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Want a Bigger Marketing Budget? Optimize Your LTV to CAC Ratio

June 30, 2016
Aaron Polmeer

By Today’s Industry Insider

sales-marketing-spend-growth-rate-chart

Almost every head of marketing, whether they are a CMO, VP, or Director of Marketing is thirsty for a larger marketing budget. With more money to spend, marketing can (theoretically) drive more growth.

But all too often marketing budgets are set without much rhyme or reason – there tends to be a huge correlation to how many sales were made in the previous month or quarter, or worse yet they are set as a percentage of the company’s revenue. This is particularly common in product driven SaaS organizations. But for growth-oriented companies, these means of setting marketing budgets are simply not serving your growth agenda appropriately.

How much do SaaS Companies invest sales and marketing?

Take the chart below as an example. Based on a sampling of 300+ SaaS companies with greater than $2.5mm in revenue, the median sales and marketing spending as a percentage of revenue is 32%.

Image Source

Does this mean all SaaS companies should simply set their sales and marketing budgets at 32% of their revenue? Absolutely not. There are a number of companies spending as much as 43% of their revenues on sales and marketing, with these companies achieving growth rates of 80%+.

While some of these companies may be spending so aggressively because they are heavily funded and are looking to capture market share, the companies that are the true darlings of the SaaS space are those that have such a strong ratio between the Lifetime Value (LTV) of their customers and their Customer Acquisition Cost (CAC) that they’ve built a compelling case to pour more dollars into their customer acquisition engines. They’ve built Ferraris and have a valid reason to believe that additional sales and marketing spending will keep their growth rates accelerating.

In your quest to obtain access to more financial resources, it’s the marketing leader’s job to educate the rest of the organization. And simply put, the idea of a “marketing budget” is outdated if growth is truly what you are after.

The Formulas Your SaaS Company Needs

Instead, you have two levers at your disposal – both of which can be optimized, and both of which are not typically considered areas of your business that marketing alone should own. The Lifetime Value (LTV) of your customer is impacted by many factors, including but not limited to:

  • Sales selling to buyer personas that have the best chance of being successful with your product
  • Product organizations delivering truly valuable features that make the product “sticky”
  • Customer success teams working with your clients to make them successful after purchase
  • Marketing developing pricing and packaging that pushes longer term contracts over month-to-month agreements.

The formulas:

Lifetime Value (LTV) = Average Customer Lifetime X Average Revenue Per Account

Average Customer Lifetime = 1/churn rate (expressed in months or years)
Ex: 1 / 5% monthly churn = 20 month average customer lifetime

Average Revenue Per Account (in a given period) = Total revenue /total customers added

So for example, if last month you made $200,000 in revenue from 25 customers, your calculation would be $200,000/25 = $8,000.

And …read more

Source:: Kiss Metrics Blog

      

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