Want a Bigger Marketing Budget? Optimize Your LTV to CAC Ratio

Almost every head of marketing, whether they be a CMO, VP, or Director of Marketing is thirsty for a larger marketing budget. With more money to spend, marketing can (theoretically) drive more growth.

But all too often marketing budgets are set without much rhyme or reason – there tends to be a huge correlation to how many sales were made in the previous month or quarter, or worse yet they are set as a percentage of the company’s revenue. This is particularly common in product driven SaaS organizations. But for growth oriented companies, these means of setting marketing budgets are simply not serving your growth agenda appropriately.

How much do SaaS Companies invest sales and marketing?

Take the chart below as an example. Based on a sampling of 300+ SaaS companies with greater than $2.5mm in revenue, the median sales and marketing spending as a percentage of revenue is 32%.

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Does this mean all SaaS companies should simply set their sales and marketing budgets at 32% of their revenue? Absolutely not. There are a number of companies spending as much as 43% of their revenues on sales and marketing, with these companies achieving growth rates of 80%+.

While some of these companies may be spending so aggressively because they are heavily funded and are looking to capture market share, the companies that are the true darlings of the SaaS space are those that have such a strong ratio between the Lifetime Value (LTV) of their customers and their Customer Acquisition Cost (CAC) that they’ve built a compelling case to pour more dollars into their customer acquisition engines. They’ve built Ferraris and have a valid reason to believe that additional sales and marketing spending will keep their growth rates accelerating.

In your quest to obtain access to more financial resources, it’s the marketing leader’s job to educate the rest of the organization. And simply put, the idea of a “marketing budget” is outdated if growth is truly what you are after.

The Formulas Your SaaS Company Needs

Instead, you have two levers at your disposal – both of which can be optimized, and both of which are not typically considered areas of your business that marketing alone should own. The Lifetime Value (LTV) of your customer is impacted by many factors, including but not limited to:

• Sales selling to buyer personas that have the best chance of being successful with your product
• Product organizations delivering truly valuable features that make the product “sticky”
• Customer success teams working with your clients to make them successful after purchase
• Marketing developing pricing and packaging that pushes longer term contracts over month to month agreements.

The formulas:

Lifetime Value (LTV) = Average Customer Lifetime X Average Revenue Per Account

Average Customer Lifetime = 1/churn rate (expressed in months or years)
Ex: 1 / 5% monthly churn = 20 month average customer lifetime

Average Revenue Per Account (in a given period) = Total revenue /total customers added

So for example, if last month you made $200,000 in revenue from 25 customers, your calculation would be $200,000/25 = $8,000.

And if customers stay with you for an average of 20 months, you multiply 20 x $8,000 and reach the lifetime value of $160,000. So the cost to acquire a customer (CAC) should be no more than $53k. ARPA = $200,000/25 = $8,000

In this example 20 months X $8,000 = $160,000 LTV

Just as there are many ways to extend your customers’ LTV, there are also a number of different strategies that you can employ to lower your Customer Acquisition Cost (CAC). Marketing can focus on more cost effective lead generation strategies like organic search, conversion optimization, and developing customer advocates. Sales teams can learn to more efficiently move prospects through the customer acquisition funnel and can do away with expensive events and client dinners in lieu of more cost effective inside sales techniques.

To calculate the cost it takes to acquire a customer, you simply divide the total sales & marketing spend by the number of customers added in a given period. So if you spent $100,000 in a year and acquired 10 customers during that time frame, your CAC would be $10,000.

As a general rule of thumb, a SaaS business with a LTV:CAC ratio of 3:1 is considered healthy – meaning you get $3 in customer revenue for every $1 you spend to acquire them. If you have this ratio or better, you have a customer acquisition engine that is performing well. It is important to mention that this is simply a benchmark – not a magic bullet. This ratio had held up well and provided a valid target at a number of companies I’ve worked with, but every company’s unique situation in terms of funding, growth rate, burn rate, and business goals should be considered. Never put all of your eggs in one basket by looking at any SaaS metric in isolation.

3:1 Ratio is Your Benchmark for a Higher Marketing Budget

With a ratio of better than 3:1, you have a strong argument for investing more money in customer acquisition programs if maxing out your growth potential is your objective. You can make a simple argument to the CEO by saying, “we know that for every $1 we spend to acquire a customer, we get $3 back in revenue.”

