Marketing budgeting is one of my biggest bug bears. If you have a Marketing function that only focuses on demand generation and not sales or customer success then how can it budget effectively? The ability to identify, engage, develop and retain customers is the cornerstone of a successful business. If you have separate functions addressing the different stages of the customer lifecycle, with limited cross-functional accountability, then you have a company budgeting problem.
OK, so why is that?
The leaky bucket analogy
Let’s use the leaky bucket analogy as a means of framing why this is an issue. So to make this analogy simple; Marketing provides the hosepipe, Sales makes sure that the hosepipe fills the bucket and Customer Success plugs the holes in the bucket to stop leaks and to maximise retention.
OK, so what happens if you have a very leaky bucket. Well, more emphasis is then placed on Marketing & Sales to put more into the bucket. In the worst case scenario, a significant amount of effort & investment is then expended just to maintain the level in the bucket. The result is that more & more focus is placed on the front end.
How does this impact Marketing?
Clearly Marketing has to work harder at demand generation to provide more through the hosepipe. But is that all it impacts? The answer is an emphatic NO. The reason is that the investment budget that is allocated to marketing to create demand must have some correlation with the degree to which this investment will be paid back. Otherwise, your company will not be on a strong financial footing. Consequently budgets get cut and the spiral begins.
We must consult our means rather than our wishes
George Washington
Marketing planning metrics
Here are some quick thoughts and examples on how to approach marketing budgeting. These are based on a technology company applying a subscription service. However, the general thought processes can be applied to any business.
LTV: CAC Ratio
The starting point must be to measure the relationship between the lifetime value of a customer and the cost of acquiring that customer. As a cloud-based SaaS business your LTV:CAC ratio should be more between 3-5.
Customer Acquisition Cost (CAC)
This is calculated as the total cost of acquiring customers (total Sales & Marketing spend), divided by the total customers acquired over a given period.
e.g. in one year: $1,000,000 S&M investment / 50 new customers = $20,000 to acquire one single customer
Lifetime Value (LTV)
Lifetime value (LTV) is the total amount of money a customer invests in your solution across the customer’s entire relationship with your business. There are several ways of calculating this. Here is one of the common methods.
LTV can be calculated by taking the average revenue per customer (ARPC) over a year, divided by the churn rate (percentage of customers who left) over the same period.
e.g. the ARPC is $10,000 per year / 10% churn rate (based on starting with 200 customers and losing 20 over the course of the year) = LTV $100,000 per customer
In this case the ratio is 5:1. As a benchmark, if it’s below 3 you’re overspending on customer acquisition. On the other hand, as in this case where it is 5, you should consider increasing investment to further accelerate growth.
CAC Payback
NOTE: CAC Payback is also a good check. For SaaS companies 3 years is a good benchmark. This is calculated by taking CAC and dividing it by the average ARR of a new customer.
e.g. In the same example CAC $20,000 / ARPC $10,000 = 2 years CAC payback (we all dream of that!)
So in summary how should marketing approach budgeting?
1. Customer lifecycle budgeting.
The first step is very easy. Marketing, Sales and Customer Success need to work together on customer lifecycle budgeting. This will ensure that the foundation for their financial planning is robust.
An alternative, if you are not able to work with both Sales and Customer Success, is to focus on the cost of marketing investment in comparison to revenue growth. A good model is as follows:
Take 30% – 40% of your revenue-growth delta as a reasonable marketing investment to cover both marketing headcount and discretionary spend.
e.g. Total new revenue target $2,000,000 x 0.3 = $600,000
By using this method, you will always tie your marketing investment to your revenue target for the year, which is clearly a very sensible thing to do.
2. Support Customer Success to improve retention.
There are many ways Marketing can support Customer Success to help customers better utilise and gain benefit from the investment they have made in your business. This helps plugs the leaky bucket. Some examples:
- Develop and implement a Value Framework which can identify, measure and validate for your customers the value delivered by your solutions.
- Establish a benchmark, based on an assessment & aggregation of all your customers, that defines a best-practice application of your solutions for direct comparison by every customer. This encourages and motivates customers to maximise the benefits they garner in a very objective way.
- Establish a training and resources portal with information that is valuable to both users and decision-makers. This gets them up & running quicker, onboards new customer team members quickly and ensures the solution is used to maximise value outcomes.
- Implement a feedback mechanism that makes it easy for customers to provide feedback across all aspects of the business. It is your early warning mechanism and ensures you can address problems before customers take the decision to leave.
Supporting customers must always be a focus for Marketing. It has far-reaching benefits including, not not limited to:
- More and better case studies.
- Better understanding of use cases, to improve targeting, content, support etc.
- More customer word of mouth and social endorsement of your company
- Improved feedback to aid product & operational improvements
3. Optimise marketing spend.
The very simple premise is that the market and the customers within it are always in a state of flux. So this means that Marketing need to adopt a test, learn and try again approach in everything they do. Nothing should be locked down and the team need to be able to flex and pivot at a moment’s notice. The key is to focus more efforts on those things that work and to stop doing those things that don’t work.
The reality is that resource and budget are always constrained so the secret sauce is to recognise that you can’t & shouldn’t try and do everything. Focus, focus and focus on where you can influence the customer (positively obviously) and drop everything else.
When it comes to marketing budgeting, Marketers must take the lead, as no other department will take such a broad approach to financial planning & budgeting. Take ownership and become the financial and data-driven leader in establishing & optimising customer acquisition and retention investments across the customer-facing functions.
Also read the blog post Play Bigger. These work very well together.