitability. Based on a per-unit analysis, unit economics shows how profitable a business is or how soon it will achieve profitability. 
  • Develop strategies for product optimization. Unit economics allows companies to understand whether their product is overpriced or undervalued. This can help them identify what and how should be optimized. 
  • Evaluate a product’s future potential. Relying on unit economics, businesses may analyze what customers love more, thus keeping up to sustainability standards.

Unit economics model

The unit economics model presupposes two approaches to calculating revenues and costs depending on how companies define their unit.

Approach 1. Unit defined as “One item sold”

If a unit is defined as “one item sold,” a company can determine its revenue/cost balance using the contribution margin. It is calculated as a difference between a price per item and variable costs per sale:

Variable costs are the expenses that vary depending on the quantity of the product you produce, e.g., materials, sales compensation, and so on. 

Example:

A particular laptop in a computer hardware store costs $150. The computed variable cost per laptop is $60, so the contribution margin will be:

Contribution margin per laptop = $150 – $60

Contribution margin = $90

To count the total contribution value, you should calculate the number of items sold during a certain period. Say, one customer purchases an average of one such laptop (which costs $150). For the first month, it was sold to 130 clients. To count the total price of items, you should multiply the number of customers by the cost of one laptop:

Total price of laptops = 130 х $150

Total price of laptops = $19,500

To count the total number of variable costs, you should multiply the variable cost per laptop by the number of laptops sold:

Total variable costs = 65 х 130

Total variable costs $8,450

So, the total contribution margin will be:

Total contribution margin = $19,500 – $8,450

Total contribution margin = $11,050

email verifier

Approach 2. Unit defined as “One customer”

For companies that define a unit as “one customer,” unit economics is commonly determined by the ratio of two metrics: customer lifetime value (CLV) and customer acquisition cost (CAC). Some businesses, however, count a CAC payback period instead. Let’s consider both options.

CLV to CAC ratio

Customer lifetime value (CLV) is how much money a business gets from a customer before they stop purchasing from the company. To calculate CLV, you should multiply the average value of purchase by the number of times your customer makes purchases a year, as well as an average length of your customer relationship in years:

You may find more information about CLV in this glossary article.

Customer acquisition cost (CAC) is how much money a business allocates in attracting a customer. This includes the total sales and marketing costs (campaigns, salaries, programs, and so on).

To calculate CAC, you need to divide the total sales and marketing costs by the number of new customers won. 

Example:

A SaaS company spent $150 on marketing in 2020 and acquired 100 customers in the same year. Their CAC will be:

Cost to acquire a customer = $150 / 100

Cost to acquire a customer = $1.5

CAC varies from industry to industry and depends on many factors such as purchase value, frequency, length of a sales cycle, company maturity, customer life span, etc. 

The probability of selling to a new customer ranges between 5 and 20%, while the likelihood of selling to an existing customer is 60-70 %. This is why a company needs to count the balance between CLV and the cost of obtaining new customers. 

Experts claim that an ideal LTV to CAC ratio is considered to be 3:1. In other words, the value of your customers should be three times the cost of obtaining them.

If your ratio is lower (e.g., 1:1), it means you spend too many resources on acquiring new clients. If your ratio is too high (e.g., 7:1), it means the revenue you get from a customer exceeds the money it costs you to onboard them. In this case, you spend too little.

CAC payback period

Some businesses prefer using an approach that focuses on how many months it takes to start making money from each customer. This is more suitable for startups that have a higher churn rate and need time to adapt their product to meet the needs of a market. As a result, counting CLV for them is rather complicated. 

The average payback period for young businesses lasts 15 months based on gross margin. However, a shorter payback period is more advantageous since it requires less expenditure on moving a customer to the purchase, enabling a business to grow faster.

Having elements of unit economics in mind, let’s consider how the unit economics model looks like:

Wrapping up

Every business, no matter how mature it is, should be aware of its financial performance, which is impossible without having a deep insight into its revenue and costs balance. Unit economics helps companies analyze these basics and focus on directing their business processes towards constant growth. 

Rapport

Have you ever met people who can easily find common ground with others? Magically, they succeed in creating an atmosphere of trust within several minutes. Knowing how to build rapport can help you not only in everyday life but also in your marketing efforts. 

Let’s learn what rapport is and how to build it with your leads to boost your sales.

Rapport definition

Rapport is a close and harmonious relationship in which people understand each other’s feelings or ideas and communicate well. The word itself is taken from the French verb “rapporter,” which means “to bring back.” 

In other words, rapport presupposes that what one person gives, another one gives back. For example, they may find out that they share similar values, beliefs, experiences, etc. 

Rapport in marketing

In terms of marketing, sales reps build rapport with leads to create a sense of trust and confidence. It’s a primary step to getting prospects eager to share their needs and pain points with someone who has an affinity with them.

The basis of rapport and long-lasting relationships is trust. And you can even calculate it. Trusted Advisor worked out the Trust Equation – a formula for measuring trustworthiness.

Trust = ( Credibility + Reliability + Intimacy ) / Self-Orientation

Ask yourself questions:

  • Credibility: Are you as good as you say? Do you know what you are talking about?
  • Reliability: Do you deliver on what is promised on time?
  • Intimacy: Do your clients feel comfortable with you? 
  • Self-orientation: Where does your focus lie? Do you have your clients’ best interests at heart, or are you doing this for yourself?
Trust equation

How to build rapport? 

In their attempts to look more “professional,” marketers nowadays don’t quite demonstrate their personality. Their marketing is often primitive, generic, and has no difference from others. Salespeople act as they would never act in real life, using boring heady words and phrases. 

As a result, they quickly lose customers’ interest. But what a success they could get acting more natural and human! This is where marketers need to build rapport.

There are a lot of methods to do so:

1. Coordination 

Coordination, also known as mirroring, means getting the same vibe with leads on verbal and nonverbal levels. Sales representatives define the following types of mirroring: tone and tempo, emotional, and posture. 

  • Tone and tempo mirroring means matching the tone, tempo, and intonation of a person’s voice. Try to mimicry the conversation speed. For instance, if your prospects speak fast, speed up your speech.
  • Emotional mirroring implies being a good listener to fish for your leads’ concerns and pain points. This helps you formulate additional questions to your clients using their words to understand them better and show empathy.
  • Posture mirroring means matching the customer’s body language by repeating their posture, hand gestures, breathing, and eye contact. But be careful not to overdo with repeating, as people can often take it offensively. Copy one particular body feature at first and, when you feel natural doing that, copy another one. 

In his well-known research, Dr. Mehrabian discovered that 55% of your message’s impact is defined by your body language, 38% – by your voice, and only 7% – by the content or words that you use. Therefore, while coordinating, pay your attention to body language first.  

2. Reciprocity 

Reciprocity is a powerful technique of offering gifts and favors to prospects, making them like you and feel obligated to you. The idea is to treat your leads as you would wish to be treated. Reciprocity can be material or emotional: 

  • Material reciprocity may include rewards in loyalty and referral programs, rewards given in return for some purchases, or free trials and demos of your product. 
  • Emotional reciprocity involves words that cause people to feel positive and content about themselves, such as “Thank you for your time,” or “It was a pleasure to meet you.” This will make your customers feel valued.

Here’s a video to get a better understanding of the role of reciprocity: 

3. Commonality 

Commonality is the process of finding common things with the prospects to build rapport.

People like people who are most like themselves. That’s the first rule of rapport. 

Michael Brooks, communications expert

Ask questions about their business, preferences, hobbies, etc. People like talking about themselves, and the more interest you show in them, the more comfortable they will feel with you and ready to trust. 

How to reach commonality with your customers online? Expose more personality on pictures and videos. Why are YouTube and Facebook so popular today? Because we’re extremely interested in what other people do and say. Benefit from social media by engaging with prospects:

  • Post videos to your website with you or your colleagues. It can be a simple short description of your product, but it will add authority to your brand. Prospects perceive it as a face-to-face conversation with a trusted source. In fact, people buy from people, not from companies. So, don’t hide behind your brand; use it to express your opinions, give advice, and, most importantly, be yourself!
  • Post reviews written by your customers. This will show how your company once helped solve some problems. It’s a chance for your prospects to find commonality with their issues and better understand how your product may help them.
email verifier

This will build rapport straight away and will make you unique in the eyes of a customer. 

Deferred revenue

If you have received revenue, it doesn’t necessarily mean it has already been earned. Often, you can deal with deferred revenue – something most SaaS subscription companies are familiar with.

What is deferred revenue?

Deferred revenue is also known as unearned revenue or deferred income, It’s payment received by a company in advance for services it has not yet provided or goods it has not yet delivered. This money has not been earned and thus can’t be reported on the income statement. 

Is deferred revenue a liability?

Yes, deferred revenue is a liability and not an asset. The payment the company gets represents something owed to the customer.

Deferred revenue examples

All companies selling products or providing services that require prepayments deal with deferred revenue. Here are some examples:

  1. Advance rent
  2. Mobile service contracts
  3. Ticket selling
  4. Prepayment for an annual subscription to an online service
  5. Annual subscription to a SaaS company’s plan

Let’s dive deeper into the last example. Imagine that a business offers a yearly plan with monthly payments of $10. Their customers who decide to try it pay in advance for the subscription. This revenue will be deferred until clients receive a full year’s use of the service. 

Liability vs. asset

As soon as the goods or services are delivered or performed, the deferred revenue turns into the earned revenue. You can now move it from the balance sheet to the income statement.

Deferred revenue vs. Accrued expense

Deferred revenue is often mixed with accrued expenses since both share some characteristics. For example, both are shown on a business’s balance sheet as current liabilities. The difference between the two terms is that deferred revenue refers to goods or services a company owes to its customers. Meanwhile, accrued expenses are the money a company is obliged to pay. 

For instance, if a business buys tech supplies from another company but still has not received an invoice for the purchase, it records the accrued expense into the balance sheet. The same goes for employees’ salaries and bonuses accrued in the period they take place but paid in the following period.

Deferred vs. accrued

Why is deferred revenue important?

In its broader sense, the deferred revenue is a strategy used in accrual accounting. 

Accrual accounting is one of the two main contrasting ways (another is cash accounting) of approaching finances. In it, income and expenses are recorded as they occur, regardless of whether the cash has been received. According to the GAAP, all companies with more than $25 million in annual sales should use accrual accounting.