So it’s the job of the marketing leader to relentlessly look for ways, across the organization, to lower customer acquisition costs and extended the lifetime value of the customer. If you’re able to do so, you’re making a compelling case for marketing to be given access to whatever financial resources are available, whether you’re a funded or bootstrapped company.

In fact, a strong LTV:CAC ratio is one of the most important metrics you can show if you are trying to raise funding. In my opinion, perhaps the most valid reason a SaaS company should raise funding is if they have a very healthy LTV:CAC ratio and their growth is only limited by access to capital.

Gone are the days of marketing leaders waiting until after a big sales month to nervously ask for an increase in marketing budget. And gone are the days of the marketing leader advocating for marketing spending to represent a larger percentage of the company’s revenues. Relentless focus on increasing customer lifetime value and decreasing customer acquisition costs will blow the top off or your marketing budget (as it should!) indefinitely.

About the Author: Geoff Roberts is the Vice President of Marketing at Bizness Apps. Bizness apps is an app building platform used by small marketing and design agencies to build mobile apps for small business clients.

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5 Steps to Recovering from Low Landing Page Conversions

Landing pages are intended to be simple and straightforward – a single page designed to get a specific audience to take an action.
Marketers use landing pages to get people to:

• Make a product purchase
• Opt-in to get a promotional product like an ebook or report
• Request more information or a consult
• Urge an audience to subscribe

You’d think that creating a page for such simple tasks would be easy, especially when you consider the wealth of tools at our disposal for building out landing pages.

And, in fact, the act of producing landing pages is actually not complicated – at least, until you factor in the human component of your audience.

People, the ones you want to get to take a specific action, muck up the entire process and make landing pages much more difficult.

There’s no specific way to design or configure a landing page to ensure it’s going to perform a certain way or deliver favorable conversions.

All you have is your research and whatever knowledge you may have picked up about copy and landing page best practices, so you go on intuition.

You’re not alone in that. Over 60% of marketers optimize sites based on intuition alone.

Then the testing starts. And despite everything you feel you’ve done correctly, you go through what many others experience: lackluster conversion rates.

There are a lot of changes and tweaks you can make, but don’t approach your landing page like a master control panel where you start pulling levers and pushing buttons blindly.

There are 5 key areas where you can start making small challenges to positively influence your conversion rates.

1. Trust Signals

Simply put, if you don’t have trust, then you don’t have sales. You may have been funneling traffic to your landing pages as a result of lead nurturing, but chances are you’ve got some fresh landing page traffic made up of people who have no idea who you are.

Even if you’ve been nurturing your leads via email and building a relationship, you still need strong trust signals to boost the confidence of your audience and help tip them over into a conversion.

Social proof

Social proof tells your audience that you can be trusted because other people have trusted you and made an investment of time and/or money. If you’ve got the attention and business of these other people, then you must be credible to some degree.

Some of the most common ways of adding social proof to a landing page include highlighting social shares, number of purchases, subscriber counts, or social followers.

Supplier/manufacturer affiliation

If you partner with any brand, be it a major organization or an influencer, getting their name or logo on your landing page creates an affiliation in the mind of the audience.

The audience will perceive you as more trustworthy and credible because you’re working with X brand, which must mean that X brand trusts you.

You’ll see this a lot with brand mentions that include “As seen on” logo placements.

Third-party certifications

They may not seem like much, but certifications can put a lot of people at ease, especially if you’re asking them to give you money or personal information. Using third-party certifications such as the Better Business Bureau and VeriSign create a perception of authority around your landing page and brand.

Testimonials

Testimonials are another form of social proof, and are one of the strongest trust symbols. According to Nielsen, 83% of consumers trust recommendations from people they know, and 66% trust consumer opinions posted online.

If you can, share the full details from customers, including their name and city if they’re comfortable with it. Because it’s easy to fake testimonials (and many online consumers know it) it pays to be as transparent as possible.

2. Fix Your Call to Action and Make it Obvious

Remember what I said above: your landing page has a single goal. The only way you’re going to get your audience to take action is if you make that goal 100% clear to the people landing on your page.

If you don’t have your call to action where it’s visible, above the fold, then it’s virtually impossible to direct people to take action.

