How much VC money should you spend on Marketing?
Or, is the million dollar question “how much do I need to spend on marketing to get to market, get to profit and onto exponential growth?” That question needs understanding well before you worry about your CAC, CLV and Customer ROI!
How much VC money should you spend on Marketing?
The recent article by Tushar Ahluwalia in TechinAsia (“How much money should you spend on Marketing?”) stated the realization that “very few people working in venture capital and entrepreneurs have a deep enough understanding about how to look at marketing spend and the metrics to track marketing efficiency.” It’s a great article and worth a read!
In the article, it’s fair to say that you can conclude that VCs will undoubtedly question your CAC, CLV, and Customer ROI metrics when evaluating whether or not to invest in you. But, the million-dollar question is, “how much do I need to spend on marketing to get to market, get to profit, and onto exponential growth?” That question needs understanding before you worry about your CAC, CLV, and Customer ROI!
Let’s do the math!
Customer ROI = CLV/CAC
Internet companies are evaluated on these metrics: Customer Acquisition Costs (CAC) vs. Customer Lifetime Value (CLV). CACs have no meaning without the corresponding CLV - how much money do I pay to acquire versus how much money do I get back over time from the customer?
Customer ROI is a measure of marketing efficiency. CLV is influenced by many variables, such as margin, repeat purchases, average order values, discounting, and your effectiveness at re-engaging with customers through email newsletters, cart abandonment, etc.
As the demand for customers increases, that industry’s marketing spend, meaning CACs go higher. External factors like competition and market growth will affect your CACs (cost per visit, conversion rate, etc.). But, if you build something completely new, with high barriers to entry, no competition, and a lot of demand for it, you’ll have extremely low CACs.
The point of Marketing is?
It’s not about winning awards, getting followers & likes, posting endless blogs, or jumping on the latest influencer bandwagon. While it may all be a lot of fun, it’s a bit like putting all your money into a fantastic roller coaster ride but having nothing to show for it in the end.
If we just cut to the chase, then the point of Marketing should be to ensure your target market gets to know you and can express an interest in your product. Marketing needs to generate leads with a ‘front-end’ plan to create a customer and make enough money from the first transaction to cover the acquisition costs. The ‘back-end’ plan focused on driving repeat purchases and up-selling. For this to work, Marketing can’t go solo. It needs the support of sales conversion and customer lifetime value management; otherwise, it’s a bit like having the latest aerodynamic carbon road bike without any wheels - you’ll get nowhere fast!
If you’re serious about scaling your B2B or B2B business as rapidly as possible, marketing is typically 20% of the business planning process that delivers 80% of the results. So before you can begin to answer the question “how much should I spend on marketing?” you’d be better off investing your time into defining your target market, your target messages, and the media you need to use to reach them. That will determine how much you need to invest in earned, owned, and paid media.
Product/Market fit is essential for a start-up to succeed
In his book ("From Startup to Exit"), Shirish Nadkarni makes a very valid point that "Product/market fit is essential for a start-up to succeed." He goes on to point out that "you'll know when you have achieved product/market fit - customers will return your calls, and your sales cycle will be short."
Shirish also says that "having a clear target market for your product is critical to achieving product/market fit. The narrower the target market, the better, as this ensures your messaging, marketing, and feature set are highly-tuned to your customer needs."
Find your North Star
The North Star is so important for navigators because the axis of the Earth is pointed almost directly at it, meaning that it remains in very nearly the same spot all year round.
Your North Star is the What, Why, and Who of your business, and this lays out the foundations of your marketing plan - how to navigate to market, to profit, and onto exponential growth. To be effective, you need to define your target markets first, e.g., who may want to buy your products and what these customer personas look like? Then, your North Star can be developed in three steps:
“The What” - what does your business provide to these target customers? Try to describe it in an elevator-pitch style and articulate the key features and benefits.
“The Why” - what’s the problem your product is solving, and what’s the impact for customers? Think Problem > Solution > Impact.
“The Who” - building on from your target markets to Ideal Customer Profile (“ICP”) - in effect developing customer user stories to define your exact customer better, what they want and why they want it. Sometimes this does mean selling what they want, but giving them what they need!
Once you have these personas, you’re in a much stronger position to develop your marketing plan and successfully navigate to profit and exponential growth.
Marketing is about Market, Message and Media
The foundations of your marketing plan should set the strategy so that your ideal customer profile can get to know you, like you, and trust you enough to become a customer. You can approach this in three steps:
Target markets - identify the niche market segments where you can play to win - the best niches to go for are a centimeter wide and a kilometer deep. This helps ensure that your marketing messages don't end up being weak and diluted. For your ideal target market segment, define who your customers are - the type of company, industry sector, location, who the buyer is, etc. Then paint a picture of them by thinking about what keeps them awake at night, what is their 'fear of loss or desire for gain,' what trends are occurring in their industry segment, what's the one thing they crave above all else, what business problems do they need to solve, etc.
Target messages - next, you need to define the core messages for your ideal customer profiles. This includes developing your brand-level strapline and positioning, compelling product-level strapline and messaging (crafting a persuasive reason to buy), and creating unique selling propositions. It's good practice to use emotionally charged words and phrases as purchasing is done with emotions and justified with logic after the fact. The strapline is the emotion, and USPs are the facts.
Target media - this is the media you'll need to use to reach your target market. Think about where your target customers hang out online and what media you can use to reach them. Build up your marketing assets - websites, blogs, email lists, etc. Then use social media as a way to drive traffic. One thousand email addresses are better than 10,000 followers. Also, consider Direct Response marketing - it's trackable, measurable, uses compelling headlines and sales copy, targets a specific audience, makes a specific offer, demands a response, and includes maintenance of follow-up of leads.
How much money do I spend on Marketing?
The answer is that it depends on your level of aggression and potential to recoup customer acquisition costs. The Customer ROI formula can also be an excellent way to gauge your marketing spend and measure its effectiveness.
In his book (“From Startup to Exit”), Shirish Nadkarni also states that “sustainable growth is achieved via driving real customer engagement and retention. Without customer engagement and retention, your growth will dry up the moment you turn off your customer acquisition activities.”
So, how much you can sustainably spend on marketing depends on your ability to convert leads and grow customer value. I’ll talk about these next time, but in the meantime, take a look at the Zone 4 Growth Accelerator Model, which has been designed to help businesses get to revenue and break-even using proven sales techniques; and onto exponential growth using proven customer value management tools.