Deferred revenue helps apply the universal principle in accrual accounting — matching concept. It presupposes that businesses report (or literary match) revenues and their related expenses in the same accounting period. If companies report only revenues without stating all the expenses that brought them, they will deal with overstated profits. 

Tips for deferred revenue accounting

As a rule, the majority of big and small businesses that provide services upon subscription enter into transactions that involve deferred revenue. Your company is most likely not an exception. To account for the deferred revenue, you need to: 

Identify transactions that involve the deferred revenue

Step 1. Determine the reporting period

It can be a month, a quarter, or a year, depending on your company.

Step 2. Determine the realized customer orders

Identify the services or goods for which you have already received payment but which you should still deliver till the end of the reporting period. As you identify these transactions, it’s high time for your accountants to calculate and record the amount of the deferred payment. 

email finder

Record the deferred revenue

Step 1. Fill in the balance sheet 

The cash that the company receives should be recorded on the balance sheet as an asset account. Meanwhile, the deferred revenue must be reflected on the balance sheet as a liability account.

Let’s say, your business receives payment from the customer for the month of subscription to your service, which costs $40. You should record the entire amount as the deferred revenue. To do this, your accountants will make the following deferred revenue journal entry: 

  • Debit Cash $40
  • Credit Deferred Revenue $40

Step 2. Record the earned revenue 

At this stage, you will need to update the journal entry in the previous step by reducing the balance sheet liability and transferring the amount to the income statement.

For instance, your company offers the annual subscription to your service, which costs $360. After the first month of your client’s using it, you will earn $30 ($360 / 12) of revenue. Now, the deferred revenue amount will be $330 ($360 – $30). Your accountants will need to transfer $30 from the deferred revenue account to the earned revenue account using such a journal entry:

  • Debit Deferred Revenue $30
  • Credit Subscription Revenue $30

Step 3. Make records until all the revenue is earned

You should go on adjusting the balance sheet and income statement as long as you are providing the service until you have nothing to owe, so the liability to the customer reaches zero. 

For example, when your customer’s annual subscription (let’s assume it’s the one mentioned above) comes to an end, your deferred revenue account will have a balance of $0, while your earned revenue altogether will equal $360.

Summing up

In accrual accounting, revenue is recognized as earned only when payment has been received from the customer, and the goods or services have been delivered to them. So, the deferred revenue is accrued if the client has paid for goods or services in advance, but the company is still to deliver them later. 

Deferred revenue accounting is important for accurate reporting of assets and liabilities on a business’s balance sheet in accordance with the matching concept. Thereby, it prevents brands from overstating their profits. 

Companies that provide service on a subscription basis should record the deferred revenue by adjusting their balance sheet and income statement till the end of the customer’s subscription, i.e. when their liability to the customer is nullified.

Closing ratio

Closing ratio, or close rate, is a measure that shows how efficiently a sales professional or a sales team performs. It tracks how many sales have been closed compared to the number of proposals given. In other words, it tracks how many leads out of all prospects made a purchase.

How to calculate the closing ratio

To calculate the closing ratio, you should divide the number of closed deals (wins) by the total number of leads a sales professional was trying to convert and multiply by 100 to get the rate as a percent. Here is the exact formula for closing ratio calculation:

Closing ratio = (Closed deals) / (Total sales leads) x 100 

Closing ratio

For example, a salesperson closed 10 deals out of the 50 leads they had been working with. The closing ratio, in this case, is 10 / 50 * 100 = 20%.

The above is the manual way of calculating the closing ratio. You may also find automatic closing ratio calculators that will count your closing ratio and compare it to your industry competitors.

You can calculate the closing ratio for any period (a year, a month, a week, etc.), but for the most accurate results, it’s better to choose a period that is longer than three months.

What is a good closing ratio?

71% of sales and marketing leaders say increasing lead-to-customer conversion is their top priority. Many of them link it with their closing ratio metric, hoping to understand what result may be considered a marker of their success. 

The truth is that there is no universally good closing ratio. Everything depends on your company, product, and the industry in general. Here is an example of the sales closing ratio benchmarks calculated for five various industries:

  1. Biotechnology industry close rate: 15%
  2. Finance industry close rate: 19%
  3. Computer software industry close rate: 22%
  4. Computers & electronics industry close rate: 23%
  5. Business & industrial industry close rate: 27%

However, even if you know the average closing ratio within a certain industry, you should keep in mind that results may vary depending on such factors as the companies’ location, specifics of their customer’s buyer persona, and so on. Therefore, your sales success can’t be determined solely by your closing ratio.

How to determine the most optimal closing ratio for your company?

The best way to do it is to track your leads and closed deals, comparing results with your closest competitors and finding out the average score. Pay attention to companies that belong to the same industry and are located in the same region. Remember that the focus of your calculations should not be just on the metric itself, but on its increasing dynamics. 

Importance of the closing ratio

Though closing ratio is not the only component that determines sales success, for marketing and sales teams, this is one of the most important numbers to know, and here is why: 

It indicates how well your sales team is performing

Tracking your closing ratio regularly, you may notice its unpleasant drop and start analyzing your team efforts at all stages of the sales cycle. As a result, you may find out that sales reps have experienced problems with qualifying leads before meeting them or have been sending proposals to uninterested prospects. 

sales cycle
(Source)

It aligns sales and marketing teams

There may be situations with unaligned teams when the marketing department achieves the goal of finding many new leads, but sales see a sudden drop in the closing ratio, which they connect with poor lead quality. Closing ratio helps both departments work in cohesion and pursue the same target.

How to improve the closing ratio

It’s a typical scenario when sales get stuck. The closing ratio doesn’t increase, and a common question among sales reps arises: ‘What should be done to increase it?’ Here’s a list of tips that can help improve this metric.

Know your product

You should understand your company’s strong points and be able to advocate for your product. Think of any prospect’s objections to cooperating with you and their possible arguments in favor of your competitors. Build up your answers that would defend your product. Make sure you can articulate its value to your potential customer.

Know your prospects

Prospects are more likely to buy from you if you match their personality style. Do research to understand their buyer behavior and drivers of their decision-making process. Don’t stick to one-for-all tactics. Some prospects respond faster to high-pressure techniques while others prefer more laid back methods. 

Ask the right questions  

If you have established the contact with your prospect, be prepared to keep the dialogue. Ask relevant questions to shift the accent from your desire to sell to the client’s needs. You may also ask how they feel you compare to competitors, if any. This way, you will demonstrate that you are ready to think about offering them more perks.  

email verifier

Use storytelling

Share examples of how your product helped other customers. Explain what challenges they faced before and what results they’ve achieved after cooperating with you. 

Work a referral system

Asking your current customers to refer your product to another company is one of the most valuable sources of qualified sales leads. They have a much higher closing ratio than those leads you generate through other methods. However, do referral selling correctly: ask for a referral right after the purchase and don’t be afraid of requesting it once again if you get ‘no.’ 

Get marketing intelligence on missteps

One of the keys to improving a company’s closing ratio is analyzing not only your wins but also your failures. Pay attention to what did not work for your company, as well as your competitors. Ask your clients what prevented them from making a purchase. This information may be quite eye-opening.

Wrapping it up

Even if the closing ratio can’t be a direct measure of your sales success, this metric, when not growing, is a symptom that you should improve your sales efforts. Don’t concentrate on closing a deal so much as on defining what value your customer is going to get from your product.

Cost per impression (CPM)

Online advertising strategies need sizable expenses. CPM, combined with CPC (cost per click), CTR (click-through rate), and other metrics, is the most effective way to measure the success of lead generation efforts marketers have already made.

What is CPM in marketing?

Cost per impression (CPM) is one of the metrics aimed at demonstrating the effectiveness of online marketing campaigns. The lower the CPM rates, the more effective and optimized the marketing campaign is.

CPM abbreviation can be interchangeable with cost per mille. With the help of this metric, you can calculate the costs for each thousand (from the Latin word – mille) advertisement impressions. The appearance of each ad is measured as one impression. If advertisement displays are counted on the CPM basis, an advertiser has to pay for each thousand ad views.

CPM helps keep an eye on expenditures carried forward in terms of such digital campaigns as:

  • Google Adwords;
  • Facebook Ads;
  • Linkedin Ads.

In 2019, the highest CPM was offered by Facebook. Other social networks are presented below in the graphic.

How much does a click cost on each social network?
(Source)

Main purposes of CPM

CPM helps to:

  • analyze the viewership generation;
  • compare costs between different media resources;
  • plan new stages of marketing campaigns;
  • estimate the results of past ad displays.

CPM formula 

The pricing model of CPM is very similar to printable ad sales. There is a fixed price for the agreed number of ad displays. CPM formula allows marketers to pick sides with the desired monthly (quarterly, yearly) advertising costs. It’s presented below:

CPM = Total Amount Spent / Total Measured Ad Impressions х 1,000

CPM formula

It means that the CPM rate is formed using the proportion of a fixed sum on a set of ads and the number of times the advertisement was shown on the page. It’s necessary to make the result a thousandfold and take it into account for new campaign planning.

With the help of this formula, both the total cost of the advertising campaign and the quantity of desired impressions can be counted. You only need to modify the original formula:

Total Amount Spent = Total Impressions / 1,000 x CPM

Total Impressions = Total Amount Spent / CPM x 1,000

CPM examples

Let’s take a look at one of the examples. An advertiser wants to stay within a $200 budget and get 10 thousand ad views on the top-ranking online media resource. The computation will be the following:

CPM = $200 / 10,000 х 1,000

CPM = $20

It means that one thousand advertisement displays will cost $20. 

The next example will show how to calculate the total number of impressions if the digital marketing campaign cost and CPM rate are fixed. A marketer counts on a $300 budget. They are ready to pay $20 for one thousand impressions. The total number of ad views will be next:

Total Impressions = $300 / $20 х 1,000

Total Impressions = 15,000

CPM for email marketing

It’s worth noting that CPM is used not only for social media advertising campaigns and marketing strategies for Internet promotion. It can also be an essential part of email marketing pricing.

In email marketing, CPM stands for the cost per one thousand email messages sent. It should be noted that this also often covers license fees, image hosting, and other services. An example of CPM calculation for $100 budget and desired 5 thousand impressions is the following:

CPM = $500 / 20,000 х 1,000

CPM = $25

If you want to save on email marketing campaigns and get an automated turnkey solution for your cold outreach, find more here.

CPM vs. CPC comparison 

CPC is a pricing model when an advertiser pays for each ad display. It means that user actions are more important. Marketers don’t need to pay for advertisement impressions if website visitors don’t click the offered ad.

