2 Metrics to Better Understand Your Customer Acquisition Cost and Lifetime Value: Interview with Greg Head

 
Glenn: Hi, everyone. I’m Glenn Gow, Founder & Advisor of Crimson Marketing. Welcome to Moneyball for Marketing where we talk about the incredible changes happening in marketing organizations around big data and marketing technology. We feature marketing technology insights from the top marketers in the world. The reference to Moneyball is from the story of how the Oakland A’s baseball team were able to win and win and win because they figured out how to use data and technology to their advantage. If you’d like to learn about how to use big data and marketing technology and marketing to help you win visit us at CrimsonMarketing.com or email us at info@CrimsonMarketing.com. And now on to our podcast.

Today I am very pleased to welcome Greg Head, the CMO of Infusionsoft. Greg oversees the company’s marketing strategy, communications, and other partner programs. So Infusionsoft, what do they do? They offer an email marketing and sales platform for small businesses including products to streamline the customer lifecycle, customer relationship management, marketing automation, lead capture and e-commerce. So, Greg it’s great to have you here.

Greg: Hi, Glenn. Great to be here.

Glenn: You and I were talking earlier about a topic that is universal to marketers irrespective of the size of the company and it’s one that fascinates me and I’m going to ask you to talk a bit about that now which is the lifetime value of a customer versus the cost of acquisition of a customer. You have a deep understanding of the different types of cost of acquisition and how a marketer should view them. Please take us through some of those different ways of thinking about it.

Greg: Sure. This is really important for marketers and anybody in the revenue business in any size company, and I’ve been in the software business over 25 years, it used to be you spent money on marketing and you could see the revenues happening right away, quick hit licensed revenues and there wasn’t a lot of revenue stream after a customer bought the box or the—so this is just another version of how much did you spend and how much did you make ROI in the modern software company which is subscription-based? So, we all know you can spend money and acquire leads and customers and so forth, and in a subscription business now that pays out over time in the financials or in cash, and in Infusionsoft we sell to small businesses, so literally cash is not coming up front for the year, it’s coming every month.

So, the customer acquisition cost, we call it CAC, C-A-C, and that is—there is a few ways to dig into that, but that’s the total sales and marketing and revenue generation cost in the business, literally at the income statement level, and the lifetime value of a customer—actually, that’s the total cost divided by the total customer. So, what you spend in sales and marketing and revenue generation in a month divided by the number of customers in a month.

Glenn: So, just a quick question there. So, the cost of acquisition is a comprehensive measure, right? In other words, it includes not just marketing but it includes sales.

Greg: Yeah.

Glenn: It might include things like the overhead of the organization to make it run.

Greg: Yeah, and when you’re talking about customer acquisition cost, let’s call it Simple CAC, that’s what investors and boards and executive leadership is talking about, and that’s really just related to the basic financials of the business, and it doesn’t matter how much it cost per lead per that media. You’re really rolling it up all the way to the top and saying, “Well, of all the things we spend to generate customers this is what it cost to acquire new customers every month per customer.” And for low priced products, it could be hundreds of dollars when you’re making $30 a month or something like that. It could be thousands of dollars when you’re making hundreds of dollars a month. It could be—so it’s really variable. So, you imagine enterprise customers with a million dollar sale, the customer acquisition cost is higher than if you’re selling something to a simple tool for a very small business for $20 a month. So, the cost and the revenues go together not surprisingly, and this is the way to tie them together for subscription businesses.

So, LTV, just to finish that, lifetime value is any one-time revenues, maybe upfront services or something like that, divided by—or plus the average—actually, I’m going backwards here. The average subscription revenue per month divided by the turn rate. So, somebody’s making a thousand bucks a month and customers stay on average three years, the lifetime value of the subscription is $12,000, one times 12 times three, so $36,000 plus any one-time cost there. So, it’s a derived number but then you compare the customer acquisition cost to the lifetime value.

Glenn: Let me just make a point there which is the lens that you’re looking at this through is one of a subscription software company, but in fact this applies to any company that needs a customer even if a company is selling one-time a device let’s say.

Greg: Yeah.

