Is your lead generation budget big enough? Probably not. But then again, I’ve never met chief marketing officers (CMO) who’ve felt they had enough dollars to do all of the things they wanted. But is your lead-generation budget competitive? Ahhh, well, this is a completely different question, and the answer may surprise you.
As it turns out, companies are all over the map when trying to answer this question.
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), while aggressive, growth oriented companies may spend much more (between 10 and 25 percent). While these numbers are only benchmarks, assessing marketing costs as a percent of sales is a valid top-down approach.
But there are other ways as well.
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, but it is becoming more popular today due to the emergence of new analytics tools.
If using the LTV is the path you’d like to take, here are the five stages you’ll need to figure it all out:
1. Determine your customer’s lifetime value
For example, say that the average contract is a one-year agreement and the average fee is $20,000, then your annual LTV, or ALTV, 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.
However 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
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. Most companies aren’t and instead use the 20 percent rule. So if your LTV is $240,000, then your customer acquisition costs (CAC) would be $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. One month of revenue 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 CAC? 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 and determine lead attribution.
4. Calculate your cost per won deal (CPWD)
After campaigns begin, you’ll need to calculate your CPWD— 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, you’ll typically see a difference. Your goal is to find a way to bring these numbers together. There are several ways to make this happen, but here are two approaches to consider:
• Shift the budget to your best performing tactics. Some tactics will underperform and others will overperform. 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 cost per thousand impressions (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 wrong, they just require consensus on the assumptions that they are built upon. As you learn more, your can adjust your assumptions accordingly.
So what does this have to do with determining if you have the right budget? Well, it’s 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 your goal 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. While this may be a lot, remember that this will drive $24 million in associated revenue. A big win, right?
Hopefully, I’ve given you a few things to think about regarding your lead generation budget. Now lets hear your thoughts.
Previously published on: Chief Marketer Magazine