Although CPC is meant as a more profitable pricing advertising model, it’s not free from shortcomings:

email finder

As compared to CPC, CPM is suitable for many marketing strategies. It’s recommended to use the CPM pricing model if:

  • an advertiser expects a desired CTR on the advertisement
  • the launch of the new project, service, or product takes place
  • marketers aspire to build budget-friendly brand recognition

Most marketers tend to believe that CPC and CPM rates should be as low as possible. In this case, the advertising campaign might not meet the expectations and efforts that need to be made. 

But it’s worth pointing out that there is a range of marketing campaigns with lead generation aimed to get CLV consumers (with high customer lifetime values). This kind of situation deserves individual attention and expenses.

Wrapping it up

The main idea of CPM is to demonstrate the cost-effectiveness of ads shown on different online resources. To find the optimal platform with the target audience and low CPM rates, it’s recommended to use the split-testing method. Plan your digital marketing campaign so that two or three advertisements will be shown on different websites simultaneously. 

It’s reasonable to compare results after receiving 3-5 thousand impressions. A marketer should take into account the CPM rate and profitability of the ad view.

Key performance indicator (KPI)

In any executive meeting, performance review, or strategy session, the term “KPI” would be used numerous times. But even though it’s overused, it’s often misunderstood, and businesses that are using KPIs effectively are not so common. When used properly, KPIs can make a huge difference to the success of a company. 

What is KPI?

A key performance indicator, also known as KPI, stands for a quantifiable measurement used to evaluate the success of a company or employee in meeting objectives for performance. In plain words, KPI is a measurable value that shows the progress against the desired result. In business, it’s used to improve performance and define success.

Key factors to consider when setting KPI

All KPIs have to start with several considerations, or else they will not be successful indicators. Generally, KPIs are numbers or ratios determined by the SMART principles, as they should be:

  • Specific
    Having a clear objective is by far the most important part of developing a KPI. It’s crucial to be measuring key objectives – the ones that have a direct impact on your business’ success. Without being connected to a specific business objective, a KPI has no intrinsic value and usefulness. 
  • Measurable
    KPIs must be regularly counted and compared to past numbers and objectives. 
  • Attainable
    To implement KPIs, appropriate and realistic measures should be taken.
  • Realistic/relevant
    KPIs should be practical and pragmatic, as well as have genuine value.
  • Timely
    KPIs must be under consistent check to be helpful. Some KPIs should be measured once every two weeks; others – quarterly or even yearly. But they all should be checked on a schedule; otherwise, the metrics are useless.
SMART principles
(Source)

Actionable KPIs

Making sure your KPI is sufficiently actionable requires five steps:

  • Review business objectives and goals
    When designing your KPIs, you have to know where you want to go before figuring out how to get there.
  • Analyze current performance
    Ask yourself questions: Is your current setup working? What is working and what is not? Is your current performance sustainable?
  • Set short and long term KPI targets
    If you have an extended time frame, it’s important to set up goals along the way to keep on track. These short term targets increase the chance your long term goal will be successful. 
  • Review targets with your team
    Everyone needs to be on board with the goals in order to meet them. Getting insight from everyone is essential for success, too, as it can fill any chinks that may be missing.
  • Review progress and evolve
    Once you put KPIs into place, it’s time to watch your progress, analyze numbers, and see where improvements can be made. An unreviewed KPI is purposeless and helps no one. 

Importance of setting objectives and updating KPIs

KPIs are based on objectives; otherwise, they have no real purpose. Once you’ve set an objective with a timeframe that’s further into the future, you can work on identifying the milestones you will need to mark to get there.

Let’s look at the following KPI example. You want to convert 3,000 leads into sales in the first quarter of the year. You will need to set monthly or even weekly milestones to get there. This way, you will be able to continually assess, reassess, and adjust the course to hit the long-term goal.

You could divide the targets equally according to each month. In this case, this would be 1,000 subscriptions in January, 1,000 in February, and 1,000 in March. 

But you may want to get more specific. There are more days in January and March than in February, so perhaps you should set a target of 1,100 for those months. Or maybe you get more website traffic in February because your company has a popular booth at a large trade show. In this case, you could set a target of 1,500 subscribers in February, even though the month is shorter.

email drip campaigns

Whatever you do, break down your KPI targets to set short-term goals that will move you towards your long-term objectives more efficiently.

A KPI that is never updated or changed based on performance is going to become worthless. Reviewing your KPIs monthly (or, more ideally, weekly) will give you a chance to correct or even change the course completely. Sometimes, you’ll think of new, more efficient paths to your objectives and goals. 

How to measure KPI?

Most commonly, there are five ways of KPI tracking:

  • Counts
    Counting is the easiest numeric value to calculate – be that the number of customers who are satisfied, the number of sales, or the number of workplace accidents. Counts are useful in measuring something that doesn’t need any more context to show change over time. 
  • Percentages
    Percentages are counts of the number of people or things that exhibit a target characteristic divided by the total population size. This number is then multiplied by 100. Click-through rate (CTR) and return on investment (ROI) are good examples of percentages.
  • Sums or Totals
    They might be confused with counts, but sums or totals are continuous variables that can take the form of numbers with decimals. For instance, the total time spent making sales calls this week was 42.5 hours.
  • Averages
    Also known as the mean, it’s the sum or total of all the numbers in a dataset divided by a count of people or things upon which the sum was based. For example, you can measure the average sales revenue per sales call or the average customer satisfaction rating.
  • Ratios
    Ratios compare two numbers side by side, separated by a colon. But make sure only to use them if it makes sense to compare two numbers.

Wrapping it up

KPIs should not only match your industry, but also your company and strategy. The right KPIs for you might not be the right KPIs for other businesses. Make sure you’ve researched as many KPIs as you can to determine which ones are suitable for you.

Net Promoter Score (NPS)

Nowadays, customers quickly share their recommendations and reviews (especially the negative ones) on different social networks. As a result, even a single client’s bad experience can damage your new business, revenue, and ROI.

This is why it’s crucial to collect customer feedback and identify headaches to make them happy. And this is where a Net Promoter Score comes in.

What is a Net Promoter Score?

Net Promoter Score (also known as NPS) is a measure of customer satisfaction and loyalty to a company. It can be measured with a single survey question, which is “How likely are you to recommend [business/product/service] to a friend or colleague?” 

NPS index ranges from -100 to +100. Respondents have a 0-10 scale to pick from, 0 being “not at all likely” and 10 being “extremely likely”. Depending on the received information and numbers, you can divide your clients into three different categories: 

  • 9-10 are Promoters or people who are enthusiastic and loyal customers. They will repurchase your product or service and are most likely to recommend your company to others.
  • 7-8 are Passives or people who are satisfied, but not loyal or happy enough to be considered Promoters. They may or may not recommend your business to others. They also may or may not buy from you again if given a competitive offer.
  • 0-6 are Detractors or people who are unsatisfied and unlikely to purchase from you again. Such customers may even actively discourage others from buying from you.

How to calculate NPS? 

Your Promoter and Detractor scores matter the most in Net Promoter Score calculation. The equation itself is simple: subtract the percentage of Detractors from the percentage of Promoters.

NPS formula

So, for example, if 10% of respondents are Detractors, 20% are Passives, and 70% are Promoters, your NPS score would be 70 – 10 = 60. 

What is a good Net Promoter Score?

Anything that is above 0 would be considered a “good” NPS because it shows that the majority of your clients are loyal. If your score is more than 50 – then your NPS is considered “excellent.”

As you may see, it’s better to shoot for 9-10 responses to encourage growth and loyalty, especially via word of mouth, referrals, and reviews. The way you get into the negative digits is when your Detractors outnumber your Promoters, and you absolutely don’t want that to happen.

How to make an NPS survey?

Even though NPS surveys are relatively easy to create, you must think about the long-term data use when deciding what to put in them, such as buying history and potential interaction. Using programs specifically designed to calculate NPS is ideal for this. 

It isn’t unusual for NPS surveys to first gather demographic information. But, when it comes to that, the shorter is the better, as you mostly want your customers’ rating, and you don’t want them to give up on the survey before they get there. You will have most of the demographic data in your CRM or customer database anyway. A common practice is to ask for demographics after asking the question.

To reiterate, the question you need to ask is, “How likely is it that you would recommend [business/product/service] to a friend or colleague? 0 (not at all likely) – 10 (extremely likely)”. Even just presenting this question is a complete NPS survey. 

The big decision is what to ask about, whether it be a product, your company, or any other variety of business-related things. Make sure you ask what you want to know about the most.

email drip campaigns

What can be measured using NPS?

Practically any aspect of your company can be measured using an NPS. You can get feedback on not just your organization, but also websites, products, individual stores, and even employees or staff members. This is important because if you have a seemingly squeaky wheel, you can determine what needs to be improved and how from an NPS survey. 

Context is important when taking NPS into consideration. A product may be popular with one demographic and disliked by another.

One employee may be dealing with customers canceling their subscriptions, thus getting a lower NPS score than an employee who is signing people up for their subscriptions. NPS is not so much an objective measure of success as it is a subjective way to measure your user base and use it as a tool to improve.

Turning 7s and 8s into 9s and 10s

Realistically, you can’t save face with Detractors who give you a low score in the survey. But you can make the experience better for the Passives in hopes that they can become Promoters. This is why you should consider adding a feedback/comments section to your NPS survey. 

Ask every targeted customer why they gave you the score they marked. You can also ask them what you could do better. By doing so, you will find out directly from them where you are failing and succeeding. Questions like “What did you like and what did you dislike?” can lead to a lot of usable insights. 

People who are almost satisfied can become completely satisfied if you take the time to implement any changes from the feedback you receive. If you get the same complaint over and over, you know what to do with it (the answer is to listen and change for the better!). This lack of guesswork pays off.

If you still have questions after reading their feedback, you can always add a section asking if it is ok to contact the customer with a follow-up and ask for their contact info, most commonly their email.

email verifier

Churn rate and NPS

The cool thing about NPS is, when paired with churn rate data, you can predict when a customer is going to churn, cancel your service, stop buying from you, or stop using your product. There are many tools out there to help crunch the numbers for this exact purpose. Connecting the business dots by early identification can give you extra time to win customers back before they even leave you.

