*Updated on August 28th, 2018
“How do I choose which marketing funnel stage and tactics to focus on next?”
This is one of the first questions posed by new Ladder hires. As they’re introduced to their first client, they learn a lot about the business and industry they’ll be working on. In that process, they begin to understand the exact goals and needs of their clients.
This question always pops up around the office.
You’ve probably been there yourself — not sure which levers to pull to make growth happen. It’s not an easy problem to solve, and requires both a view of the trees and the forest overall. And when you’re entrenched in execution or strategy – one side or the other – you tend to miss the other half of the equation.
To make the strategic ideation process easier, we codified some best practices for choosing a funnel stage, which then naturally leads to solid., ROI-driven tactic ideas.
It’s been massively helpful in training new hires, and is also a useful tool for all our strategists.
And we’ve decided to share it with you — the exact document we give to new hires to help them pick a funnel stage to target using tactics found in the Ladder Playbook.
Choosing a funnel stage
The value we (Ladder) provide to clients stems largely from our ability to choose the right tactics to test, for the right funnel stage, at the right time.
Done right, funnel analysis saves our clients’ resources, drives faster growth, and prevents a lot of headache.
Below you’ll find the thought process you should run through when selecting which funnel stage and growth tactics to prioritize.
The rules behind this process are the basis for how our proprietary growth technology makes testing recommendations 😉
To find the right path to growth, we first need to chart the territory. Mapping funnel stages tells us a surprising amount about a business, how it makes money and how to improve the equation.
A Ladder marketing funnel, modified from Dave McClure’s ‘Startup Metrics for Pirates’ version, works like this:
- Market – how many potential customers are there in the target audience?
- Awareness – how much of that audience is aware of the brand?
- Acquisition – how many of that audience clicked through to the site?
- Activation – how many visitors became users (created an account / downloaded a content offer)?
- Conversion – how many activated users become customers (paid / made you money)?
- Revenue – how much revenue do you make on avg per conversion?
- Retention – how many times do they pay you money over their lifetime?
- Referral – how many of your visitors tell their friends about you?
To understand the return on investment (ROI), you also need to know how much an average transaction is worth to the business you’re growing, and how much you spent on marketing. You also need to know how these metrics are related so that you can figure out the value of improving one of the metrics.
Here is an example marketing funnel breakdown:
Your funnel calculations
- Revenue should be the money you make after accounting for production costs (margin)
- Referrals should be separately worked out as % of visitors, not % of customers
- Find referral value by looking at historical conversion rates from shares to new customer
From here, you can calculate some key values that will help you make valid, data-driven decisions about which tactics to choose next.
Customer Lifetime Value (LTV) = $30,000 / 200 = $150
Customer Acquisition Cost (CAC) = $10,000 / 200 = $50
And you’ll also be able to figure out how much your ads will cost and how much revenue each ad click brings in.
Cost per Click (CPC) = $10 / 1000 / 1% = $1
Revenue per Click (RPC) = $150 * 20% * 10% + ($12 * 1%) = $3.12
Finally, you can also calculate your ROI — the gain or loss in relation to your marketing spend and efforts.
Return on Investment (ROI) = $150 / $50 = 300%
*Bookmark this post to refer back to whenever you’re not sure which formula you need to use.
Your funnel formulas
- LTV (lifetime value) = Expected revenue / # of Conversions
- CAC (customer acquisition cost) = Budget / # of Conversions
- CPC (cost per click) = CPM / 1000 / CTR
- RPC (revenue per click) = LTV * Conversion rate * Activation rate + (Referral value * % of referrals per visitor)
- ROI (return on investment) = RPC / CPC
Some things to remember
The above calculations aren’t hard and fast rules. They’re adaptable based on the needs of your business/client. Some businesses won’t be as far ahead or have as much data as you need. So remember the following 3 rules:
- IF you aren’t certain about an assumption, downweight it until you feel confident.
- IF there’s a long customer or sales lifecycle, consider discounting future cash-flow.
- IF you don’t have the cash-flow to wait for lifetime revenue, use 3, 6, or 12-month revenue.
You should always segment your final funnel by marketing channel (as described in this Marketing Funnel Analysis post).
It’s very common to see differences in conversion and retention rates depending on which paid channel a user comes through.
A healthy business will typically break even (on a last-click basis) on the paid marketing channels they can influence and make up the margin through organic / word of mouth channels.
Your advertising is likely to be more effective than you can measure due to the ‘halo effect’ that’s hard to attribute. Last-click attribution – the default attribution model for Google Analytics – tends to overvalue retargeting and undervalue awareness generation campaigns at the top of the funnel.
