What if you could acquire a customer once and have them repeat business with you forever? Is that not your ideal customer? Startups and often large companies fail to understand and utilize key CAC and CLV dynamics. In growth mode these dynamics are make or break.
If you do not know how to calculate CAC and CLV then you should google it or look here. CAC and CLV – unlike how marketing defines them is cost all the way through the sale and not merely for brand awareness or click through to site. In fact, I would urge you to add in customer service costs to this as well for a more wholistic view of your business and your customers’ point of view. Assuming you know how to calculate CAC and CLV for your business – below are key principals to ensure growth.
Here are some basic assumptions before we jump in.
· Your CAC and your CLV do leave you a profit margin
· The funnels below are a combination of marketing and sales – which should be what your CAC and CLV should be based on.
Whether in Startup or large companies, demonstrating revenue and traction … quickly … becomes paramount. Any large amounts of time, effort and money spent in areas of the funnel not closest to revenue is not efficient and often spells death for the initiative. The lower down in the funnel that you start your spend the less costly it is and the hope is that having spent your CAC you start large CLV. Any substantial price paid by a customer these days is a matter of research and comparison and therefore starting your spend at that stage is usually much more efficient.
Don’t let marketing or even marketing agencies come in to drive costs or data analysis that does not bridge all the way through sale. In todays world of overabundant choice, utility and comparative value drives loyalty more than any brand hype. Personalization does drive CLV but that is putting the cart before the horse. More on these in a later article.
The biggest challenge for growth (and every Startup Investor’s dream) is a low and efficient CAC that leads to substantial CLV. Typically products/services, channels and customer segments that answer to that ideal drive the fastest and most sustainable growth.
Below are key principles to bear in mind for the CAC/CLV game:
1. Stay OUT of the Red Zone: Do not bother with effort on customer’s whose need or desire for your product or service is not clearly established. Even in a brand launch situation this is not justifiable. It is more efficient to find and address customers who have the need. Find ways to let those customers discover you! SEO does indeed rule!
2. Figure out the Dark Green Zone: Assuming you spend your CAC in an insightful manner, it will yet remain inefficient if you are forced to re-spend it to re-acquire the same customer. Ensure you are spending it on customers who will repeat business.
3. Spend in the Blue through Dark Green Zones: Your ideal company or business unit sales and marketing spend is on customers who have clear need and desire and will also become loyal to your products and company. CAC is reasonable to lowest when customers are comparing options and about to make their buy. Any money spent to increase CLV from these customers will preferably be small and multiply CLV.
Identifying the right revenue pipes to focus on is an important step that most companies big or small never take. One of the worst examples in my consulting history was a large B2B customer who had mounted a multiyear initiative to put all their SKUs on their website … including a Blade Server for $45K. Wrong channel, wrong product, incorrect marketing spend on sales mechanism for this!
Your sales and marketing funnel can be vertically separated into multiple sub funnels or pipes. It is important to make this separation in some form so you know how your product/service portfolio, your customer segments, your channels and your business units are performing. It is also very important to have this picture inform decisions on what to prioritize and scale. Subsequently one might choose to boost effort on new and upcoming sub pipes. However, if at any given time you do not know your most lucrative sub pipes and how to widen them you are shooting in the dark!
4. Find and Scale the Right Pipes: in the diagram above pipe 5 has no CLV and you will re-spend CAC. In the remaining pipes 2 and 3 are the widest at the top but 3 has smaller conversion and CLV than 4. Therefore 2 and 4 are good narrow pipes (more conversion) with lots of CLV. Pipe 1 is small but has potential with the CLV promise.
If as a startup you need to guess at these pipes, then make quick short experiments to find the right pipes and build them up.
If as a large company, you do not have or do not consider this data in some form then your success is serendipitous, and some Startup will disrupt you sooner than later.
Agencies have latched on to the idea of large amounts of data leading to marketing and customer insights. Fair enough but that is barely a tenth of the job and utility of data. It’s fine to be able to characterize your customers and personalize accordingly but it’s much more valuable to
· Identify your biggest revenue pipes
· Ensure those pipes have large loyalty wells
· Understand the revenue pipes in terms of products/services, margin, supply chain, executional complexity …and customer characteristics.
· Develop insights on efficiency increase potentials, widening big revenue pipelines, prioritize revenue pipelines
Build data models that can look at the larger picture. Don’t let narrow interests such as IT or marketing or even sales tell you that integrating all those concerns or data is impossible or takes too long. Find a true company leader who understands data and charge them with developing this big picture.
The data already exists … even if it is silo’ed. Think and act entrepreneurially to gradually pull together sales and sales/marketing operational data and then add a weighted index for anything not easily integrated like production. Then mix in servicing and loyalty data. This should be a bare minimum.
After you have this model analyze where your biggest bang for the buck is and then appropriately ration funding and effort to sales and marketing and charge them with developing the most relevant pipelines and strategies to widen them.
Large companies that take on the behemoth of digital transformation fail to take this perspective on priorities. Granted they have the money to attempt wide scale transformation. However, many such efforts run aground simply because they fail to demonstrate enough gains along the way to sustain interest in the effort.
Lastly, for both Startups and large companies, if this is not Board level thinking in terms of organic growth then your Board cannot be insightful or able to help sustain growth initiatives as executives and perspectives come and go.