Click-through rate (CTR)

Online marketing is aimed at finding potential consumers with the help of digital channels. Users surf the Internet, socialize online, and focus their attention on the most interesting blogs, informational and commercial websites, as well as attractive advertisements. Click-through rate (CTR) is one of the ways to measure the success of the search engine, advertising, or email campaigns, among others. It shows the exact percentage of users who decided to click on the link just after seeing it.

CTR formula: how to calculate the click-through rate

According to the definition, CTR is the ratio of the number of clicks (people who were interested in the offered advertisement and performed some activity, for example, clicked on the ad or link) to the overall number of impressions (views). This figure should be multiplied by 100 to make CTR into the percentage. Here is the exact formula for CTR calculation:

(Total Clicks) / (Total Impressions) x 100 = Click-Through Rate

CTR formula

The above is the manual way to calculate the CTR. Additionally, marketers might use different metrics to monitor it. Let’s take a look at one example:

The total number of impressions is 1670. The total number of clicks equals 89. It is enough to see the CTR percentage. Here is a formula applied to the case:

CTR = (89 / 1670) x 100

CTR = 5,32%

CTR demonstrates the quality score of the campaign – the higher it is, the better the return on investment you might have. 

What is a good click-through rate?       

Experts note that there is no ideal CTR index because its percentage depends on your platform direction and the type of content. But some common rules help to understand if the CTR is high or low for your online business:

  1. Most marketers would state 2% CTR is the average score for any advertising campaign
  2. Some experts name 4-5% CTR as the most optimal result for digital projects
  3. If CTR is higher than 10%, it might be dangerous for the monitored website

The last point might sound surprising, but too high CTR percentage is the key reason for Google to inspect the digital platform. Search engines will take a focused look at your website’s activities and can even block it. So, even the most successful paid advertisement can’t provide you with a CTR that is higher than 10% if you do not violate the white hat practices of digital marketing.

email verifier

How to determine the most optimal CTR for your market niche?  

The most useful advice for website owners and marketers is to analyze different projects, advertising campaigns, and marketing strategies in only one sector. It’s necessary to take a look at CTR of all the competitors and find out the average score. Note that each industry has its peculiarities. For example, according to the Google AdWords Industry Benchmarks, the automotive sector enjoys a rather high CTR score (4%), while the technology, B2B, and customer services segments have a lower CTR indicator (2-2,5%).

Click-through rate as one of the most important lead generation metrics

Just like the conversion rates, cost per customer, cost per click, and other popular metrics, CTR measurements are used to see the effectiveness of a lead generation campaign. It shows how many targeted users have clicked the links that were offered by the lead generation channel.

Additionally, CTR helps to see the proportion of the number of website visitors who clicked the link to the total quantity of lead generation recipients. If the percentage is low, it is a sure sign to work on your content. At the same time, a high CTR score demonstrates a good response from the audience. 

Using the CTR metrics can lead to the improvement of any lead generation campaign. A comprehensive CTR analysis can help adjust the lead generation strategy and come up with further thought-out actions that will bring better results. 

CTR is also widely used to improve the results in other digital marketing campaigns. Among them are:

Speaking about email marketing and CTR, it’s important to note that CTR is considered to be the most critical metric for any campaign. It’s often used paired with the open rate metric. Marketers compare the results of these two metrics to see the following statistics:

  1. How many people usually open emails
  2. How many recipients click the link in the message

Email click-through rate

Email CTR is aimed at measuring the number of people who clicked at least one available link in the message. CTR in email marketing helps to understand the quality of the email copy and its performance. To calculate email CTR, perform the following three steps:

  1. Take the total number of recipients that clicked the link you added to your email
  2. Divide this score by the number of messages delivered to recipients
  3. Get a ready percentage – multiply the result by 100
Email CTR

For instance, you sent 1,000 letters and know that 43 recipients clicked the link that had been placed inside the message. Use the formula to calculate CTR: 

CTR = (43 / 1000) x 100 

CTR = 4.3 %

This score is a good result for email marketing. It means that you have an excellent engagement. Marketers consider CTR as the level of the engagement rate. A high open rate score doesn’t mean that people are interested in the information provided in the letters. CTR is the metric that tracks the leads’ interest in your offer. 

Top 3 ways to make email CTR score higher

Marketers often search for efficient methods to improve CTR, so here’s a list of tips that can help increase the CTR score of your email marketing campaign:

  1. Make your content engaging – the quality of information should be extremely high. Texts, pictures, promotions, and other data should be attractive. 
  2. Take into account the CTA (call-to-action) aspect. The stronger the CTA, the higher the CTR.
  3. Focus on your target audience – you can optimize your email campaign using audience segmentation. Divide all the potential customers into several groups. All the categories will have different needs and specific content. 

Wrapping it up

Experts name CTR as a ranking signal, which makes it an important self-analytics constituent of Google’s RankBrain algorithm. Do not neglect this metric and use it to improve your digital marketing campaigns.

Sales turnover

What is sales turnover? It is an accounting concept that determines how quickly a business conducts its operations. Most often, it is used to understand how much of its inventory a company sells within a defined period.

For example, if a business is selling mobile phones, the turnover rate would be the total amount of mobile phones sold in a year. It will represent the value of total sales provided to consumers during this time. Turnover is also used to calculate how quickly a company collects cash from accounts receivable. 

Sales turnover vs. revenue

Sales turnover is often confused with revenue, and while these terms are related, they are two different measures used to determine the success of a company. While revenue measures the profitability of the business, turnover determines its efficiency. So, although sales turnover and revenue are not quite the same, they do often correlate, as companies earn more revenue by turning over their inventory frequently. And even though the turnover is not necessary to report, unlike revenue, it helps to understand how to manage production levels better. 

Besides, we shouldn’t confuse sales turnover with the term “overall turnover,” which is a synonym for a company’s total revenues, most often used in Europe and Asia.

Email drip campaigns

Two things to track: assets and ratios

Two of the most significant assets owned by a business are inventory and accounts receivable. And the most common measures of turnover rely on ratios involving these two things. Both assets require a heavy cash investment, and it is essential to calculate how quickly a business makes money. 

Turnover ratios measure the efficiency with which a company generates revenue. They compare the dollar amount of sales or revenues to its total assets. Yes, this can get confusing, but stay with me!

Generally speaking, a higher turnover ratio = company is efficiently generating sales. A lower ratio = business is not using the assets efficiently, and there are some internal problems.

Sales turnover ratios vary depending on the sector, so you should only compare your ratios to companies within the same industry. These ratios are usually calculated on an annual basis, but it is quite common for it to be calculated quarterly too.

How to calculate the sales turnover ratio?

Accounts receivable turnover ratio

Now let us define the accounts receivable turnover ratio: it is an accounting measure used to quantify the company’s effectiveness in collecting its receivables or money owed by clients. This ratio shows how well a business manages the credit it extends to customers and how quickly this short-term debt is paid back. The equation to determine the accounts receivable turnover ratio is:

Accounts Receivable Turnover Ratio = Net Credit Sales / Average Accounts Receivable

Accounts receivable turnover ratio

So, if you have credit sales for the month that total $400,000 and the account receivable balance is, for example, $60,000, the turnover rate is 6.7. The goal is to maximize sales, minimize the receivable balance, and generate a high turnover rate.

Inventory turnover ratio

Calculating inventory turnover can help companies make better decisions on pricing, manufacturing, marketing, and purchasing new inventory. The inventory turnover ratio formula is a little bit more complicated, but not by much. First, you have to calculate the cost of goods sold (COGS), which is: COGS = Beginning Inventory + Purchases during the period – Ending Inventory

After you have your COGS number, you can now calculate your inventory turnover ratio, which is:

Inventory Turnover Ratio = COGS / Average Inventory

Inventory turnover ratio

For example, if your cost of goods sold is $500,000 and you have $150,000 in inventory, your inventory turn ratio is 3.3. Inventory turnover helps investors determine the level of risk they will face if providing operating capital to a company. So a business with a $7 million of inventory that takes eight months to sell will be considered less profitable than a company with a $3 million of inventory that is sold within three months.

Why is sales turnover so important when you can just look at revenue?

We are all here to make money, right? Yes, revenue is the top line, the big number that shows you how much money you have made, but sales turnover ratios show you how well you are doing at making that money. 

If you are running a company that sells physical inventory like a clothing store or a grocery market, your sales turnover ratio will be much higher than say a car dealership’s, so it is important to take your industry into consideration when reviewing it. Comparing your sales turnover ratio to other companies within your field can help you find your sweet spot and determine what ratio to shoot for.

If you are a non-physical goods company, such as a SaaS or a service provider, you might want to use the accounts receivable turnover formula to learn how quickly you are collecting payments, and the goal is to maximize sales, minimize the accounts receivable balance, and generate a high turnover rate. Again, it is helpful to look at other businesses in your industry to get an idea of what kind of ratio you want to aim for.

Summing up

Technically, there is no intrinsic value to sales turnover – in other words, there is no exact number or scale you should aim for. Instead, you should use it as an indicator of your company’s performance in comparison to past performance and industry standards. 

Yes, the higher the ratio, the better, but that does not mean every company’s “higher” will be the same. Your sales turnover ratio should be tracked to determine if a trend or pattern is emerging, as well as to see if there is any room for improvement in your assets or selling process, there is no arbitrary number you should be hitting. 

Simply put, the turnover ratio is an indicator of the efficiency with which a company is using its assets to generate revenue. It is a way to keep a check on your success. The higher the turnover ratio, the more efficient a company is; and conversely, if a business has a low turnover ratio, it shows it is not efficiently using its assets to generate sales, and some changes need to be made.

Conversion rate optimization

Conversion rate optimization (CRO) is the process of improving the percentage of visitors to your website that convert (aka the conversion rate) by changing the ad copy, design, marketing strategy or methods, retargeting etc.

Why you need to include CRO in your marketing strategy

Conversion rate optimization demands time and effort. However, besides the obvious advantages of improved conversion rate, higher ROI, and growing revenue, there are other reasons why no good marketing strategy can truly be good without CRO: 

✔️ It’s cost-efficient 
It’s more expensive to find new leads than to convert the old ones. That’s why once you have a lead, you should really try to convert them. Retargeting old leads as well as improving your landing pages, UI design, ad copies etc., will pay off and help you improve your bounce rate, time-on-page, SEO, and brand recognition. Even if you choose to use conversion rate optimization tools, you will find CRO to be much more cost-efficient than most sales and marketing strategies. 

