How Much Should You Invest in Sales and Marketing?
Last week I attended the American Marketing Association’s January Luncheon. It’s no coincidence that High Level Marketing’s very own Scott Bell, Founder and CEO, was the guest speaker of the event.
The theme of the discussion was to outline the process and metrics business owners should be thinking about when trying to determine how much to invest in sales and marketing. Scott posed several questions that you should be asking: How much should you pay to acquire a new customer? What is the rate of customers you are losing over time, or churn rate? Do you know the lifetime value of your customers?
While this may seem like a complex subject, Scott boiled the concept down into a conversation that was easily followed not only by seasoned VPs, managers and business owners but by young entry-level marketers as well.
Hope is Not a Strategy
When it came to how much companies should invest in acquiring new customers, the first thing that needed to be addressed is that “hope is not a strategy.” “I hope we will grow by 20% gross revenue next year” or “hopefully this word-of-mouth thing will work.” Not quite. Hope is great, but as Scott explained, to really be successful, you need a good strategy.
CEOs, marketing managers, and sales executives could probably all agree that having predictable revenue is the dream. Any organization, whether you’re a new bakery in town or a century-old publicly-traded corporation, can have the same level of confidence in its annual revenue forecast.
Takeaway: Replace hoping for consistency by creating a strategy for predictability.
Customer Acquisition Costs and Customer Lifetime Value
A good strategy starts with the end in mind. The goal is to understand what you’ll get in return for what you invest. A few key metrics will help determine how to drive predictable revenue. According to Scott, the most important metrics to track are actually some of the most basic elements of your business:
- Customer Acquisition Cost (CAC) = sales & marketing costs / net new customers
- Lifetime Value of a Customer (LTV) = average revenue per transaction, churn rate and repeat visitor rate
The problem is companies rarely understand how much of their gross revenue they should contribute to sales and marketing efforts. It wasn’t until Bell Media’s transition to a digital marketing agency more than four years ago that Scott realized he needed to develop one metric to drive the companies investment in sales and marketing.
This ratio is the golden metric: LTV:CAC
After performing some analysis, Scott realized that High Level Marketing was paying around $10,000 to acquire a new customer with a lifetime value of only $25,000, a disappointing ratio with a return of less than 3 to 1 on the investment. It doesn’t take a mathematician to realize that there is no way the company could achieve long-term revenue growth without making some significant changes and tough decisions.
RECALIBRATING GOALS FOR SUCCESS
Scott was faced with a choice to either lower acquisition costs (CAC) or increase customer value (LTV). After considering multiple factors, the decision was made to focus on increasing improving customer value (LTV).
So here is what he did:
- Increased Internal Training: A better-educated sales team could target and pursue clients who were a better fit for the company.
- Raised Minimum Investment: This lead to an increase in overall client spend and moved the team away from acquiring lower value accounts.
- Invest in a Customer Success Team: Developed a team to manage accounts more successfully to provide a better customer experience and reduce customer churn
After 18 months of implementing these changes, High Level Marketing was able to improve its LTV:CAC ratio by 5x. This provided more predictability and a true strategy for creating consistent revenue growth.
Many business owners do not realize that marketing budgets are not one-size-fits-all. It all depends on what your company is trying to accomplish.
Check out what some of these industry leaders are spending each year on their growth efforts:
- MindBody: 40% of total revenue invested in marketing, 37% revenue growth year over year
- Tableau: 58% of total revenue invest in sales and marketing, 27% revenue growth year over year
- Salesforce: 49% of revenue invested in sales and marketing, 24% revenue growth year over year
- Oracle: 22% of revenue invested in sales and marketing, 2% revenue growth year over year
Wondering how these companies have that much confidence in their sales and marketing? It comes from having a deep understanding of their metrics – CAC and LTV. These are some of the fastest-growing companies in the world and are consistent year-over-year because they take the time to understand the key metrics that affect the growth of their business.
If a company truly wants to improve revenue growth each year, they have to have a true understanding of the metrics that really matter. If you are paying close attention to these key metrics, creating a growth strategy can be stress-free by providing more predictability for years to come.