Measuring Marketing Success: the Startup Scaries
Sunday Scaries? That’s nothing. Let’s talk about Startup Scaries!
Marketing is a startup killer. We said it! Acquiring new customers is one of the most important hurdles a new business faces, yet many entrepreneurs remain overly-optimistic in the initial founding of their company.
There are two common misconceptions we’ve seen repeatedly:
Entrepreneurs believe their business will become an instant sensation or go viral.
Owners grossly underestimate the cost it takes to acquire a new customer.
Marketing is a tool that SHOULD be used, particularly in the early stages of a business. Yet it’s difficult to know what works. Even mature businesses lack confidence in their marketing and advertising, with 54% of business owners stating they are “unsure if their online presence attracts new customers.”
The problem? We are told to prioritize marketing efforts in our business yet are not taught the skills needed to measure success and return on investment (ROI).
Justifying Marketing Return on Investment is easier than you think. You simply need to know:
How many customers you acquire for every $1 of marketing / lead generation spent (known as CAC).
The Lifetime Value of a Customer (LVC).
How Much Should I Spend on Marketing?
The U.S. Small Business Administration recommends spending 7-8% of your gross revenue on marketing, assuming you make less than $5M in sales annually. Many experts recommend spending even more if you’re a brand new business. Startups may benefit by spending ~25% of their revenue on marketing, as finding and educating customers is critical for early adoption rates.
Those are big numbers. If we’re investing 7-25% of our revenue in marketing, we need justification our money is creating more business. We need to see the return.
That’s where the CAC comes in.
Using Cost to Acquire Customers (CAC) to Measure Marketing ROI
Acquiring new customers is an experiment.
Marketing and advertising are never static - as generations and people evolve over time, so must our customer acquisition. Unfortunately there’s no secret recipe to marketing as our success is dependent on numerous factors like our industry, demographics, and preferred marketing channels (Instagram vs. direct mail, for example). But with a little discipline and the right metrics, we can better equip ourselves to evaluate past marketing decisions and choose future actions.
Your Cost to Acquire Customers (CAC) is simply how much you spend finding new customers, divided by how many new customers you actually acquired (in a given time period).
CAC = (Marketing + Advertising + Sales Spend (e.g. salaries & costs to find new leads)) / Number of Customers
CAC helps you evaluate how much it costs to find a new customer and determine if your marketing, advertising, & sales spend is worth the effort. When calculating this number, don’t forget to add in the salary associated with sales costs (e.g. time spent emailing leads, attending markets / events, etc.).
Once you have your CAC, you need to compare that to the Lifetime Value of a Customer (LVC).
Lifetime Value of a Customer
Marketing and advertising spend, at first glance, leads to incremental sales. Yet if we do our job right, it leads to a customer. Our customers have value past a one-time sale (unless you’re in an incredibly unique industry), which means acquiring a customer has a Lifetime Value (LVC).
To evaluate marketing success, we must compare our CAC to the LVC, or our spend to Acquire the Customer to the Lifetime Value of that Customer.
If our CAC is $45 (it takes $45 to gain one new customer) yet our LVC is $40, common sense would say that was a bad investment. Yet if our LVC is $2,000 (we anticipate a customer on average will spend a lifetime of $2,000), then that marketing spend of $45 is well justified.
Evaluating Marketing ROI
With the CAC and LVC, we can evaluate our Marketing ROI (return on investment) and work to increase results.
Three goals to evaluating marketing success:
CAC should be 3-5 times LOWER than the LVC.
That means it costs 3-5 times less to find one new customer, compared to how much they will spend with your business over a “lifetime.”
CAC should have a quick pay back period, where possible (less than 12 months is recommended).
We must work to continually lower our CAC, through tweaking and refining our marketing and sales efforts. The goal? We experiment with channel, messaging, and markets to gain more customers for less investment.
Now it’s your turn! Have you used CAC or LVC before? What marketing and advertising tricks have worked for your business? Comment below!
Note: LVC is a lifetime value but each business must be realistic in defining a “lifetime.” A lifetime for a business probably isn’t the same lifetime as an entire human life. Do you anticipate to being around for 3 years? 10 years? Essentially - if you’re calculating an LVC with 50 years in mind, ask yourself if you or that customer will be around AND be realistic about your cash flow (you could easily drain cash too quickly and not make it to that year 50!).