✔️ Improved customer experience
Because the two are so connected, CRO lets you take care of your conversion rate while improving the overall customer experience. How? Any conversion rate optimization strategy implies the improvement of UI/UX design, landing pages, simplification of the checkout process etc. This will inadvertently improve the customer experience. 

✔️ Better customer lifetime value
With the improvement of the customer/user experience, your churn rate will also improve. This will subsequently improve your CLV (aka LTV). What’s more, satisfied customers are more likely to become brand fans over time, referring new potential customers that are more likely to convert. 

✔️ Higher ROI
CRO will give you a higher return on investment, not just from the website, but also from paid ad campaigns. Remember to conduct A/B tests to find out what converts leads better. 

How to improve your conversion rate 

When the conversion rate doesn’t seem to grow or even goes down, a good conversion rate optimization strategy can help you. There are many ways to improve the conversion rate.

These are our favorites:

  • Improve UX by making the website easy to navigate. A great UX will improve the conversion rate. Don’t make your leads do the extra work – the smoother the experience, the higher the chance to convert.
  • Work on SEO to ensure your website is ranked well in the search engine. This doesn’t just help leads find your service easier, but also improves brand awareness and image, which often count in the final decision-making.
  • Design a CTA that will be bright, clear, and really calling to action. Create them not only for your landing pages but for blog posts too. Do not add CTAs only at the end of your posts or website: not everyone reads till the end. Insert a few CTAs throughout. 
  • Add pop-ups, drop-downs, banners, and slide-in boxes. HubSpot has proven that slide-in boxes can improve the conversion rate even better than traditional CTA buttons (192% more clicks-throughs and 27% more submissions). 
  • Create long-form landing pages. According to research, long landing pages convert 220% better compared to short ones. Keep this in mind when you set a task to your designers. 
  • Add forms to get more information about your leads. This is done not just for you to send them relevant information and content, but also to fine tune your perfect buyer persona and your CRO strategy overall.
  • Create a conversion funnel. This is really one of the best conversion rate optimization practices as it will let you analyze user behavior, which stages your leads get stuck on, define the triggers they react the most to, and decide what you need to improve.
  • Implement live chat tools to have an opportunity to communicate with visitors directly. They can either appear on the spot or after a user spends a certain amount of time on the webpage. Such tools make it easier to improve the conversion rate: the conversation will be easier to start as the leads are already interested in your service or product and you’ll be there in case they have any quick questions that may be stopping them from a conversion.
  • Optimize and update popular blog posts with a low conversion rate. There are a few (obvious) reasons in favor of this conversion rate optimization strategy. Firstly, everyone (including search engines) loves relevant and updated information. Secondly, this is an opportunity for you to add more CTAs throughout the texts that can increase your conversions and stop leads from exiting the page once they find the information they’ve been looking for.
  • A/B test to see what works better for your audience. It’s almost impossible to predict what exactly you can do to convert your audience better. A/B testing helps you get actual numbers on what works better, even if it seems counter-intuitive to you. 

Now that you know what to do, you need some tools to help you with it. Here are our favorites.

11 conversion rate optimization tools

You may find it challenging to work on the conversion rate optimization manually. We recommend choosing a set of conversion rate optimization tools and platforms to help you conduct surveys and tests. 

A/B Testing

A/B Tasty
With this conversion rate optimization tool, you will easily analyze your website and find how user-friendly it is, get insights on the loading performance, and conduct A/B and Multivariant testing. 

Optimizely
Optimizely is one of the most popular all-in-one platforms that offers marketing testing. This platform will help you improve UX and helps you test not only your website but also Android and iOS apps.

Experiment Engine
This conversion rate optimization tool is provided by Optimizely. This is the A/B testing tool that will help you find the best version of your website through reports and detailed analytics.

Conversion rate and design analysis

Google Analytics
Who doesn’t love GA? It’s completely free but still lets you dive into the slightest detail of the user performance: opens, clicks, time spent on the page, conversion, etc. Take the time to really learn it – it pays off.

Clicky
A heat-mapping tool is an alternative to Google Analytics that will help you implement your conversion rate optimization strategies. It provides data on user behavior so that you can find ways to improvement. The provided data is the same: number of visitors, average time spent on the page, bounce rate, number of clicks, etc. 

Crazy Egg
This great platform tracks users’ interaction with your website through heat maps, recordings, and snapshots. You can also make quick changes on your website and A/B test to find the most converting website version. Just note that their plans are only billed annually. 

Clicktale
This conversion rate optimization tool is an alternative to the previous ones. Clicktale provides details on user performance with heat maps, analytics for web, mobile, and apps, session replays, and conversion analytics. 

KISSMetrics
Kissmetrics is another CRO tool tracking the users’ behavior, also offering location data. With this tool on board, it will be easier for you to improve the conversion rate.

TryMuUI
This tool allows you to conduct complete UI tests and find out the best and the worst things about it. This is an alternative to Qualaroo that provides a set of similar features.

Get insights from users

Google Forms
One more free tool from Google that will help you in your conversion rate optimization efforts. Use it to create surveys and get insights on your visitors, letting you convert them easier in the future. 

Survey Monkey
This is probably the most popular tool for creating surveys and analyzing the results. You can use templates or create your own surveys, add triggered questions and set themes, change fonts and insert your logo, and much more. All this will help you design appealing surveys that people are excited to fill out. 

Implement CRO strategies, use conversion rate optimization tools, and you will improve significantly in no time.

Conversion rate

Conversion rate is the number of conversions or actions, divided by the total number of visitors. A conversion rate can be applied to other actions too, it is not exclusively tied to sales. 

Conversion refers to any action you want the consumer to take, such as clicking a call-to-action button, signing up for an email list, setting up an account, or anything else you want it to be.

Measuring the success of your site or app keeps you in control and capable of making informed changes and decisions. It is key to knowing how to improve, see what is working for your business and what isn’t, and grow sales. 

Conversion rate formula

if you are wondering how to calculate conversion rate, it’s a very easy thing to do – simply divide the number of conversions by the number of interactions.

For example, if 500 people visited your website and 40 people registered, your conversion rate is 40 ÷ 500 × 100% = 8%.

Raising your conversion rate

Conversion rate optimization, or CRO, is the process of improving different metrics in order to improve conversions. 

The easiest way to optimize conversion rate is to use A/B testing. A/B testing helps you experiment by presenting user group A with one version and user group B with another version, then see which performs better, and make changes based on the results that will improve conversions. Your A/B testing must go beyond experimenting with color or font – design and layout, ad copy, mobile optimization, and more all matter and should be tested.

Once you have an attractive site or app, making it easy to buy from you is the simplest way to improve sales conversion rate. Complicated or long checkout procedure with too many input fields, too many options, or requiring any additional actions is going to make people quit mid conversion without completing a purchase/action. Simplifying the checkout process leads to more conversions. 

For B2C businesses, one of the simplest ways to optimize sales conversion rate is to offer free shipping (seriously), which is explained perfectly here:

free shipping drake meme

One more way to optimize conversions is use cases, testimonials, and reviews. People want to trust in what they are buying and who they are buying from. 

Ideal conversion rate

It is important to note that the conversion rate will vary depending on the industry, medium, and offer. 

According to WordStream, for example, the average landing page conversion rate across industries is 2.35%

However, the top 25% reach the average conversion rate of over 5.31%. What you should be aiming for ideally, though, are the top 10% with the average conversion rates of 11.45% and higher… across their entire account, not just landing pages.

Average conversion rate
Source: WordStream

Of course, you should also consider the industry you’re in. The median conversion rate for finance is more than 5%, while the average eCommerce conversion rate is less than 2%. Study your industry benchmarks.

Conversion rate goals are a bit of a “shoot for the stars, land on the moon” situation in that you want to work towards the highest possible rate while being aware you may not – and probably will not – hit that mark. But just by aiming high, you will land high.

Remarketing to the ones who got away

On average, 96% of people who visit your website will not convert to a sale, simply because they’re not ready to convert yet. Remarketing is the process of targeting the people who, say, visited your website but didn’t purchase through multiple channels – in search results, on social media, YouTube, etc. 

Remarketing gives you a chance to: 

  • Turn abandoners and bouncers into leads
  • Increase brand recognition, which increases branded searches
  • Increase repeat visitor rates and engagement
  • Increase the effectiveness of your SEO and content marketing

Most importantly, remarketing helps you stay top of mind and once the lost leads are ready to convert, they’re more likely to choose you, increasing your sales conversion rate. 

Conversion rate is the most important metric you can improve

Conversion rate is one of many ways to measure your success, but it may be the most important one in seeing how well your business is actually doing. You will never be able to sell to everyone, but striving to keep your conversion rate high should be the priority for most of your campaigns and strategies. 

Cost per click (CPC)

Cost per click, also known as CPC, (synonymous to PPC, or pay-per-click) is a web marketing method used to draw target traffic to web pages, in which an advertiser pays a publisher when a visitor clicks the ad. A publisher is usually the owner of a website, a web platform or a search engine.

Pay-per-click is often connected with top-level search engines (like Google Ads or Bing Ads). With search engines, marketers regularly bid on keywords or key phrases regularly searched by their target audience. 

Conversely, content platforms charge a settled price per click instead of using a bidding method. PPC promotion, also regarded as “banner” ads, are shown on websites that contain associated content and have consented to display ads and are usually not CPC advertising. The mainstream social networking platforms such as Twitter and Facebook have implemented pay-per-click as one of their promotion methods as well.

Nevertheless, websites can also offer PPC ads. Platforms that employ PPC ads will show the ads when a key phrase query corresponds to an advertiser’s list of keywords that have been added in various ad groups, or when a content platform shows relevant content. Such ads are called sponsored links or sponsored ads. They are shown on the search engine page above, below or adjacent to the organic search results, or in any place of a content site, where a web developer decides to create an ads section.

The PPC marketing method is vulnerable to violations through click fraud. However, Google and its rivals have launched automated security systems to guard against abusive clicks by opponents or dishonest web promoters.

CPC/PPC destination

Cost per click, together with such metrics as cost per order and cost per impression, are used to estimate the economic efficiency and efficiency of web marketing campaigns. 

CPC has benefits over cost per impression in that it carries details about how productive the ad posting was. Clicks are a reasonable method to gauge visitors’ attention and engagement: if the foremost goal of web promotion is to cause a click, or more precisely drive traffic to a target page, then pay-per-click is the favored metric. Once a specific quantity of web impressions is reached, the quality and position of the ad will influence click-through rates and the resulting pay-per-click.

