Key Marketing Metrics in Startup Projections
Guest article by Bryan Brewer of FundingQuest
After hearing more than a thousand investor pitches in
the last 12 years, one thing I’ve noticed is the frequent omission of two key
marketing metrics: Customer Lifetime
Value (CLV) and Customer Acquisition
Cost (CAC). I’ve even had startup clients argue that determining these
metrics was not a useful exercise!
In my opinion, both of these metrics are key to evaluating
the efficiency of the company’s
marketing efforts. I think some of the confusion arises from the valid point
that assessing either of these metrics alone may not be very meaningful. For
example, if Company A is making single sales of low-priced items, the average
CLV might be less than $50. On the other hand, if Company B is selling a $30/month
SaaS subscription with an average customer tenure of 30 months, the result is a
CLV of $900. Or Company C, selling a complex piece of medical equipment with
disposable test items, might have a CLV of $10,000 or more. Taken alone, any
particular CLV does not give an indication of the company’s prospects for
success.
A better approach might be to consider the CLV as it
compares to other companies in the same space. If other businesses similar to
Company C in the above example have an average CLV of $50,000 or more, then an
investor may rightly wonder if Company C will survive in that market.
The best approach to making sense of these metrics is to calculate
the ratio of the Customer Lifetime Value to the Customer Acquisition Cost. If a
startup sells products at higher prices, then it can afford to spend more money
to acquire customers. Conversely, a company with a low CLV needs to find a very
low cost way to acquire customers in order to be profitable.
The ratio of CLV to CAC is what I call the “Marketing Efficiency Factor.” For
Company B in the example above, a CAC of $150 results in a healthy Marketing
Efficiency Factor of 6 ($900 divided by $150). However, if it turns out that
Company B needs to spend $450 to acquire a customer, then its factor drops to 2
– a position which doesn’t leave much margin for overhead and profit.
Marketing Efficiency Factor is one of numerous metrics on
which you can rate your startup in my recently released Minimum Fundable Company® Test, available for free at www.mfctest.com. The test covers 20 multiple
choice questions in the areas of Startup Viability, Business Model, Market
Strategy, Management, and The Deal. I suggest that a company needs to score at
least 50% in all five areas in order to be considered “investor-ready.” In my
experience, if a company is deficient on one or more of these areas, the story
told in the investor pitch will simply not hold together, and thus will not
hold the attention of investors.
Minimum Fundable Company is a registered trademark of
Funding Quest, LLC.
