Connecting Marketing Strategy to Business Health; Using Lifetime Value to Customer Acquisition Cost Ratio to Make a Point
I have some important information to share.
When I get called to help companies be more effective at Marketing, typical conversations start with spending money on execution of design, content, ads, email, or other tactical elements.
About half the time I get called in after a company has been in business awhile and has brought a product to market.
That’s too late (at least to be most efficient with client budget).
Tactical execution that kicks ass is the result of work that’s done upfront that involves research and careful planning.
It also involves doing math around what it will take to sell a product to an audience and if it can be done profitably.
At the root of the problem is the lack of clarity on the definition of Marketing.
Business Strategy = Marketing Strategy
Marketing Strategy = Business Strategy
The best campaigns I run are rooted deep in research and data and take into account careful test plans to reach scale.
I like metaphors.
They’re useful in helping to quickly align on well-established, relatable practices in other business verticals or industry.
In construction, it’s widely understood that a structure built on a weak foundation will fail in time.
Investing up front on proper architectural business planning is critical to ensuring proper investment when it comes time to execute.
To build on this concept, take into account one of the primary metrics in SaaS-based businesses: The Lifetime Value (LTV) to Customer Acquisition Cost (CAC) Ratio.
Side note: This is not the only metric.
There are many.
For all types of businesses.
If there’s another attributable business metric you’d like to explore as it relates to planning, please schedule time with me to talk further.
There’s been a lot written about this metric and if you are not familiar I would encourage you to spend time going deep to understand why this is critical in building high-growth businesses.
The LTV/CAC ratio is a key indicator whether a business is healthy or not.
It amplifies the relationship between LTV and CAC to see if the business can acquire new accounts efficiently AND get the value from the dollars invested in acquiring that customer.
A 3:1 LTV/CAC ratio is widely accepted particularly with venture capital, and means that a business is running at 3x value to the cost of acquiring customers.
A ratio of 3 and above- it’s an indicator that a business is healthy and running efficiently.
Below 3 could mean business health needs improvement.
See the hypothetical chart as an example to understand key sales and marketing activities that are impacted by building a solid ratio.
What's your LTV/CAC Ratio? Not sure? Give us a call at 804-925-8633 to get started.
As you can see Company A with a ratio of 5 recoups it’s CAC in 4 months compared to the drastic inefficiency of Company C which takes 20 months.
It doesn’t matter if you are bootstrapping or venture-backed, which company is poised to re-invest dollars the fastest in order to grow?
Remember taking marketing in school?
How many of the 5 P’s of Marketing are considered in order to build an effective LTV/CAC ratio?
How important is it to understand market-fit in order to be on the profitable side of the equation?
Investing in Strategy up front is not a luxury, it’s a necessity. Just like insurance, legal fees, and accounting fees.