How the CPC is calculated

Cost per click (CPC) is estimated by dividing the promotion price by the number of clicks delivered by a certain ad publication. The basic cost per click formula is:

Cost-per-click ($) = Advertisement price ($) / Ads clicked (#)

CPC formula - how to calculate cost per click, aka PPC

There are two basic patterns for defining pay-per-click: flat-rate and bid-based. In both cases, the promoter must analyze the potential price of a click from a provided source. This price is based on the sort of target person the promoter is anticipating to get as a visitor to their web page, and what the ad promoter can obtain from that visit, usually short term and long term income. 

As with other methods of promoting targeting is essential, and factors that often influence PPC campaigns incorporate interests of the target audience (often represented by a search phrase they looked up in the search engine, or the content of a page that they are browsing), buying intention, state, city or region (for geo-targeting), and the time and date that they are browsing.

average cost per click around the world
Source: WordStream

What is Flat-Rate PPC?

In accordance with the flat-rate system, the marketer and the ads publisher decide upon a fixed price that will be paid for every visitor’s click. 

Quite often, the publisher has a rate card that enlists the pay-per-click (PPC) within several various areas of their website or network. These different amounts are often associated with the content on web pages, with content that generally interests more important visitors having a higher PPC than content that interests less relevant visitors. 

Still, in many cases, advertisers can discuss lower prices, particularly when planning to enter into a long-term or expensive deal.

What is Bid-Based PPC?

The promoter signs an agreement that enables them to bid against other promoters in a separate auction held by the publisher of the ad or, more usually, an advertising network. 

Each promoter notifies the host of the highest amount that they are ready to pay for a given ad spot (regularly based on a search keyword), customarily using online instruments to do so. The auction starts automatically every time a website visitor triggers the ad spot. When the advertising spot is a part of a SERP (search engine results page), the programmed auction occurs every time someone searches for the keyword or key phrase that is being bid upon. 

The winner is determined when all the bids for the search phrase that target the user’s geographic location, the timing of the lookup, etc. are analyzed and compared. Quite often there are many different ad spots; in such cases, several winners can be determined, whose positions on the page are affected by the value of each bid. 

The bid and Quality Score give each promoter’s advert an ad rank. The ad with the top ad ranking is displayed first. The leading three match varieties for both search engines, Google and Bing, are Broad, Exact and Phrase Match. Google also introduces the Broad Match Modifier standard which varies from Broad Match in that the search key phrase must include specific keyword expressions in any order and doesn’t involve relevant alterations of the terms.

History of CPC

Different companies claim to have launched the first PPC model on the web on their websites, many of them emerged in the 1990s. For instance, in 1996, the first registered version of a PPC was incorporated in a web directory named Planet Oasis. This was a desktop app produced by Ark Interface II, a branch of Packard Bell NEC Computers. Its job was to highlight links to marketing and informational websites. 

Yet, the first feedback from marketing companies to the new “pay-per-visit” paradigm was skeptical. By the end of 1997, over 400 influential brands were paying between $.005 to $.25 per click plus a fee for placement.

In winter 1998, at the TED conference in California, Jeffrey Brewer from Goto.com introduced a PPC search engine POC (proof-of-concept). This crucial presentation and the subsequent events developed the PPC advertisement system. Credit for the idea of the PPC method is commonly given to Idealab and Goto.com patron Bill Gross.

Google started search engine promotions in winter 1999. In fall 2000 the AdWords system was launched, enabling merchants to create text ads for placing on the Google search engine. Nevertheless, PPC was only launched in 2002; until then, ads were charged at cost-per-thousand impressions or Cost per mille (CPM). 

There was a patent violation lawsuit filed by Overture against Google. They claimed the competing search service trespassed its restrictions with its ad-placement tools.

Amongst PPC providers, the three largest network operators had been Google Ads (formerly Google AdWords), Microsoft adCenter and Yahoo! Search Marketing, all three working according to a bid-based pattern. 

In 2014, PPC (Adwords) or online promotion counted for nearly $45 billion of the whole $66 billion of Google’s yearly income. In 2010, Yahoo and Microsoft started their consolidated battle against Google, and Microsoft’s Bing got to be the search tool that Yahoo used to present its search results. As they joined powers, they changed the name of their PPC platform to AdCenter. Their connected system of third party websites that enable AdCenter ads to populate banner and text advertisements on their website is called BingAds.

In 2012, Google was originally alleged to have been involved in misleading and deceitful tactics by the Australian Competition & Consumer Commission (ACCC) in probably the first juridical case of its kind. The ACCC declared that Google was liable for the content of its sponsored AdWords announcements that had displayed links to a car marketing website Carsales.com. The Ads had been displayed by Google in reaction to searching for Honda Australia. The ACCC stated the ads were deceitful, as they implied Carsales.com was related to the Honda company. 

The verdict was later changed when Google retried to the Australian High Court. Google was determined not accountable for the misleading ads run through AdWords despite the fact that the advertisements were provided by Google and produced using the company’s instruments.

Revenue

Revenue is the total income of money from the sales of a company’s goods or services, as related to normal business operations, with gross revenue being specifically the income a company generates before any business expenses are taken out.

Types of revenue

There are multiple types of revenue, for example, monthly recurring revenue. The most commonly used ones are gross revenue and net revenue.

Gross revenue is all income from a sale, with no consideration for any expenditures from any source. If a company sells 10,000 units of its newest product for $800 a piece, the gross revenue is $8,000,000. This is the simplest way to calculate your revenue, but it is not exactly accurate. 

Net revenue is income from a sale after subtracting all the discounts and returns. Therefore if 2,000 of those units were sold with a 10% discount, and 10 units ($800 each) were returned, the net revenue will be: 8,000 × $800 + 2,000 × $720 – $8,000 = $7,832,000.

Revenue is often called the “top line” because it is at the top of an income statement. So, when a company has “top line growth,” the company is experiencing a rise in revenue. Top line growth is always the goal.

All sales are part of the revenue, regardless of whether they are from goods or services. Revenue only shows how effective a company is at generating sales and does not take into consideration the fees for production, shipping, and storage, which can significantly impact the “bottom line,” or income, which will be discussed later on.

Income vs revenue

On the other end, there’s the income (or profit), aka the “bottom line”, which shows how effective a company is with spending and managing its operating costs. Despite being called the bottom line, income is often used as a synonym for revenue because both terms refer to positive cash flow. But in a financial context, the term income almost always refers to the total amount of earnings remaining after accounting for all company expenses. 

This is a given, but income is an extremely important measure of the profitability of a company, despite the term sometimes being misused. This line is the second most important after the top line and tells you what money you have in the end. Income is also separated into gross and net income.

Gross income is all income from the sale, minus the cost of goods sold. Continuing our example with the 10,000 product units at $800 each, if the cost of the goods is $200 each (25%), then the gross income from those sales will be: $8,000,000 × 0.75 = $6,000,000.

Net income is all income from the sale, minus the total expenses associated with the production, shipping, storage, and sale of the product. If the company’s gross revenue is $8,000,000, it’s cost of goods sold is $2,000,000, and it’s total selling expenses are $1,500,000, the net income will be $4,500,000. 

Net income goes further into determining the actual profits. However, gross and net incomes show the different sides of income and costs that affect it, and are used in different sides of business analysis. 

How to calculate revenue

If your company sells only one product, calculating revenue is easy. If your company sells many products and/or services at different prices, you will simply have to use the equation multiple times with different variables for each product/service. Here’s how to calculate (gross) revenue:

Gross revenue = Units sold x Sales price

Gross revenue excludes things like discounts, refunds, product costs, or any other expenses, so it’s really easy to calculate. To calculate net revenue, you will need to know data like discounts and returns:

Net revenue = Units sold x Sales price – $ lost on discounts – $ lost on returns

Calculating gross income and net income is pretty easy as well:

Gross income = Gross revenue – Cost of goods sold

Net income = Gross revenue – Total expenses

Keep your records up to date and remember: revenue does not equal cash flow. 

You have the numbers – what next?

Calculating your revenue is like giving yourself a divining rod for what direction to head next. It shows what you can do what you need to change. You can use it in many ways, all to help guide your company in the right direction. Here are a few examples of things you can do and analyze when you know your exact revenue and income:

  • Evaluate the basics – immediate and future expenditures such as employee pay, inventory, suppliers.
  • Plan for growth – use your revenue and income figures to decide if there is enough money to consider company growth. And if there is, grow!
  • Analyze trends – how does your revenue from this year look like compared to last year? If it’s better, what did you do differently? If it’s worse, what changes can be made?
  • Raise your prices – a clear picture of your revenue will help you see if you are undercharging. To decide on the fair market value of your product, you can start by looking at your profits vs. expenses.
revenue vs income

The figurative bottom line

Your company’s revenue is hands down the most important and critical financial data you need to know. If you do not know how much money you are making, you cannot make decisions about your company or your products. Knowing your revenue helps you see your products’ worth and analyze whether you are underselling yourself.

Fair market value

Fair market value, or FMV, is a price a willing, knowledgeable, unpressured buyer is willing to pay to a willing, knowledgeable, and unpressured seller. Fair market value is most often used in real estate, investment, legal, and stock market realms, but it can be applied to any buyer/seller market.

Understanding fair market value

The term fair market value is purposefully distinct from similar-sounding terms such as market value or appraised value, as it considers the economics of free and open market activities, whereas the term market value is simply the price of an asset or product in the marketplace. 

So, while a home’s market value can easily be looked up in a listing, the fair market value has more intricacies to determine. Similarly, the appraised value refers to an asset’s value in the opinion of a single appraiser, thus not immediately qualifying the appraisal as a fair market value. However, in many cases where a fair market value needs to be determined, an appraisal will usually suffice. 

Given the thorough definition of the term “fair market value”, it is often used in legal settings. For example, the fair market values of real estate and property are frequently used in divorce settlements in order to calculate compensation. 

Again, fair market value is most regularly used in dealing with the assets in the real estate, investment, legal, and stock market realms, but the buyers and sellers of any products and services use the concept when deciding prices.

Ways to determine fair market value

All things that can be sold, traded, or bartered have a fair market value. If you are selling a used car, the amount a buyer is willing to pay for it will determine its fair market value. Fair market value can be decided in many other ways, some common ones listed below:

  • Comparative analysis
    When real estate is being sold, real estate agents conduct a comparative market analysis, in which they compare the property to other similar properties. The same can be done for other assets (such as cars, jewelry, rare collectibles) and products. All you have to do is find another item like yours and see the price at which it sells, then go from there in pricing your product, item, or property.

