The two metrics that matter for marketing investments

In this era, when money is no longer cheap and every enterprise SaaS company is watching their burn/spend very carefully, there are two metrics matter the most, when justifying making a marketing investment. 

The two metrics that matter the most are a) Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV)?  Any big marketing investment needs to either lower your CAC or increase LTV.  ROI of expensive marketing programs should be based on the right movement in these two metrics.

For example:

• Would the initiatives directly contribute to lowering customer acquisition cost i.e., incremental deals closed directly because of the initiative should exceed incremental cost of the initiative.  So, (incremental marketing spend/ total number of incremental customers closed) should be lower than your current CAC, so your new aggregate CAC becomes lower.  For PLG SaaS companies, this formula applies directly. For enterprise SaaS, I would modify the formula to: incremental marketing spend/incremental forecasted pipeline generated over a 6-month period, since sales cycles are long.
• Do they directly contribute to higher customer lifetime value (i.e., either generate direct cross-sell or increase Net Revenue Retention (NRR) i.e., the percentage of recurring revenue retained from existing customers in a defined time-period, including expansion revenue, downgrades, and cancels.) 

New branding initiatives, expensive digital media campaigns, pricing changes, big messaging refresh, new vertical marketing initiatives etc. are some of the examples of new marketing initiatives that should be funded based on planned improvement in these two benchmarks. Having a very clear game plan in how these investments will reduce CAC or increase LTV, followed by ongoing operational reporting and accountability to evaluate their performance against plan is important.

I have seen initiatives such as expensive rebranding, glitzy customer videos or big customer events that are likely to fail this test. I have seen marketing managers spend big budgets on external agencies with limited domain expertise.  They end up creating assets that are content-free i.e., they have no point of view and talk about things that the customer already knows. Result is that they fail to move the needle on CAC/LTV.  I have seen investment in social media programs that generate little engagement. 

These feel-good initiatives, which seemed good in the era of free money because they generated ‘air cover’ and ‘branding’, should be carefully evaluated in today’s market against these two metrics.  In real estate they say that the three things that matter are location, location, and location.  A year ago, what mattered in enterprise SaaS was growth, growth, and growth.  Now what matters is a fine balance between growth, margin and burn (or EBITDA – depending on company stage).  And in this new era, CAC and LTV are the metrics that matter the most for ensuring good marketing investments.