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One of the top challenges B2B marketers face in setting their budget is attributing revenue results to justify that budget.1
While it should come as no surprise that executives hold their marketing departments accountable to delivering bottom line results, many marketing managers struggle to make the case for their budget.
To overcome this challenge, marketers should point their executives towards the future. Calculating customer lifetime value is the first step in making a long-term business case for your annual marketing budget and plan.
The lifetime value of a customer is the total value, or monetary worth, of a customer’s business over the lifetime of their relationship with your company.
While a return on marketing investment (ROMI) can be calculated on an initial customer purchase, the customer lifetime value is calculated over the life of the customer and places value on purchases made after the initial sale. The graphic below shows how ROMI is calculated for a one time investment.
An ROI that aligns with the customer lifetime value model takes into account all investments made to acquire and nurture customers over their lifetime and all incremental customer value generated as a result of those investments.
Here’s an example of how using the customer lifetime value model shows the true profitability of a marketing campaign compared to a monthly ROI analysis.
Say that it cost a company $100 to acquire one customer last month through paid search. That customer purchased enough services to bring in $50 in profit. An analysis within a one month window of this company’s paid search ROI shows this marketing channel in the red.
Now, let’s examine this same scenario within the customer lifetime value model.
The company has calculated the lifetime value of a particular customer segment they just acquired to be $3,500 per customer from additional investments made in cross-selling and upselling over the next 5 years. Instead of a $50 loss, lifetime value helps stakeholders within your company understand this is a win.
Calculating customer lifetime value requires combining the expertise of a variety of professionals inside your company, including accounting, sales, analytics, and IT. It also requires a common understanding of how value will be calculated. For example, “Do we calculate revenue only, or do we assign a value to other customer actions, like advocacy as well? After all, this is worth something to our business, but how do we assign a dollar amount?”
Lifetime value is especially tricky for B2B, service-based companies to calculate due to the complexity of customer interactions and relationships.
The most important guiding principle when calculating CLV is to make sure that only the stream of revenue and profit generated by the specific investment over time being measured is included in the calculation, not any additional investment.
Once the CLV is defined, celebrate the victory and then catch your breath. You’ll now want to get to work on your allowable acquisition cost. This will help you to understand how much you will need to spend to acquire each customer based on company goals and objectives.
. The higher the lifetime value of a customer, the more a business can afford to spend to attract and retain customers.
Allowable acquisition cost is a critical metric you will need to make the business case for your marketing budget.
Your company’s CFO is typically the most qualified individual to calculate customer lifetime value and customer acquisition cost. It is essential to seek out this individual and their help. While the formula for allowable acquisition cost may appear simple, the values that go into each part of the formula are open for debate.
For example, one company may calculate its value stream costs with the facilities cost but not the maintenance cost. Value stream costs is a consolidated metric that includes all costs, direct and indirect, that go into bringing a product or service to market, including, but not limited to labor, machine, materials, support services and facilities.
The allowable acquisition cost formula above is just one of many ways that companies choose to calculate an acquisition cost that achieves profitability.
Lifetime value, as touched on above, will undoubtedly be the most challenging to calculate. Some businesses will incorrectly calculate the lifetime value of a customer based on revenue, while others choose to calculate it based on profit margin.
In some cases, organizations lack the data points to fully calculate the lifetime value.
If you do not have the expertise in house to calculate this value, it is worth hiring an external analyst to help aggregate the appropriate data and get to an actionable AAC.
With your allowable acquisition cost and your acquisition goal defined, you are now ready to calculate your annual marketing budget. As long as your organization doesn’t have capacity limits, you can scale your growth until you reach your allowable acquisition cost. Allowable acquisition cost is a critical metric you will need to make the business case for your marketing budget. It will allow you to know exactly how much you can spend in order to grow profitably and reach new heights.
1Forrester Research, Inc. “Q3 2013 North American B2B Marketing Budget Online Survey.
2Josh Kaufman, “The Personal MBA, 2nd Edition.”
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