Is your lead gen budget big enough? Probably not. But then again, I’ve never met a CMO who felt that they had enough dollars to do all of the things that they wanted. But is your lead generation budget competitive? That is a completely different question—and the answer may surprise you.
Companies are all over the map when trying to answer this question. But why? It’s our job as CMOs to know how much money we need to run a successful marketing program, right?
Not so fast. Sometimes it isn’t as cut and dry as we (or our bosses) would like. And it simply isn’t always easy to determine what makes sense when establishing the ideal marketing budget.
A popular way to do so is to calculate marketing costs as a percent of sales. According to the Marketing Leadership Council, most B2B companies have a marketing budget that averages between 6 and 10 percent of gross sales. Manufacturing companies may be much less (between 2 and 6 percent). And aggressive, growth oriented companies may spend much more (between 10 and 25 percent). While they are only benchmarks, these are great ways to assess your competitiveness from a top-down approach.
But there are other ways as well.
While assessing your budget as a percentage of sales is a fairly standard procedure these days, you could break from the pack and employ a bottom-up approach using a customer lifetime value (LTV) calculation – the dollar value of a customer relationship. LTV is not a new approach by any means (first showing up in the 1988 book, Database Marketing) but is becoming more popular today due to the emergence of new analytics tools on the market today. If this is the path you’d like to take, here are the five stages you need to figure it all out:
1. Determine your customer’s lifetime value
The first step is to determine and agree upon the LTV. For example, if the average contract is a year and the average fee is $20,000. Assuming that they are signing a one-year agreement, then your annual LTV would be $240,000. If you think customers will sign up for more than one year, then you can calculate a full LTV. For instance, if your customers have a three-year lifespan, you can assume your LTV is $920,000 per customer. See how simple it is. Despite the way you come to this number, it will need to be agreed upon by key stakeholders in the business (i.e. your finance team, or the board if you’re a startup).
2. Determine the CAC
Once you know your LTV, you then need to calculate what your customer acquisition costs (CAC) should be. Growth-oriented companies would argue that you can justify spending the full ALTV to acquire a customer if you’re confident you can keep the customer beyond the first year. But most companies aren’t that confident. Instead, they use the 20% rule. All that means is that you are willing to spend 20% of the LTV to acquire your customer. So if your LTV is $240,000, then under this rule you’d be willing to spend $48,000.
Or…you can just trust your gut. For one company I consult for, I immediately felt that a one-month CAC would work. It’s just one month of revenue, which is a reasonable amount to be successful with an optimized marketing program. For other companies, an entire year’s revenue is a good CAC budget – such was the case when I worked at AT&T.
3. Build the CAC model
So what costs goes into the customer acquisition cost model? It can include things such as marketing employee expenses, marketing program expenses, sales employee expenses, and even allocated overhead. I usually only consider the direct marketing dollars because its the cleanest way to measure expenses. If you add in the other things, then the calculation gets murky and you can’t really determine attribution (where you attribute the success of the lead and ultimately the won customer).
4. Calculate your cost per won deal (CPWD)
After you start running campaigns, you’ll begin to calculate your cost per won deal. This is the actual cost to acquire your customer. Luckily, this is a straightforward calculation. If you’re tracking your marketing expenses, you should know how much you spent to win the deal. The bigger question is whether that number is over or under your target CAC. You can’t improve what you don’t measure, so measuring this number is a great start.
5. Develop a strategy to bring CPWD and CAC together
When you compare the CPWD to the CAC, typically you’ll see a difference. Your goal is to find a way to bring these numbers together. There are a number of ways to make this happen, but here are two approaches to consider:
- Shift budget to your best performing tactics. Some tactics will under perform and others will over perform. By shifting budget to the over performing tactics, you’ll increase your efficiency.
- Get a volume discount. Increasing your volume is a great way to negotiate lowering your costs. For example, if you are paying a $40 CPM at the current budget, then negotiate a $20 CPM at a larger budget. Most companies would jump at the chance to generate more revenue.
When following these five steps, you will inevitably need to add a few assumptions. The concern is that these “guesses” will make your calculations wrong. None of these calculations are ever wrong, they just require consensus on the assumptions that they are built upon. As you learn more, your can adjust your assumption accordingly.
So what does this have to do with determining if you have the right budget? Well, its simple. After you determine what it takes to acquire a customer, you can scale your budget based on how many customers you want to acquire. If you’re call is to acquire one hundred new clients within the budget cycle, and your target CAC is $48,000, then your budget should be 4.8 million dollars. While this may be a lot, remember that this will drive 24 million dollars in associated revenue. A big win, right?
As you can see, there are a number of ways to answer the question as to whether or not your lead generation budget is competitive. Hopefully, I’ve given you a few things to think about. Now lets hear your thoughts.
David T. Scott has served as CMO and head of marketing for startups, Fortune 500 companies and billion-dollar organizations, including GE, AT & T Wireless, PeopleSoft, Foresee, and Intermec. He is the author of The New Rules Of Lead Generation.