Is your marketing program profitable? Do you know how much you can spend to profitably acquire new customers? Do your marketing and sales teams share a common revenue goal?
If your answer is “no” or “I’m not sure”, I hope you’ll find this issue helpful.
I recently got to sit down and chat with Adam Goyette, Founder of Growth Union, to get his advice on how to build a profitable marketing program. Adam has led marketing efforts at companies like G2 and Help Scout, and now helps leading SaaS companies accelerate their growth.
Read on to discover the top takeaways from what he shared!
Or listen to it on Spotify or Apple.
Before trying to build a profitable marketing program, you need to know what you’re aiming at. Adam recommends setting an overarching company goal, then dividing it up between sales and marketing, so it’s clear which team is responsible for what.
How you divide it up depends on your company structure. Marketing could be responsible for Leads, Sales Qualified Leads (SQLs), Pipeline, or Revenue (measured by Closed/Won Deals).
Let’s say your company goal is to add $1m ARR this year, and to do that, you’ll need to close 50 deals. Marketing might be responsible for drumming up 15 of those closed/won deals, or 500 leads, 10% of which will convert to closed/won deals.
Whatever you choose, the point is that the whole team sets a revenue goal, and each team knows what part they play in reaching it.
After you know what marketing is responsible for, it’s time to determine what % of that goal you’ll hit if you did nothing else this year. Your goal is to walk away with a close approximation of what you’d achieve if you kept doing things exactly as you are now.
If you’ve been tracking the right metrics and accumulating historical data, this will be much easier. If you haven’t, that’s OK! The next best time to start tracking these things is now, so this process only gets easier in the future.
For example, let’s say marketing is responsible for driving 500 leads, and historically, your existing channels gain you 300 leads per year. That means you’ll need a strategy to get an additional 200 leads (increasing by 16 leads/month).
Before investing in any new channels, it’s important to know how much you can spend to profitability acquire a new customer. If you aren’t sure, Adam recommends meeting with your CFO, Founder, or Revenue team to determine these metrics together.
PS – your finance team will love you for asking this 😉
This involves tracking metrics that tell you:
There are a few metrics that can help you with this, but Adam recommended tracking:
Customer Acquisition Cost (CAC): The total cost of acquiring a new customer.
Formula: CAC = Total Marketing and Sales Expenses / Number of New Customers Acquired
Example: If you spend $100,000 on marketing and sales in a month and acquire 1,000 new customers, your CAC is $100.
Lifetime Value (LTV): The predicted total revenue a customer will generate over their entire relationship with your company.
Formula: LTV = (Average Purchase Value × Purchase Frequency × Customer Lifespan)
Example: If a customer spends an average of $50 per purchase, buys 4 times a year, and remains a customer for 3 years, their LTV is $50 × 4 × 3 = $600.
CAC:LTV Ratio: Compares how much money you spend to bring a customer in the door (CAC) versus how much money that customer is likely to spend over their whole relationship with you (LTV). Adam recommends aiming for a 1:3 ratio at minimum.
Formula: CAC:LTV Ratio = CAC / LTV
Example: If CAC is $1,000 and LTV is $3,000, the CAC:LTV ratio is 1:3.
At this point, you have your company goal, your team goal (in our simple example, 200 additional leads), and how much you can spend to acquire new customers. Now it’s time to figure out how you can make up that gap and hit that goal.
To do this, Adam suggests a simple, 2-pronged approach. First, find opportunities to improve what you’re already doing so you can get as many results as possible out of your existing efforts. Then work on identifying new channels to make up the difference.
List each stage a prospect goes through from start to finish, measuring the conversion rate of each one. You’ll want to do it for each of your primary marketing channels, as well as your product or sales funnel.
Here are a few simple examples using Databox’s pipeline and funnel visualizations, which will automatically generate the conversion rate % between steps for you…
Once you have the visuals and conversion rates between stages, look for areas to improve. For example, you might find that the conversion rate between booking a call and showing up for a call to receive a demo is lower than it should be. To find why it’s so low, you go through the process yourself and determine that it’s taking too long to get connected with a sales person, so you implement a direct booking form to improve the call show rate.
If you need help finding areas where you might be underperforming, use industry benchmarks as a guide.
Once you’ve optimized your existing channels and conversion rates, you can focus on testing new channels to help you achieve your remaining goal. But how do you know which channels will work? And how long should you give them before you stop investing in them?
To help you answer that, Adam recommends tracking leading metrics, and lagging metrics. Leading metrics help you know that these channels are at least starting to “work”. Your target audience is seeing your ads, consuming your content, or visiting your website. Lagging metrics help you know whether they’re actually converting into customers, and whether you’re “overpaying” for them.
This is where it’s crucial to track the metrics we talked about earlier (CAC, LTV, and CAC:LTV Ratio) to know what you can spend to profitably acquire new customers. For example, let’s say your average customer lifespan is 10 months, and your total revenue per customer is $20,000. You’re aiming at Adam’s recommended ratio of 1:3 (CAC:LTV). So you can spend about $6.6k ( $20,000 ÷ 3) to acquire each customer. Keep in mind, you’ll likely want to make sure that amount covers all acquisition costs, including ad spend, software, content creation costs, salaries, etc.
Instead of manually tracking and updating these key metrics each month, you can use Databox to track them automatically. See how.
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