  • Professional appraisal
    Having certified experts in your field, with their training and experience at hand, appraise an item, product or property can help determine the market value. Though do note that it is important to work with an appraiser who regularly assesses the worth of whatever it is you are trying to find the value of. For example, if you want to know the fair market value of a rare book, hire an appraiser who works with rare books, not just any antiques dealer.

  • Averaging
    The fair market value of publicly traded stock is calculated by averaging the highest and lowest selling prices of the day. So, if the highest is $15 and the lowest $5, the fair market value for that day would be an average of $10. This can be applied to other fields too in order to find the best free market value of a product.

What affects fair market value

Unfortunately, there is no equation to determine fair market value. Determining a fair market value for your asset, item, or product requires looking into the fair market value of similar products, a professional appraisal, or determining average market value.

However, there are things that can affect the fair market value beyond these. Therefore, adjust your fair market value according to relevant factors, such as:

  • Previous purchase price of your asset or service
    If you are evaluating an asset not long after it was originally purchased, the price you paid can be a good indicator of its current fair market value.

  • Past sales price of similar asset
    This is relevant when the sale of an item was very recent and the asset that was sold is similar to the item being valued.

  • Replacement cost of asset or service
    The cost to replace the asset or service may be relevant, especially the going price of an identical item or service.

Having said that, there may be many other factors that set your assets and services apart from others on the market, so you may not always end up comparing apples to apples. 

Besides, fair market value is not even always completely fair. In some instances, fair market value gets totally derailed. For example, let’s imagine a famous rapper teams up with a famous shoe company to release limited edition designer sneakers. Expectedly, this rapper’s fans are completely willing to forgo what would be the fair market value and will pay exorbitantly more for the shoes than they are worth, even when they know a sneaker is not truly worth $500 or more. In this kind of scenario, the fair market value is inflated to reflect the price the consumer is willing to pay.

Why fair market value is so important

Simply put, fair market value is a financial concept related to the price a buyer will be willing to pay and a seller will be willing to sell for, with reasonable knowledge about the item in the open market, free from pressure. 

The fair market value process offers many advantages. In its broadest economic sense, fair value represents the potential price or value assigned to an asset, product, or service, taking into account its utility, supply and demand for it, and the amount of competition for it. Knowing the fair market value leads to being able to price a product in a range that people will be willing to pay for it, while not underselling yourself.

ROI

ROI, or return on investment, is a commonly used measurement of gain and loss generated on an investment relative to the amount of money invested. It is one of the profitability ratio formulas used in financial analysis for monitoring sales and profits within businesses.

ROI is most often presented as a percentage. The equations are relatively straightforward and simple, but ROI can be used beyond just a company’s total profitability calculation and it is often used within specific departments.

Calculating ROI

There are several different ROI equations, all equally valid but used for different scenarios. Calculating your return on investment is pretty easy as long as you have the numbers ready.

Here are 4 of the most commonly used ROI calculation formulas.

ROI formula #1: Net income method

The formula for Net Income ROI is pretty simple. All you need to know is your initial cost of investment and your final net return. Here’s how to calculate net income ROI:
ROI = (Net Return / Cost of Investment) x 100%

Net income ROI formula

ROI formula #2: Capital gain method

The capital gain method lets you calculate ROI on investment. It is one of the easiest ROI formulas, as all you need to know is the cost of investment and it’s current value:
ROI = ((Current Value of Investment – Cost of Investment) / Cost of Investment) x 100%

Capital gain ROI formula

ROI formula #3: Total return method

Total return method helps calculate return on investment in shares:
ROI = ((Current Share Price + Total Dividends Received – Original Share Price) / Original Share Price) x 100%

Total return ROI formula

ROI formula #4: Annualized ROI method

This method allows to calculate ROI taking into account the time of investment. This formula is slightly more complicated than the others and to calculate ROI using it, you first need to calculate your capital gain ROI and know the number of years the investment is held for:
ROI = [((1+ capital gain ROI)^1/n)−1] × 100%
(Where n is the number of years the investment is held
for)

Annualized ROI formula

ROI metrics can be as simple or complex as you want them to be. These formulas are very flexible and can be used in various ways. Anything that had an initial investment and a measurable current value of profit can have its ROI calculated.

Interpreting ROI

The ROI equations use “net return” instead of “net profit” because the returns from an investment can be and often are negative instead of positive. Just like balancing your checkbook, if your ROI is positive, you’re in the black, and your total returns exceeded your total costs. Having a negative ROI means you’re in the red, with your total returns being less than your total costs and your investment producing a loss. 

So what is a “good” ROI? Well, that depends on your business and industry. If you are an investor, generally, 15% is considered good. For digital marketing, it is 118%. As you can see, there can be some drastic differences. You should not just shoot for a number you picked randomly, you need to know your industry’s standards and work from there, as an Overarching Good ROI Measurement™ does not exist. 

Benefits and downsides of using ROI

ROI is the simplest measurement of the percentage of profit from an investment and has a lot of benefits:

  • Easy to calculate
  • Helps predict future potential returns
  • Helps set goals for current and future projects and departments
  • Understood by both experts and laymen alike
  • Effective in measuring project success
  • Can help in deciding between different investment opportunities, giving you plain numbers to help with decision making
  • Can be used for calculating or comparing the returns from the past. (For example, if you are looking into investing in a project or a business, you can see how it performed in previous years, with ROI being the first metric to check)

In making investment decisions, ROI can play a big role, helping you know where to focus your investments and where not to for maximum revenue. For example, a negative ROI might call for a major change. However, you should always take into consideration what the average is in your industry to make sure you’re within a “good” range.

That said, ROI calculations have their downsides. One major downside to ROI calculations is in that, for the most part, time is not factored into them (except in the annualized return method), so you cannot see the impact of time on your numbers. 

Also, the variety of ROI calculation methods can make it confusing: if a company calculates using one formula, an investor may calculate using a different one, which might result in different percentages, creating both a difference of opinion and confusion. Obviously, you do not want that to happen, so communication is key when crunching numbers – make sure everyone is using the same formula.

In conclusion

Knowing your return on investment gives you a big heads up in financial decision making on all levels of your business. ROI equations are a quick, simple, and easy-to-understand way to analyze your investments, determine the worth of your investments, and help you make financial decisions based on how well your business is truly performing

MRR

MRR, or monthly recurring revenue, measures a recurring revenue expected monthly. Mostly used in SaaS and other subscription services, it averages various pricing plans and billing periods into a single number that can be tracked over time. It can help predict future revenue and allow for reporting performance even when there are numerous subscription terms. It is one of the most important metrics in subscription-based business, as recurring revenue is what keeps the business going.

How to calculate MRR

You can calculate MRR in a number of ways. Here are the most common MRR formulas:

Calculating MRR using customer-by-customer

This is a more thorough way of calculating MRR. It requires going through every single account and adding up their fees. You will know your exact base MRR this way.

Calculating MRR using ARPA (average revenue per account)

Calculating MRR using ARPA is a relatively simple equation. First, though, you must calculate ARPA, which requires setting a defined time period (usually a month, but sometimes a quarter or year) according to your billing options. The total revenue from all accounts during that determined time period divided by the number of accounts gives you the ARPA. 

ARPA formula

For example, if you have two accounts, one bringing in $100 and the other $300, the ARPA would be $200.

In order to calculate MRR, you multiple ARPA by the total number of accounts for the month. Using our previous example of an ARPA of $200 between 2 customers, the MRR would equal $400. It’s a quick and easy way to predict revenue, which is priceless for planning ahead.  

MRR formula using ARPA

You may want to have separate MRR calculations for existing and new customers in order to have a more complete and accurate prediction. 

Other sections of MRR for calculating a comprehensive view of revenue

Calculating the MRR for existing accounts is great, but there is more to the picture than just existing accounts. In order to have a comprehensive and complete MRR report, calculate the following as well:

  • New MRR – MRR from new accounts
  • Reactivation MRR – A subcategory of New MRR from previous accounts who have come back to your service
  • Expansion MRR – MRR from existing accounts upgrading to a higher pricing level
  • Churned MRR – lost MRR from canceled accounts

Factoring in these specific MRRs will give you more exact results for what your overall MRR is. Some of these numbers (new, expansion, and reactivation MRRs) will show your growth, while the others (churned MRR) show revenue loss. Obviously, all are important in predicting future revenue streams, charting growth, preventing loss, and planning pricing. Possibly more importantly, they will help you determine why your revenue is going up, down, or staying the same.

Calculating Net MRR

Again, this is a pretty simple equation. In order to calculate net MRR, you calculate: 

Existing MRR + New MRR + Expansion MRR – Churn MRR = Net MRR

Net MRR formula

How to grow MRR

Generally speaking, you want your MMR to grow, not stay the same. There are several ways to go about upping your revenue:

  • Increase in price
    Do not make the mistake of underpricing your product. Consider it carefully; what does it actually do for your customer and what is that really worth? Find the sweet spot of what customers are willing to pay and what your product’s value is.

  • Upsells
    Upselling to existing customers is a great way to boost revenue. Offering add-ons is an easy up-sell (“get this feature for only an extra $5 a month!”) and creating pricing-per-user packages is easy and quick. Giving people the option to buy more works.

  • No freemiums
    Offering a limited-use free plan for your product does two things:
    1. it literally makes your product limited, not showing potential clients everything it can do;
    2. the consumer will make do with the limited plan and never buy the full version of the product.
    The alternative to freemiums is limited free trials. Instead of offering a free way to use your product forever, let your potential customer try a full version of it for 30 days. Once they see how great and helpful it is, they will convert easier and your revenue will go up.

  • No unlimited plans
    You sell yourself short if you offer an unlimited plan. Charge people for what they want to use – if they need an “unlimited” amount of whatever you’re offering, chances are they would be prepared to pay for everything they need anyway. 

Why MRR is important

As we have noted before, knowing your gains and losses, and why you are having those gains and losses is important for predicting your revenue and charting your progress. The equations for calculating MRR and ARPA are simple (though some of them can be time-consuming), but they will give you a valuable insight you need to run your business right. 

Comparing your MRRs month-to-month (or year-to-year, etc) can help analyze what areas your gains and losses are coming from and give you a chance to either build upon or fix those areas. 

