‘ROI’. Probably one of the most insane pieces of hyperbole ever created. Of course, as marketing people, it’s predominantly our fault. When we work for our respective businesses, and it is our job to drive sales of our respective company’s wares, we do it through driving themes.
And regardless of what you sell, the ‘fact’ that your product or service offers a quicker or bigger return on investment is a really common thing to read from marketing teams.
I guess put simply, return on investment is ‘what I got back vs what I spent’. This is often presented as pounds, dollars or euros in a ratio format (5:1) or as a multiplier (5x). Pretty straight forward, you wouldn’t have to be any kind of marketing or indeed business scholar to get that clear in your head.
This kind of ROI calculation is OK for making on the fly go/no-go decisions on campaign spends, or as a really short one-liner in summarising a campaign’s effectiveness to a board room, but it’s pretty narrow. As a marketing leader or business owner, it doesn’t really allow you to take a holistic view across all of your campaigns and consider how it all fits together in any kind of neat fashion.
Wouldn’t it be cool to be able to take a look across all of your marketing campaigns, figure out how much it costs you to onboard a new customer, and how much each customer will on average bring into the company?
You’ve always been ABLE to do it, now’s the time to actually START doing it.
Customer acquisition cost (CAC)
This journey begins with CAC, which is all the costs spent on bringing in new customers divided by the number of new customers.
For example, if you spent £100 on marketing and brought in 100 customers, your CAC is £1.00.
It can be useful to frame through a single campaign lens, or perhaps quarterly, but it’s most powerful when taking a full view of all of the campaign spend.
Even if you’re scarred for life after a mither at middle school maths, you should find those numbers pretty straight forward to work through. If you’ve got a handle on how much you’re spending on campaigns, then you should be able to put that together extremely easily.
CAC is important, not just because it’s an important metric in its own right (although it is) but also because you need to know it to work out…
Customer lifetime value (CLV)
CLV, that is the amount that a typical customer contributes to your business throughout your partnership together, can be a bit more of a beast.
Confusingly, there are two approaches to calculating it, which can be a bit of a head spinner at first glance. For the sake of a blog post, and to keep things simple for those of us who never quite achieved our full potential at school, we’ll stick to the simple method:
CLV = (Annual Profit contribution per average customer x Average number of years they remain a customer) – The initial costs of customer acquisition
So if on average your customers:
- Contribute £1000 profit per year
- Remain a customer for 5 years
- And the CAC is £2000
The CLV is £3000 (£1000 x 5 – £2000).
As it’s the simple way of calculating, it doesn’t take into account all the costs of servicing the customer nor an appropriate discount rate, but considering you’re probably not measuring this at all at the moment – even the simple model above will provide very interesting new insights into your marketing and business development activities.
As you get more confident with using the model, you can always check out the more complex model and move things forward when you feel ready.
CLV and Account-based Marketing (ABM)
Now you have your new found insight, you can put it to good use. Because ABM is all about running a marketing campaign that targets a small number of companies, CLV is a really powerful calculation to feed into the ABM process.
At the very beginning of an ABM campaign, you build a list. You’re working in conjunction with sales, sometimes with a strong amount of healthy debate about which accounts to target for your upcoming campaign. What better measure to play around with than CLV?
If you start slicing your data using company size, revenue, vertical market – you can see a picture emerging before your very eyes about the best companies to target.
If the CLV is higher in Financial Services than Telecomms, that’s important information when building an ABM list.
If you can see that CLV is highest in organisations between £100m and £500m turnover, – this is ABM goldust!
When you have these kinds of insights, it makes starting out on your ABM journey a little more scientific than whoever shouts the loudest during a roundtable debate.
Comparing apples with apples
It’s also interesting to think about the CAC/CLV for ABM campaigns vs non-ABM campaigns. Our experience is that CAC can be higher, but customer lifetime value more significant, as a result of the greater focus on the accounts with the most profitability potential.
If you’re embarking on ABM for the first time, it can also be a neat way to budget. By segmenting the data and focusing in on a smaller number of accounts, you can show a greater CLV. So using the earlier example, by building an ABM list focused on Financial Services, this will give you a higher CLV, which in turn will give you a different number to play with when it comes to budgeting your ABM campaign. In other words, you can afford to spend more to bring in your real marquee accounts – on the basis they’re going to pay you back and then some once you’re snared them.
As you can see, you need to approach all of this with a sense of play. Getting the base number figured out, then playing around with the various ways of cutting it will almost certainly yield valuable insights into your business. This kind of information can only ever improve your marketing planning process and bring you better outcomes from your marketing spend.