The reason for this is because most people spend less than 15 seconds on any given web page, which means most won’t even bother scrolling. They’ll glance, their brain will decide whether you’re relevant or not, and they’ll bounce.

If you hide your call to action below the fold, bury it in clutter, or don’t make it stand out, then you’ll lose a considerable amount of conversions.

Eric Ries’ Lean Startup keeps the call to action above the fold and clearly visible.

Everything your audience needs to make a decision should be above the fold, but don’t necessarily try to put all of your content above the fold.

Likewise, it takes more than the placement of the call to action to make it effective. It also needs to be compelling.

Use power words

Avoid using corporate babble and industry jargon. Stick with practical language and power words that are proven to compel people to take action.

Use active language

Remember that your call to action is telling your audience to do something. Use verbs that inspire that action, such as “Join,” “Subscribe,” “Download,” etc.

Make it stand out

You want your call to action to stand out from everything else on the page, but you also want it to be consistent with the design and theme.

Tim Ferriss uses a great CTA design that clearly shows his audience where to begin.

I also want to point out the trust signals he uses on his landing page.

Use brevity

The best CTAs say the most in the fewest words, so limit them to around 90-150 characters. That’s about 5-7 words. If your call to action is too long, then you lose the hook, and if it’s too short, it may not clearly convey what step visitors should take (or why.)

Make it personal

Avoid using broad calls to action like “Start today.” Instead, personalize it to the user so it reads more like “Start your trial today.”

3. Remove the Ability to go Elsewhere

Clear navigation and links are great to use in your content marketing and on your website to help you expand on concepts and help the audience get to a destination, but they don’t belong on your landing page.

Your landing page is the destination.

You never want to give visitors the ability to click out of this endpoint in your funnel. Remove the navigation from your landing page, and avoid adding links to your content at all costs.

I also recommend adding in an exit pop-up that will appear based on user behavior, such as if the user moves their mouse toward the top of the browser. This pop-up should encourage them to stay and focus their attention on the main call to action.

4. Add Visual Engagement

If you’re getting great traffic but the conversions are low, try to incorporate visual elements as a way to improve engagement and keep the attention of your audience.

People who view video are almost 2x as likely to make a purchase, and, according to another study, the addition of video to a landing page can increase conversions by as much as 80%.

Even if you can’t create high-quality video content, you can still use relevant images to seal the deal with your audience. Include high-definition product photos, illustrations, or quality screenshots for digital services that show some behind-the-scenes product/service use.

Think like a shopper – people often want to pick up, look at, and handle a product before they purchase it. Visuals make the audience feel like they’re doing just that. This is why e-commerce sites rely on detailed and numerous product photos to help sell their goods.

5. Improve the Copy

Your copy consists of every written element on your page, especially the headlines. It should be compelling, free of errors, and written in a way that makes an emotional and psychological connection with your target audience.

It also needs to be presented in a way that’s easily scannable, with the most critical points standing out with formatting and design elements like bullets and callouts.

I can’t tell you what you should say – that’s going to be based entirely on your audience and what they need to hear, so that’s where your own research comes into play.

Test Everything You Do

Every change you make is going to have some kind of an impact on your conversions. Hopefully you’ll see a lift in conversions, but it’s possible for a change to cause them to drop.

That’s why testing is so important. There are two ways to test the work you’re doing.

A/B testing lets you pit two elements against each other so you can test one or two updates, such as a headline or call to action. Once you have a winner, you can test again or move on to another element.

Multivariate testing lets you evaluate a larger number of changes across your page at the same time, helping you find the best combination. It’s more complex to do, and many marketers prefer A/B testing over this method, but it can get you through testing a lot of changes more quickly.

If you’re getting low conversion rates, you don’t need to scrub it and start over. Make small, strategic changes to your copy and calls to action, and monitor your performance using the recommendations above. With the right approach, you should begin seeing substantial lifts in your conversion rates.

What kind of changes tend to bring you the best results with your landing pages? Share your success with me in the comments.

About the Author: Aaron Agius is an experienced search, content and social marketer. He has worked with some of the world’s largest and most recognized brands to build their online presence. See more from Aaron at Louder Online, their Blog, Facebook, Twitter, Google+ and LinkedIn.

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