Glenn: Maybe in that case the way to measure things is a little bit more straight forward, but ultimately I really like this concept, understanding what is the cost of acquisition because now you need to look at that other side of the equation and ask, “What’s the lifetime value I’m getting out of those customers?” And that, I imagine, starts to open up what kind of customers you want to go after.

Greg: Yeah, and this is the—and again, another modern fact here that, first of all, I’m talking about leading marketing from the CEO side of the table. I’m not just saying, “You spend a little money to get a few leads and ignore everything else.” No, this is looking at the whole the business which is what senior marketers need to do. And marketers have responsibility on both sides, customer acquisition cost and the total spend across everything it takes to do that, maybe not just marketing media expense, and lifetime value. So, lifetime values includes pricing, it includes upsells, it includes how long customers stay in a subscription business or how much they buy again and one of the biggest factors there because customer retention and turn in subscription business is the most material number is acquiring the right kind of customers and if you acquire the wrong kind of customers that aren’t really good fits they won’t stay very long and marketers at the front end of the funnel can have a really big impact on lifetime value by getting the wrong customers.

And so, it’s a better and more true system that guides businesses better and guides marketing spend better. You’re not just trying to get any customer or any lead, you’re really trying to find the ones who will stay a long time. So, it’s a dual system of quantity and quality that I think is very rational for modern subscription businesses. It’s a little hard wade through, but then once you get it to the other side it’s a very honest system and it makes for great businesses. The subscription business model is really awesome because incents the right kind of behaviors, the right kind of cost, the right kind of customers, and the right kind of customer delight that will increase lifetime value. And if you can increase lifetime value of a customer by getting the right customers, having them stay longer and so forth, you actually have more money to spend to acquire them.

Glenn: Right, and it’s that last point you made about customer delight that I want to emphasize. Now marketing has marketing has a financial incentive to make sure the current customers are happy customers.

Greg: Yeah.

Glenn: And it’s not just—and a lot of marketing organizations just focus on acquisition, but you’re focusing on acquisition and retention.

Greg: Yeah, and smaller companies, you’re right, they’re very interested in survival and acquisition in the first place, and as you grow you’ve got to pay attention the lifetime value in turn and right kind of customers, and there’s all kinds of ways to segment that and play that game. But from the top leadership marketers should not be focused on simply, “Here’s my budget, get a certain amount of leads.” The marketing leader should be very involved with the holistic business growth challenge.

Glenn: Right, right. Excellent, excellent. And you look at the cost of acquisition along a wide spectrum of variables, right?

Greg: Right

Glenn: So tell us a little bit about those variables.

Greg: So once you see the relation to all the costs of acquiring customers and lifetime value and you take responsibility for both of those then you start digging in and because the fully loaded cost of acquisition, all sales people plus the rent plus the marketing expense, all the marketing people, business development, license, royalties, right? You add all that stuff in fully loaded right at the income statement level to help you get to CAC with the number of new customers per month, but then you can start digging in and looking at different levels of CAC t start to manage that because some customer acquisition methods are less efficient than others and you’ve got to distinguish those. Some—you can distinguish the customer acquisition cost per spend media for example, pay per click; cost average, cost for acquisition of a lead, a prospect, a customer. So, those right on the marginal spend for marketing.

And so, we look at the levels all the way down to the marginal spend in marketing to help those owners in our business manage those and have guidelines for those. It’s not just a big budget and make things happen. They’re incented on the paid—their total marginal cost per customer, not just leads, so they’re watching all the way down to the customer which is really good behavior. But one thing we do at Infusionsoft because we sell to small businesses, it’s a wide market. We go to market in several different ways is we create a channel version of CAC. What does it cost to acquire a customer with paid media? What does it cost to acquire a customer through organic channels, coming through the website, different partner channels? When we acquire customers with a customer referral program, there’s a fee for that and so forth, but it’s not just the marginal costs of partner commissions or a paid media. We fully load the entire sales and marketing cost into those channels.

Glenn: Right.

