Customer Acquisition Cost (CAC) is the key metric in revenue generation. Simply put, it is the total
marketing and sales expense associated with new customers divided by the number of new customers
over a specific period of time.
For example, HubSpot’s CAC was reported to be $11,977. Most companies also track the ratio of Life Time Customer Value (LTV) divided by CAC. A ratio of 3 to 1 is a typical target for SaaS companies. 5:1 is considered excessive, 1:1 is considered to be problematic. A never-ending challenge for contemporary technology companies is how to continually lower CAC while still hitting revenue growth targets. Market-Driven messaging can significantly enhance the effectiveness of an organization’s marketing and sales efforts, which will drive improvement in CAC and LTV/CAC.
What is Market Driven messaging?
Market Driven Strategy is an approach that has been used by thousands of companies to consistently
grow revenues and profits. Market Driven organizations are 31% more profitable than their peers.
Market Driven organizations share some common traits:
• A market-driven organization systematically favors the market’s perspective over its own
opinions.
• Market-driven organizations create a system and programs to constantly be iterating on
their understanding of the market.
• The decisions inside a market-driven organization are fundamentally driven by an
understanding of the market and their business plan.
• Market knowledge provides the organizational confidence to better engage the actors in
your market.
• A market-driven culture provides the clarity and alignment needed to exceed the business
plan
Market Driven messaging is applying these principles to your marketing and sales efforts. These
principles can help fundamentally improve your organization’s CAC and LTV/CAC ratio.
1. Document Baseline Metrics
Before beginning on a journey to improve your CAC and LTV/CAC ratio, you need to know where you are starting from. You should document a few things:
- Current CAC. What is your current Customer Acquisition Cost? What formula does your firm
use to calculate CAC? - Current LTV and ASP. What is the current lifetime value of your customers? Is it segmented or
tiered in any way? What are the average selling price (ASP)? - Journey Stages. How has your firm defined the stages of the buyer journey?
- Conversion Rates. What are your firm’s conversion rates between each stage of the buyer’s
journey? Have they changed over time? - Paid Campaign Performance. Does your firm used paid advertising for search keywords on
Google, Bing, or Yahoo? FaceBook? Instagram? Twitter? What has the performance of these
investments been?
2. Build the Foundation
The process starts by building a foundation that can be used to support all of your marketing and sales
efforts. The foundation is composed of four components:
- Buyer Personas. A buyer persona is a semi-fictional representation of your ideal customer based on market research and real data about your customers. Personas typically include a name, title, age, demographic and psychographic descriptors, aspirations, and challenges. Buyer Personas are the foundation of any effective marketing and sales campaign.
- Buyer Journey. The buyer’s journey is a framework that acknowledges a buyer’s progression
through a research and decision process ultimately culminating in a purchase. - Journey Events. Buyer Journey Events are the events that occur to the buyer or market that cause a customer to move from one stage of their journey to the next stage. For example, when the European Union implemented the Global Data Protection Regulation (GDPR) requiring compliance by May 2018, it triggered most companies to investigate and implement solutions to ensure they were GDPR compliant. There are dozens of events like this such as other compliance mandates (Sarbanes Oxley, SSAE-16), new technologies (Big Data, AI, etc.), fundamental market changes (Uber/Lyft, PayPal,/Venmo, etc.). Understanding these events, in context of your buyer persona and buyer journey, will enable you to optimize your marketing and sales campaigns.
- Contact Segmentation. The final step in building your Market Driven messaging foundation is to segment your contact/email/CRM list by buyer persona and industry vertical. Messaging
effectiveness is driven by delivering the right message to the right contact at the right time as
they progress through their buyer journey. Sending the wrong or incorrect message to a contact is not only a waste of time and resources; it also degrades your credibility as a trusted advisor to the
contact. Tailoring messaging for each contact, based on their persona, is a fundamental tenet.
3. Optimize Demand Generation Campaigns
Companies execute dozens of different types of campaigns to generate demand for their products and
services. Improving conversion rates is the single most impactful way of lowering your CAC. Buyer
Journey math is tough. For example, if you relied solely on display advertising, the number of prospects
and cost you need to engage is staggering. For example, to generate an incremental $25 million in
revenue with an average sale price of $50,000, you would need over 663 million display ad clicks, based
on industry average conversion rates.
Market Driven messaging can help your organization precisely target the messages that your buyer
persona will be receptive to at each stage of their buyer journey. Consider the following customer
acquisition techniques:
Paid Search. Display advertising based on keywords is one of the most common demand generation techniques. Companies pay anywhere from $3.00 to over $500.00 for specific keywords and ad placement. Understanding how personas, buyer journey stages, and journey events tie together helps your company optimize spend on paid search.
Organic Search. Organic search is the dream of most marketers. While you do not spend on display advertising, you do have to spend on content creation and curation. Again, having a detailed understanding of your buyers will enable you to develop content that attracts prospects at each stage of their journey.
Social Advertising. Advertising via FaceBook, Instagram, Twitter etc. can enable you to better target specific buyers due to the detailed demographic and psychographic criteria these advertising platforms offer.
Email. While email campaigns offer some of the lowest conversion rates of all demand generation techniques (0.7% lead to opportunity conversion, 160 days average lead to sale
duration), email is a highly effective tool for nurturing leads over time. Intimate knowledge of a
persona’s needs at each stage of their journey can dramatically increase email effectiveness.
4. Experiment
“No battle plan survives first contact with the enemy” noted Helmuth von Moltke the Elder. He was the
Chief of Staff of the Prussian army before World War 1. The same is true for initiatives that target
lowering CAC and improving LTV/CAC. A core tenet of Market-Driven Strategy is that understanding
customer and market needs is an iterative and continuous process. Teams should take in feedback from
all parts of the enterprise – marketing, sales, customer support, professional services, and even finance
to distill customer needs. From all types of interactions with customers, you can learn market facts.
Market facts are the problems and concerns customers express in their own words. It is taking an
Outside-In perspective, versus your team speculating what a customer truly needs.
Experimentation enables you to test how effective your personas, buyers journey, and segmentation
are. For each type of marketing and sales program you should constantly experiment with different
messages, keywords, ads, even email subject lines — and compare the results to the baseline data you
gathered at the beginning of the process. Google, Amazon, and Facebook all exploit A/B Testing as a key
method for optimizing their solutions.
Experimentation enables you to develop a better closed-loop knowledge of the effectiveness of your
efforts to lower your CAC and improve your LTV/CAC.
