I am working with a consulting client and have found a fundamental imbalance in the company. It’s in the ratio of sales people to marketing spend to marketing headcount. This imbalance has the potential to completely undermine marketing and sales success to the extent that the P&L is completely out of whack with a CAC that’s far too high.
Cost to Acquire a Customer (CAC)
The cost to acquire a customer (CAC) is the fully loaded sum of marketing spend, sales compensation (fixed and variable), and marketing wages. In recurring revenue companies, CAC is a very high-level success indicator when held against annualized recurring revenue. If you can recover your CAC in less than a year, you’re good (assuming you have reasonable lifetime value). If you can recover your CAC in 6-9 months, you’re really good. Anything less than that is great. Point is, we use CAC as a vital business KPI.
The problem with CAC is that it can bury imbalance within it. Of course, if the next-level down is truly broken, CAC will be really high and you’ll dig into why. This is a cautionary tale to examine and track the ratios that lie within your CAC.
Salespeople, Leads and Marketing Team Ratios Within CAC
I thought it was obvious that the relationship between leads, salespeople and marketing team size was relatively fixed. The core of that is that a salesperson needs a certain number of marketing generated leads to complete his or her pipeline (outside of whatever outbound responsibility is set). This number is set by reverse engineering the funnel based on established or targeted efficacies. But it’s definitely a number. Less than that number of MGLs means idle hands (and cranky sales leadership) and more than that number means: hire more salespeople, watch leads go stale, or ratchet back the lead flow.
Leads cost money. Again, based on historicals or targets, cost-per-lead is known and relatively predictable. So, each sales rep needs X number of leads at $N per lead, creating a marketing spend budget per sales rep.
Marketing leads are the product of a marketing team. Once again, the output of the marketing team is historical and/or targeted. The marketing team can produce X leads from Y headcount. Yes, it’s a machine comprised of all kinds of marketers, but it has a capacity and you would not want to overbuild or underbuild that team. Underbuilt means frayed nerves, late hours or under delivery of demand. And if it’s overbuilt with excess capacity, people are bored and costs are too high.
When budgeting, either sales team size or marketing spend has to rule the scale of the program. If I’m designing a sales and marketing budget to achieve a growth goal, I plug in sales team/funnel efficacies from the bottom up to get to the top-line number of new leads necessary to result in the new contract value required to achieve the growth goal.
Knowing the number of leads required lets us back into the number of sales reps needed to work that lead count. Combined with existing knowledge of rep ramp-up time, we can then back into a hiring ramp for the sales team that aligns with our marketing spend over time. Also based on the required lead volume, we can ramp the marketing team to fulfill that.
Bad Ratios, Bad CAC
When the ratios are off…for example too many salespeople for available marketing spend; or too many marketing team members for the available spend and lead requirements; the whole program is destined to fail. There’s no way to bring in a reasonable CAC because sales will never have enough leads to work and marketing wages will be far too high per lead to make fully loaded CPL business-reasonable.
None of the three legs of the marketing and sales CAC stool can bee too long or too short. They all have to be just the right length or the stool won’t stand up.
If you don’t have metrics, it’s hard to know what your ratios should be. Actually, it’s impossible. And, without metrics, each leg of the stool can point at the others as too long or too short—because there’s no objective measure of who’s right and who’s wrong. You can’t build a sales and marketing organization that works without reliable metrics. If you have them and your ratios are off, you have the tools to fix them. If you don’t have the data, get it. And get your stool on equal footing.
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[…] in my recent eBook. It’s a primary indicator of capital efficiency, executional risk, and sales and marketing efficacy. It’s also a number that leadership track over the lifecycle of the business. Early on, if your […]