Greg: If 50 percent of our business is coming through organic, of customers, comes through organic we allocate 50 percent of our sales team coming through that and all the way up, and we actually get down to a P&L level at these channels and there’s channel owners in the business who cannot just say, “Make the number, here’s a budget, make the number.” They’re responsible for being efficient, so it’s no good if you get 10,000 leads and your entire sales team spends half the quarter sorting through those, that’s not very efficient. So, those kind of all the way through the pipeline costs get washed out and the right behavior starts to work. “Okay, so if I don’t spend money to get the wrong ones then I don’t get all the salesperson budget, so that be more efficient.” So, it’s like owning a business or a P&L, so just always good behavior when you line up the true costs with the true results. So, imagine customer acquisition cost per channel and lifetime value per channel. Sometimes the most expensive ways we see that when you acquire customers, you pay to get them, you write, you’re just aggressive to make those numbers yet customers who don’t have all the momentum that somebody who’s coming in unaided on their own accord has, so they have less lifetime value in many ways. So, isn’t that interesting, sometimes our highest cost of acquisition which is a great lever to pull doesn’t have the same lifetime value.

Glenn: Well, let’s talk about that for a moment because you and I talked earlier about how to segment.

Greg: Yeah.

Glenn: And once you begin to understand where your best customers are that’s where you start to segment. Talk to us about how you do that.

Greg: Of course, segmentation is the first magic trick for marketers whether it’s in our own business or talking to somebody else we all know that our target market isn’t everybody and we have to start slicing and dicing. And in the small business world where it’s a wide market, we have 25,000 customers, we’re acquiring over 1,000 customers a month and we’re doing it—we’re actually decreasing a CAC overall and increasing lifetime value, the business getting better. It’s really all about digging into segment the customers, segment the channels that I just went through, partners or organic or paid, and figure out what are the right kind of customers. And when you do that segmentation you can see, literally, in more detail what’s going on in the business and that can guide product, it guides operation, service products, and the rest here. So, we’ve always done this both, and before I arrived four years ago it was very savvy, but it was kind of intuitive, and we’ve kind of go through the process on this to keep tuning it and the market moves a little bit every year and we’re getting to be quite a big business and there’s more and more segments.

So, the markets changing and so forth, but we do a lot of primary research collecting from our sales teams and our partners, what’s working, what’s not, and a lot of conversations. We’re talking to all our customers as they come in, and we’re spending a lot of time with our customers so we have some intuition about what’s going on, but then we do more quantitative research, surveys and others, to really kind of put some shape to it and where we can see year over year our customer flow is changing or this channel is changing in the profile of customers, and that could include demographic, which is very important in small business, a small business with one or two people is different than a small business with 10 or 15 employees and their industry and maturity and their size, how long they’ve been in business, those are really important and it helps us qualify on the front end and target and tune or messages, who’s coming through, who’s staying the longest, we can tune there. But also in small business we’re talking to business owners, so there is people mindset psychographic type dimensions, are they aggressive in their business? What’s their mindset? Different roles in a small business have different mindsets. We love that about small business, it’s very dependent on the owner and the people in the business and there’s a lot of variation and we have a lot of fun with that, but it’s not just a demographic, it’s the psychographics.

And then, lastly, it’s the behaviors. What are they actually doing? Are they showing up to events? Are they clicking on things? Are they leaning in or not? And so, we play with all of those to adjust how we acquire, what we say, what channels go to market, how we create products, features, and services that decrease CAC and increase LTV.

Glenn: So I’d love to hear a story or two, Greg, about how you—what you’re actually doing to decrease CAC and increase LTV.

Greg: Well, the first—let’s just talk about CAC. In any business, especially a long growing business, there’s real limits on cash to spend, of course, in any size business, and you’re going to acquire customers and you’re really kind of heads down in that growth mode kind of thing. So, when I arrived the company was a little bit larger and had about 4,000 customers, something like that, but they really hadn’t distinguished between what was the channel CAC. So, there was a lot of myths about what worked and about what didn’t, so we actually these days have about 95 percent of our new customers, we’re tracking their original lead source method, they searched on this term, they were at this partner conference, right. How they came into our pipeline, their first touch, and we also do a little multi-touch, so we’re tracking that channel CAC and when we first did a rough cut of it we were really surprised that the lore of, “This thing always worked, keep going on that,” when you really tracked how they came in and the fully loaded cost for each one of those, we had some wild variations in, not surprisingly, paid type of activities and our highest cost partner events. And it was surprising to us and the business leaders that we just thought that’s what happened and, in fact, other things were guiding it.

