In this series, we’ll examine the first 90 days from a variety of perspectives and provide lots of links to different resources for more in-depth looks at individual topics.
The New CMO's First 97 Days Series
- Part 1: Introduction
- Part 2: Organizational Intelligence
- Part 3: Strategic Immersion
- Part 4: Resource Immersion
- Part 5: The Most Important Marketing KPIs
Now that we’ve had a chance to meet the company, understand strategy, map our resources, and get to know our people, we must study the two key performance indicators that will make or break our tenure as CMO: CAC and CLV.
CAC, or customer acquisition cost, is the total sum of what it costs our business to acquire a customer. This is an extremely difficult number to capture because it requires cooperation and inputs from across the company. Done well, we will know how much we’re paying per customer acquired, which informs projects like customer experience.
Here are just a few of the components of CAC:
- Hard dollars spent on infrastructure, such as Internet access, physical office space, desk chairs, snacks and coffee, etc.
- Hard dollars spent on marketing infrastructure, such as marketing automation software, domain names, website hosting
- Hard dollars spent on marketing programs, such as PPC ads, display ads, tradeshows, events, webinars, etc.
- Soft dollars spent on support, such as HR, training, management, security, etc.
- Soft dollars spent on marketing, such as content creation, email, social media, etc.
The goal of CAC is to find a reasonably accurate number. Computing down to the penny is a waste of time and energy; unless you control 100% of your infrastructure, it’s nearly impossible to be accurate and have a result that’s valid for more than a few minutes.
What constitutes reasonably accurate? Volume. A difference of a dollar for a business that only needs 5 new customers a year (like a Boeing) is insignificant. A difference of a dollar for a business that churns millions of customers a year is, well, millions of dollars. Decide what level of accuracy – as measured by cost – is acceptable for your business.
CAC is the master computation which requires you to gather a massive amount of data. Once you’ve obtained the data, you’ll be able to segment and analyze portions of it later.
The second and equally important KPI as a CMO is CLV, or customer lifetime value. CLV is how much a customer is worth to us for their tenure as a customer. As with CAC, CLV has multiple components:
- Time spent as a customer, measured in days, weeks, months, or years
- Revenue from initial purchase
- Revenue from subsequent purchases
- Revenue from upsells
- Revenue from referrals (if appropriate)
In short, any way a customer can contribute revenue to our business must be a part of CLV. Every business will have a different CLV and even businesses in the same industry may have radically different CLVs. For example, in the food delivery world, one company with a superior mobile app may generate significantly more revenue via upsells than a competitor, even if the competitor’s customer initial purchase value is higher. Over time, that difference could make or break the business.
As with CAC, we need to understand CLV at an acceptable level of accuracy. What constitutes an appropriate amount of uncertainty for our business? If we sell a product for pennies, even two cents may be unacceptable inaccuracy. On the other hand, if we sell 95 million private jets, even a500 level of inaccuracy might be fine.
The Magic Formula
The magic formula which either lets the CMO sleep well at night or stay up worrying is simple:
CLV – CAC = Net Customer Value
If our acquisition cost exceeds our lifetime value, our business is doomed. We must pivot to either reduce acquisition cost or increase lifetime value.
if our acquisition cost is below our lifetime value, our business can grow. How fast it will grow depends on how wide the margin is between CLV and CAC.
Before you do anything else as the head of marketing, understand what your net customer value is to understand the overall health of your marketing.
In the next post in this series, we depart the overall strategic picture of our business to dive headfirst into the marketing machinery.
You might also enjoy:
- What Is The Difference Between Analysis and Insight?
- The Biggest Mistake in Marketing Data
- It's Okay to Not Be Okay Right Now
- You Ask, I Answer: Google Tag Manager and Google Analytics Integration?
- How To Set Your Consulting Billing Rates and Fees
Want to read more like this from Christopher Penn? Get updates here:
Get your copy of AI For Marketers