Mary Meeker sent a direct message to marketing and customer experience teams on the topic of customer acquisition costs (CAC) and lifetime value (LTV) in her 2019 Internet Trends report.
“Reality = CAC can’t exceed LTV for very long,” Meeker, founder of Bond Capital, wrote. “Effective + Efficient Marketing = One’s Own Product + Happy Customers + Recommendations.”
Marketers, sales and customer experience teams should aspire to a ratio of 3:1 when it comes to LTV (estimate of profit before a customer churns) over CAC (sales and marketing spend required to acquire new customers), according to an Edison Partners Sales and Marketing Roundtable report (pdf).
Time to Change the Marketing Playbook
This is a big job: spending money to acquire customers who ideally will ultimately bring three times the lifetime value. And Meeker says it needs to happen more so than ever before. The question is how can you get to that point where LTV is consistently outperforming CAC?
“The challenge with CAC is that with digital marketing people have become very lazy,” Peter Boolkah, a business consultant who wrote about the topic on LinkedIn last year, told CMSWire. “People will throw money at advertising without fully identifying what a true customer journey looks like. For many it’s not about nurturing a relationship, it is about the mantra that if you throw enough stuff at the wall some of it will stick.”
Because marketers have access to such a potential wide audience, it matters less if a customer is lost as more marketing is often the answer, according to Boolkah. The fact we operate in a highly congested digital space with everybody vying for visibility doesn’t exactly help marketers to keep the spending down acquiring new customers. Marketers typically find themselves spending more to keep up in the visibility game.
“It’s a great business model for Facebook, Google, YouTube,” Boolkah said. “Unless you create a one in a million piece of viral marketing then be prepared to get your credit card out and pay, which has become cost prohibitive to many companies over the years.”
Related Article: Keys to Building Customer Lifetime Value
The Cost of Acquiring New Customers Will Likely Rise
Ted Bauer, a freelance content strategist, sees that spending rising even more due to the effects of the COVID-19 pandemic. Marketers, he said, tend to dump a lot of money into Google and Facebook to get new customers.
“We’ll probably see that more and more with coronavirus and limited trade show attendance, which is a big lead generation channel for lots, too,” Bauer said. “Some Google search terms that used to be cheap even three to four years ago seem astronomical per click now, so that ecosystem isn't necessarily friendly to demand generation. There's almost like a complete inversion of the whole curve that people came up understanding. It's weird.”
Related Article: Focus on the Customer Experience First and the Metrics Will Follow
Do You Know Who Your Target Customers Are?
So how do you bring down CAC and create a better ratio with LTV?
Jeremy Korst, president of GBH Insights and a marketing strategist, said the biggest challenge in rationalizing CAC versus LTV is the lack of a related company strategy and organizational accountability. Does the CEO and senior leadership team understand these metrics and embrace them to guide company planning and execution? Is there a clearly defined set of target customers that the entire organization is focused on, from product development to marketing to sales to support?
“The most efficient way to acquire a high value customer is to first make a decision on who your target customers are, and it can’t be everyone,” Korst said. “Then, build your entire company and brand around serving that set of customers.”
Develop a differentiated strategy to reach each of your most valuable customers. If you can deliver value across the entire customer lifecycle and journey with those valued customers, you can minimize CAC, while improving LTV. That’s a big “if,” though. Especially considering companies often have misaligned vision between different departments that play a role in acquiring customers and keeping them valued for the long haul.
“Common roadblocks that get in the way of companies reducing CAC include a lack of alignment between product, marketing and sales teams,” Korst said. “Too often we see firms develop products, experiences or offers based on internal assumptions, desires or resource constraints, rather than what‘s aligned with their competitive brand position and target customers.”
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Focusing on Short-Term Wins Over Long-Term Customers
Companies have a tendency to overreact to churn, broadening their acquisition efforts to sign up customers with a lower-priced offer just to “just get them in the door,” according to Korst. This comes before an upsell attempt of something more expensive later. This approach, however, inevitably leads to churn and higher CAC, as companies are focusing on the wrong customers to begin with, Korst added.
“Keeping acquisition costs down while improving LTV requires discipline, and making sure your product, marketing and sales teams are aligned,” Korst said. “In addition to staying crystal clear about what customers you are trying to serve, equally important is making sure every team understands who you are intentionally not targeting. You also need to make sure your sales team has incentives and offers in place that are focused on selling to the right target customers for the long-term vs. short-term sales.”
Related Article: The Dirty Secret of the SaaS World: Customer Churn
Investing in Data-Driven Practices
Companies also need to invest in developing a data-driven culture, competencies and best practices across their team for turning available data and insights into action, according to Korst. According to a presentation by Maxwell Locke & Ritter (pdf), on top of CAC and LTV, it's important to include the following metrics:
- Monthly recurring revenue: Monthly recurring revenue for each customer represents the monthly subscription price charged by a SaaS business.
- Customer retention and churn rates: Rate of renewal after annual subscription contracts expire is measured by retention of churn.
- Rule of 40: the belief that your growth rate plus your profit should add up to 40%.
Marketers should ask a series of questions to improve retention and LTV: What’s happening with customers in the moment and how can we improve the message, the content and the experience we’re delivering? Why aren’t some of our intended target customers choosing us? Are their adjacent, high value customer segments who could be attracted to the brand or product extension?
“To effectively answer these questions and improve LTV,” Korst added, “marketing teams need to experiment and learn, ideally via randomized experiments, while also separating the signal from the noise.” Successful brands, he added, capture customer feedback in real-time and keep the lines of communication wide open. Through trial and error, applying better data, insights and voice of the customer feedback, you’re able to hone your brand and product strategy and marketing approach to maximize growth, Korst said.
“Once again, though, it is important to differentially weigh the feedback from your target customers versus other customers,” Korst said.
Related Article: Don't Forget Your Customer After They Become Your Customer
CX, Sales and Marketing Should Collaborate on CAC and LTV
Who's ultimately responsible for CAC and LTV? Bauer said marketing and CX should work together on these numbers instead of keeping them in silos.
“Functional expertise is awesome — that's the rational for silos, I think — but not communicating across functions, which silos perpetuate, give you an erratic customer experience for the end user,” Bauer said. “The situation ends up pretty poor long-term for your business.”
To successfully improve LTV and maximize marketing ROI, companies need to ensure they’re taking an outside-in approach to optimize the products and offers for their highest value customers. “This focus and discipline has to come from the Board and CEO level,” Korst said. “Individual teams can make a difference, but in order for this to be effective in the long term, it must come from the top.”
CAC and LTV are basic, yet powerful, concepts that all companies should leverage, with the understanding and appreciation for how they drive overall company performance, Korst added.
“These are key company KPIs that must be understood and tracked at the leadership and board level, with clear targets and guardrails set for the company to execute to,” he added. “Then, every team — marketing, product, CX and sales — has a role to play. Sales and marketing own CAC, and need to execute within the guardrails and targets set by company leadership, where teams are held accountable for targeting and acquiring the right customers. The company should have methods to predict an individual customer LTV prior to acquisition.”