• Marketing and sales need to work together as one unit on targets, data, collaboration, and communications
• Understand the relationship between customer lifetime value and customer acquisitions costs to accelerate revenue and profitability together
• Joint analytics will help determine your best customers, drive retention efforts, and enhance overall productivity as you scale your business

At the SiriusDecisions 2016 Summit, Brian Kardon, CMO of Fuze, gave an excellent presentation to CMOs, chief sales officers (CSOs) and chief product officers (CPOs) at our Executive Leadership Exchange. He discussed how it’s critical for marketing and sales to work as one unit to understand and drive customer lifetime value (LTV), and LTV’s relationship to customer acquisition costs (CAC).

To begin, Brian explained that organizations need to run sales and marketing differently – more collaboratively than they have in the past. Key attributes of this shift include:

• Targets. Marketing owns and/or is responsible for leads to bookings; sales is responsible from bookings to revenue.
• Data. Transition from data silos and lack of shared vision to data that is transparent and real-time – and has a shared view.
• Collaboration. From finger-pointing to shared marketing and sales responsibilities.
• Communication. From infrequent and hostile to continuous, with agile decisionmaking.

Next, Brian noted that CMOs and CSOs should consider the ratio of LTV to CAC to drive continuous improvements in growth and profitability. My marketing graduate students tend to fear math, as may some marketing folks. However, the calculations use simple ratios and algebra:

CAC represents cash outflows to acquire customers. LTV represents the cash inflow revenues over the lifetime of the customers. For example:

CAC = \$Sum of all sales and marketing expenses/# of new customers added

\$40,000,000/400 = \$100,000

Next, calculate customer lifetime in months or years, which is the reciprocal of the customer churn rate, as follows:

Monthly churn rate = 1/monthly churn

For 2 percent churn/month

1/.02 = 50 months lifetime of customers

Annual churn = 1/annual churn percentage

For 20 percent churn/year

1/.2 = 5 Years Lifetime of Customers

LTV = Avg. Monthly Recurring Revenue x Avg. Customer Lifetime x Gross Margin percentage

\$10,000 x 50 Months x 60% Gross Margin % = \$300,000

LTV/CAC = \$300,000/\$100,000 = 3

Brian indicated that as you scale your business, you should see the LTV/CAC ratio rise over time, thus showing progress. If your ratio is less than 1:1 , you are overspending to acquire customers. Ratios greater than 5:1 probably indicate underspending.

Brian also shared some LTV and CAC guidelines for software-as-a-service (SaaS) startup companies:

You can tweak performance of these metrics to drive continuous improvement. The levers at your disposal include:

For LTV:

• Customer churn rate
• Upsell, cross-sell and customer experience
• Deal size
• Deal duration
• Pricing and gross margin

For CAC:

• Cost per marketing qualified lead (MQL) and sales qualified lead (SQL)
• Ratio of inbound to outbound
• Sales productivity
• Focus on target accounts
• Length of sales cycle