Being able to predict your revenue leads to educated planning and growth. The wise use of MRR data can help you find the perfect pricing that is a balance of your product’s worth and what the consumer is willing to pay, help determine the needs and pricings of add-ons, and help find the sweet spot for the free trial length that is most likely to lead to purchases.

In conclusion 

MRR means little when taken alone. MRR is about trends and long term tracking of revenue and where it comes from (or is being lost from) in order to predict trends and future revenue, and see where there is a chance for revenue growth. Comparing past values to present ones shows you which direction your revenue is headed. MRR is a priceless tool that helps see both where you have been and where you are going.

Churn rate

Churn rate is the percentage rate of subscribers who end or discontinue their subscription to a service within a given time frame. It is also known as the rate of attrition. 

Churn rate is vital to know in order to keep your business not just afloat but growing. A high churn rate indicates an impediment of growth and a damper on profits, whereas a 5% increase in customer retention can increase profits by 25% to 95%.

In other business contexts, the churn rate also refers to employee turnover as existing workers leave and new ones are hired.

Churn rate formula

Retaining customers is easier and less expensive than finding new ones, so a low churn rate will help the budget on multiple levels.

To determine churn rate, you take the number of customers lost during a specific time period and divide it by the number of customers you had at the beginning of that specific time period plus new acquired customers, which will result in your churn rate percentage. 

churn rate formula
One of the most popular churn rate formulas

For example, if you started with 800 customers at the beginning of the month, gained 200 new ones, and lost 10 existing customers over that same month, your monthly churn rate will be 1%.

There’s an alternative popular formula that is calculated even more easily:
Churn rate is customers that have churned in a month/year divided by the number of customers at the beginning of that month/year.

churn rate formula
A popular alternative formula to calculate churn rate

This formula can also be used for calculating employee churn rate. Just divide the number of leavers in a month by your average number of employees in a month. Then, times the total by 100. 

Please note, there is no one correct way to calculate churn rate. In fact, there are dozens of variations of churn rate formulas. Your formula may depend on the type of your business, the complexity of customer behavior, and many other factors. The formulas above are the most popular churn rate formulas.

Churn rate and growth rate 

For a company to grow, the churn rate must be much lower than its growth rate, which is the percentage rate of new customers. 

It is important to understand growth rate in the context with churn rate. Both help determine overall gains and losses. When the churn rate is higher than the growth rate, no matter how big your growth rate is, it will hurt your revenue. These two rates can’t really be separated from each other when determining how well your business is doing.

Reducing churn rate

So how do you reduce churn rate? The dream is to have a 0% churn rate, but that is not realistic, as people will always have a myriad of reasons to end their subscriptions. But there are ways to keep customers from leaving, and, as mentioned before, it is easier and more lucrative to keep a customer than to try to find new ones. Here are some suggestions for lowering churn rate and retaining customers:

  • Good onboarding practices: When you get a new customer, you want them to know they are in good hands and are appreciated by your business. Welcoming emails, informational and educational content, making customer service easy and quick, all of these things will help keep people wanting to work with you.

  • Asking for feedback soon after joining (and then again and again): Not only will your customer feel their voice is important to you, you will get free insights into how to improve your product. This will also encourage customers to use your product. Therefore, keeping a feedback loop going will keep you aware of how your product is performing and keep tabs on how your customers are feeling about their experience using it.

  • Be proactive: Reach out to your customer. Email drip campaigns can be very helpful in keeping in touch with valuable informational content, sale announcements, helpful tips, and other offers, while keeping it fully automated. Engaging with customers via social media is also easy and quick. Making sure you keep your customers up-to-date on changes or issues shows them you care and are dependable.

  • Analyze: Customer churn is inevitable, but it is not uncontrollable or completely random. When a customer does churn, examine why. Look at their case and see if there is something you can do different to keep others from churning. When a big percentage of customers churn, realize you may have a bigger problem you need to fix.

Reasons behind high churn rates

Most of the time, there’s a reason a customer cancels their subscription. Sometimes it is as simple as they don’t need your product anymore, but there are other big reasons to consider:

  • Selling to the wrong audience: This is a legit and easy-to-make mistake. If who you are trying to sell to is not the right fit, you are not going to keep them as customers for very long. Researching the market for your product, creating a buyer persona, and taking aim at the right prospects will get you customers who will stay with you.

  • Price: Consumers want the best product for the lowest price, always. There is no other way to say it. If your price does not match your offer, people will not be willing to keep paying for it. You have to make sure your product lives up to its price and if it does, you have to make sure your customers know how to use your product to its highest efficacy so they feel they are getting their money’s worth.

  • User experience: If your product runs perfectly and smoothly, your customers are much more likely to stay with you. If your product is glitchy, hard to use, or cumbersome, not so much. People use products to make their lives easier, not harder, so make it easier by constantly improving the user experience.

  • Customer experience: Your company should be easy to work with and customer interactions should be a positive experience. Poor customer service is a really quick way to get your churn rate higher. This includes a positive social media presence that is also helpful and quick to respond.

Churn rate is an essential metric of your business’s success. Lower churn rate can be achieved through studying customer feedback, customer behavior, market trends, and looking at your own product’s usability. Educational content, great customer service, and an established place in the market can also help keep churn rates low.

Customer lifetime value

CLV, also known as customer lifetime value (LTV or CLTV) and lifetime customer value (LCV), is the revenue a business receives from a customer over the length of the customer/business relationship.

Knowing your average customer lifetime value helps predict future revenue and evaluate your churn reduction efforts. Generally, businesses strive to increase their average customer lifetime value through nurturing long-term customer relationships.

CLV tells you how well you are connecting with your customer base, how much your customers like your product, and where there is room for improvement. It is the type of information every business needs to know to plan their further development strategy. 

How to calculate CLV

There is a simple formula for calculating CLV. However, it requires a couple of numbers, like the average value of purchase, the number of times your customers make purchases a year, as well as an average length of your customer relationship:

CLV = (average value of purchase) x (number of times the customer makes a purchase each year) x (average length of the customer relationship in years)

You can also calculate CLV using months instead of years for more precise results.

Predictive CLV

Predictive CLV is a bit more complicated, as you will need to know a few more numbers. There are several models used to calculate predictive CLV, they are all very complex. These models include probability modeling approaches, and generally speaking, companies hire out the crunching of these numbers to analysts due to the complexities.   

The reason predictive CLV is important is self-explanatory: it helps predict what will happen in the future so companies can plan ahead. Making business decisions solely on what has already happened isn’t looking forward, and with predictive CLV, a chance to look into the future is opened.

Importance of segmentation based on CLV

Segmentation is extremely important. Let’s imagine a client – Jenna – who has been going to Starbucks before work and ordering a venti black coffee every day for 10 years. Her customer lifetime value will be higher than that of another client – Paul – who’s been going in once every 3 weeks for a grande vanilla latte for 4 years, even though on the surface, the latte costs more than the black coffee. 

Calculating their customer lifetime value will show that the black coffee regular Jenna is the one who should get more attention. The company wants black coffee regular to stay black coffee regular because they are the one who’s creating a lot of consistent revenue, as opposed to vanilla latte occasional Paul who is just a little tiny blip in their revenue stream. 

For Starbucks, the cost of keeping the regulars is much lower than enticing the occasionals, and to keep their regulars’ CLV high, the company uses a number of techniques described below.

How to improve customer lifetime value

Considering the odds of selling to an existing customer is 60-70% but only 5-20% to a new customer, investing your more time and resources into doing business with your existing customers is the key to sustaining a high CLV.

You make more money off existing customers than new customers, period. Keeping your existing customers happy so they stay with you longer requires implementing certain techniques and tactics. There are several ways to do that:

  • Keep in touch, consistently remind customers about your product via various channels
  • Use social media to interact with your customers
  • Segment your audience and send tailored offers, e.g., don’t send an email about steel-toed boots to those interested in buying an evening dress
  • Set up a rewards program that encourages repeat purchases 
  • Include freebies, such as samples and freemiums, which will encourage new purchases
  • Send out regular promo codes, sales, and special offers
  • Upsell: for example, ask the black coffee regular if they would like a breakfast item with their drink
  • Set expectations, then exceed them: underpromise and overdeliver
  • Make it easy to do business with you: easy access to products, easy communication and help, easy exchanges and returns
  • Be friendly, send out welcome emails, thank you for your purchase emails, etc.

Why you should know your customer lifetime value

Customer lifetime value is an easily calculated, deep look into your customer base that reveals the strength of your brand loyalty. Knowing your CLV helps balance spending on acquiring new and keeping existing customers (by minimizing the churn rate). At the same time, determining which segments of your client database have the highest CLV will help you improve the buyer persona profile. 

Improving the CLV should be every company’s priority.

Take your business to a higher league
Find more leads and accelerate conversions with Snov.io, an all-in-one toolbox for B2B sales.

No credit card required

footer-people.png

Become one of our successful clients

With over 100,000 thriving companies on board, Snov.io continues helping businesses grow. Here's what our users say about their experience.

testimonial

"Our sales revenue has grown by 18% since we started using Snov.io"

Joey Mallat

testimonial

"With Snov.io we discovered new ways of lead generation."

Ramzi Barkat

testimonial

"With Snov.io our response rate has grown 900%."

Fatma Ezzahra Amrani

testimonial

"With Snov.io in just one week we sent out 500 emails with an incredible 86% open rate that led to 177 scheduled interviews."

Ross Nazarenko

testimonial

"Snov.io helped us collect more than 80,000 leads in a month, accelerating our search for emails while reducing the cost per lead."

Dmitry Chervonyi

testimonial

"We needed something that would help us automate, send emails just in time, yet feel personalized and human. We started looking for a solution, and we found Snov.io."

Sofiia Shvets

testimonial

"Snov.io’s Email Finder reduced the time it took us to find email addresses by almost 50% and the lead generation efforts by 20%."

Jaswant Singh

testimonial

"We managed to collect 35,000+ emails, including elusive leads from companies we could never reach out to before."

Aleksandr Usoltsev

testimonial

"One of our clients got 23 email meetings scheduled from just 117 emails sent with Snov.io."

Deepak Shukla

testimonial

"We needed an additional contact channel, and discovering Snov.io has allowed us to boost our conversion rate, both contact-to-reply and contact-to-call."

Kirill Rozhkovskiy

testimonial

"The open rate for the emails sent to leads collected and verified with Snov.io tools went from 25% to 73% in just one month, which resulted in 95 business meetings with potential customers."

Ricard Colom