Glenn: Can you give us an example of what worked and what didn’t work?

Greg: Well, there was a version of the—when companies get going and do a quick a growth spurt in the early days they kind of find a few tactics that start to work and they double and triple down on them and just get the momentum going. And there was a few paid channels, purchased leads which is a fast way to get some leads, and some email, before pay per click was maturing in the company here, that we were working with companies that had big mailing lists of small businesses and making content offers through them through their mailing lists, and that was one of the ways the company kind of fed the engine that was growing in the early days, but they couldn’t see the full results and all the implications of it, and it literally had three times customer acquisition cost when you look at it fully loaded by channel compared—

Glenn: You’re saying in the email approach?

Greg: Yeah, in the paid approach like that and purchased leads.

Glenn: Uh-huh.

Greg: So, when you fully loaded purchased leads that you give to sales people, they’re still pretty raw, they’re expensive, and they’re raw, and they kind of screw with sales people’s heads, they’re not qualified as much.

Glenn: Right!

Greg: And you add all that up together and you get to see when you do the CAC by channel fully loaded, man, those expensive leads took disproportioned amount of the sales team’s time and I’m going to allocate that in and give you that cost, and it actually—there was a lot of mythology of running down the hall here saying, “Do this, do this!” And we were able to slow that train down and move money around.

Glenn: And so, what does work? What did you find that does work, Greg?

Greg: Well, in our market for small businesses that are looking for one system when they graduated from simple email or a simple contact management, it is—there’s a lot of organic channels that work and as we get bigger and people know more about us and we promote organically and our customers tell each other and we have a wide partner channel, that organic channel, of course, is the core. And you’ve got to nurture that or you’re going to lose, I mean, that’s just a message here. Nobody can advertise their way to a big company and we advertised on the margin and we blend that in, so if we have to pay our way to lead generation for everything, you can just see it in the CAC by channel, you can see it in the financials, you’re never going to get there.

Glenn: Well, that’s a fantastic discovery, right? Because ultimately you are managing the ROI of your marketing spend and you realize over here what we were doing is very expensive and maybe brings in the wrong kind of customer and now I can direct my investments to these other places.

Greg: Yeah, you can direct investment but you can also calibrate it. So, I’m not saying don’t do any paid stuff, but now you know where the best paid stuff is and about how much to do, the mix is very important. So, without those calibrations you can’t even say, “Well, this month we’re going to have a 50-50 mix at customer generation or lead generation.” And you can calibrate that and you can hold organic marketers, right, everybody outside of the paid lead gen side accountable too, so you can get down into it and run a business more effectively that way, that’s just one example. And what it does, by the way, is not surprisingly, it helps move marketing investment from media to people which is basically one of the big stories of the last 20 years. Marketing departments used to be small with a big media budget, now they’re bigger with a smaller media budget that you can tune. And so, the organic marketing game takes people of social and PR and all the rest of that kind of stuff, education.

Glenn: Well, that’s a great way to wrap this up. We are actually out of time, but I love that last concept about shifting the dollars to people as opposed to media and that’s a good learning for us. So, Greg, this has been great. Thank you very much for sharing of these best practices with us and I hope the audience has learned as much as I have.

Greg: It’s been a lot of fun, Glenn. Thank you.

Glenn: All right, thanks. Talk to you soon. If you like this podcast please subscribe and rate us on iTunes and tell your friends about us. You can also go to our website CrimsonMarketing.com and sign up for our free monthly newsletter featuring the very best of our marketing insights, featured Moneyball for Marketing Podcast, and one of our favorite features called Bad Marketing or email me at info@crimsonmarketing.com. Thanks for listening to Moneyball for Marketing from Crimson Marketing. Have a great week and let us know if we can help you in any way.