To choose the right channel, it’s helpful to have a few baselines on what is considered good and bad performance. It’s hard to find this information online – every business either hides their data or isn’t very detailed.
So we set out our own ideal baselines.
These are global variables that we use to determine good vs. bad performance. Obviously, these will largely change by sector/industry, but just knowing how your metrics compare to the average gives you an idea of the strengths and weaknesses in your funnel.
Ideal baseline CPM: $10
Ideal baseline CTR: 1%
Ideal baseline Activation %:
- 2% (from content)
- 20% (just email from landing page)
- 10% (email + password from landing page)
Ideal baseline CVR:
- 60% (from Activation)
- 3% (from free user to paid user for Freemium)
- 1.5% (from visitor to purchase for eCommerce)
Ideal CPC to RPC ratio: 1:1 (paid channels)
Ideal LTV to CAC ratio: 3:1 (blended)
40% of view-through retargeting conversions are incremental
Revenue and retention for paid channels vs organic: 10%-20% lower
Revenue and retention from direct / brand traffic: 50% higher
Ideal revenue from primary channel: 80% (as % of all revenue driven)
Ideal revenue from secondary channel: 15% (as % of all revenue driven)
Mobile CPMs: 30% lower than Desktop
Mobile CVR: 50% lower than Desktop
Where to find/how to calibrate benchmark funnel data:
- Search ‘average [metric] for [industry]’
- Find industry-specific case studies
- Public company industry data
- Blog posts by industry aggregators
- Ask experts in your industry
- Use data from similar industry
- Google keyword planner / facebook insights
- Calculate what numbers need to be to break even
- If all else fails, make highly educated guesses, but test your assumptions
*Note: if the average numbers for your metrics don’t seem to make sense, it’s very possible that your competitors are running unprofitable marketing campaigns. This is a huge opportunity to take advantage of.
Size of your opportunity
Once you have your marketing funnel mapped out and your baselines estimated, you can spot the biggest differences between your numbers and the average. This will highlight where opportunities lie. This is where you should target your efforts to improve your performance.
*NOTE: This mindset is the foundation for a strategically successful growth marketing audit.
You can calculate the size of the opportunity by dividing the baseline by your client’s metric for each funnel stage and subtract 1.
- IF conversion rate (free user to paying customer) for a freemium product is 3% and your product is converting at 2%, size of the opportunity is 50% (3/2-1=0.5).
This also works backwards:
- IF the eCommerce conversion rate baseline (visitor to conversion) is 1.5% and your conversion rate is 3%, you have a negative opportunity value of -50% and should refocus your efforts on other parts of the funnel.
- IF your metric is 0-10% above baseline, mark the opportunity size as 10%
- IF your metric is -10%-0 below baseline, mark the opportunity size as -10%
Here’s a more direct example for you to follow:
Average acquisition rate is 0.95%
Average activation rate is 20%
Acquisition rate (CTR) of 1%
Activation rate (visitor to email) of 10%
Size of opportunity on Acquisition = 0.01 / 0.0095 – 1 = 10% (it’s 5%, which is <10%, so 10%)
Size of opportunity on Activation = 0.2 / 0.1 = 50%
The above case shows that any tactics that help with Activation should be the primary focus for this example client until we hit upon a few successful tests that change the economics of the business.
How to prioritize marketing tactics
We have an enormous database of all the different marketing tactics that have been tested. All our clients feed into this central database to report how well a tactic has performed in aggregate.
Conceptually it might look like this:
Tactic 1 – avg 8.3% ROI on acquisition
Tactic 2 – avg 3% ROI on activation
Tactic 3 – avg 14% ROI on activation
Tactic 4 – avg 20% ROI on acquisition
Tactic Scoring + Size of Opportunity
Now, we have everything we need to prioritize our marketing tests for the client/business that we built the funnel for. We simply need to multiply the size of the opportunity by the expected return from the tactic. This ensures we’re always taking into account the weakest part of the funnel and selecting the most promising tests.
Always filter through your best judgment to downweight or upweight these scores base on contextual relevance.
Tactic 1 – 10% x 3% = 0.3 (acquisition)
Tactic 2 – 50% x 3% = 1.5 (revenue)
Tactic 3 – 50% x 14% = 7 (activation)
Tactic 4 – 10% x 20% = 2 (activation)
Even though the funnel stage isn’t as big of an opportunity, the average performance of Tactic 4 means it will be recommended ahead of Tactic 2 (but not ahead of Tactic 3).
As you can see, it’s both ROI-driven and data-driven, requires a lot of research, and results in data-backed decisions on which tactics to prioritize.