"How do I choose which 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.
But even our more-senior strategists often get stuck, so 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. And when you're highly focused on execution or on strategy, 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 in the Ladder Planner.
So if you're stuck out of ideas to grow your business, start here:
Choosing a Funnel Stage
The value we 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, we can save our clients resources, drive faster growth, and save ourselves a lot of headache. This document is an attempt to record the thought process we should be going through when we’re selecting which funnel stage and tactics to focus on for a given client.
These rules are also the basis for how our product, the Ladder Planner, makes testing recommendations - we’ll update this doc as the Planner evolves.
(Source: Ladder Planner)
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)?
- 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 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 expected value of improving one of the metrics. Here is an example funnel:
- 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 return on investment -- the gain or loss generated by your marketing spend and efforts.
Return on Investment (ROI) = $150 / $50 = 300%
For your future reference, here are the formulas we used above. Refer back to this document whenever you're not sure which formula you need to use.
- 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
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 3/6/12 month revenue.
You should always look to segment your final funnel by marketing channel. For that, you can look at our Marketing Funnel Analysis post for further information.
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 because of the ‘halo effect’ of having your brand everywhere, and because last-click attribution tends to overvalue retargeting and undervalue awareness generation campaigns at the top of the funnel.
To choose the right channel, you need 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 for that 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.
These are also useful for modelling a startup idea before
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 calibrate / find baselines:
- 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 Opportunity
Once you have the funnel mapped out and your baselines estimated, you can spot the biggest differences between your numbers and the average. This will be the funnel stage where the biggest opportunities lie. This is where you should target your efforts to improve your performance.
You calculate size of 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.
Within the Ladder Planner, we have an enormous database of all the different marketing tactics that have been tested. All our clients feed into this central database, so you can see how how well a tactic has performed in aggregate.
(Source: Ladder Planner)
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 a 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.
(Source: Ladder Planner)
Note: If you’re trading off a small amount of observations (i.e. Tactic 3) or you don’t think the data applies (e.g. the tactic is oriented towards B2C businesses and you’re working on a B2B business), use your best judgement to downweight or upweight these scores.
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).
And that's how we choose funnel stages at Ladder. 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 test.
But for that you also need a database of tactics to work off, which is available in the Ladder Planner. Featuring 1000+ tried-and-tested tactics alongside a drag-and-drop marketing plan builder and a tactic recommendation engine, the Planner helps our strategists grow businesses of all types and sizes.
If you're interested in trying the Planner, sign up for a demo!
Need help figuring out which funnel stage to target next? Ladder can help!
Review your marketing strategy and goals with a Ladder Strategist: