The Disrupter Metric

Let me tell you a story. I recently spent three intense days at Leadscon, connecting with over 100 industry leaders. One theme kept echoing: the frustration with ROAS and MER volatility. While these metrics have their place, they often leave us chasing shadows, neglecting the bigger picture of customer lifetime value and sustainable growth.

Imagine this: you're at the helm of a marketing team, constantly pressured to deliver on short-term gains reflected in ROAS and MER. But these metrics, heavily influenced by external factors like channel updates and industry dynamics, feel like a rickety rollercoaster. You crave stability, a way to map out a clear path for long-term success. What's the real indicator?

Even as I had concluded my day before headed to Harry Reid Las Vegas, I bumped into another Marketing Executive, on a phone who spoke about ROAS. It was the same story, and what made it worse, I was listening to measurement gaps. This is not the leaders fault, though, it's an industrial fallacy in book, and it was led by what had worked over a decade ago, perhaps even more.

But this was my "aha" moment. I thought about ROAS and MER, stuck at the airport, fueled by Red Hot Chili Peppers' "Scar Tissue," I delved into my trusty excel sheets, searching for a more reliable compass in my KPI matrix. LTV to CPA, a common favorite, offered glimpses of growth potential, but it didn't capture the entire financial landscape.

Then, inspiration struck. I donned my financial officer hat and pondered: "How can I ensure a single, scalable variable shapes my LTV to CPA as I ramp up marketing spend?" Bingo! The answer wasn't ROAS or MER, but laid with accounting, COGS (Cost of Goods Sold).

This epiphany led me to a powerful equation:

PSM = LTV / (CPA + COGS)

PSM, or Profitable Scaling Margin. -I later found out what it was called, by placing in the formula on web search (because I knew some person already sought a solution), but hey it's how I arrived to the destination that counts right?

This elegant formula transcends fleeting transactions. It considers the customer's lifetime value, the cost to acquire them, and the cost of delivering your product or service. It's a game-changer for marketers seeking sustainable growth.

Here's how PSM empowers us:

• Strategic Planning: Understanding customer value (LTV) alongside margins allows for data-driven budget allocation and growth strategies. Loyalty programs, referral programs, cross-selling and upselling. An example here is selling let's say lip gloss for $15, but upselling lip stick for $30, and then building that audience to a high ticket item: Botox ($300-$2500).
• Prioritized Investments: PSM pinpoints the most effective marketing channels for acquiring valuable customers, not just those boasting the highest ROAS. It's about true ROI, not fleeting efficiencies. It can tell us if PPC is the deal maker or if it's Connect TV.
• Confident Decisions: PSM relies on reliable metrics: CPA, LTV, and COGS. This empowers us to make confident investments in the future.
• Scalability: PSM helps us project future growth and invest in scaling our customer base. It allows us to revisit channels we might have previously dismissed due to ROAS limitations.

But PSM isn't just about numbers. It fosters a shift in mindset. We move beyond chasing daily metrics and delve into strategic planning for long-term success.

Ready to Ditch the Rollercoaster?

Here's your action plan:

• Calculate Your PSM: Uncover the true value of your customers, both for your total marketing spend and for specific channels.
• Focus on the Levers: Strive to improve LTV through upselling, cross-selling, and data-driven audience building. Lower your CPA through targeted marketing tactics and operational excellence tools like AI chatbots and phone calls (I use AI Rudder ) cover lost in expenses from call center mistakes. Operationally, the business I venture with saves from not having to hire at scale for a call center. Optimize COGS by considering vendor contracts and efficiency improvements. Another example here is finding easier cost for product distribution, or data cost. etc.
• Test and Optimize: With more data from a wider customer base, you can make rapid improvements in both operational excellence and sustainable growth.

I realize a lot of us will still use ROAS and MER, but understand PSM is the NorthStar metric, I'll still use LTV to CPA, and I'll still use quick ratio, but ultimately it's going to be PSM that drive the needle going forward.

This journey from ROAS and MER frustration to PSM empowerment is a powerful one. I've sort of been modeling out data for the last hour based on it, and have been testing channels based on results. So far, so good today.

Let's champion PSM and lead the marketing community towards a future of data-driven, long-term growth strategies.