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.