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Time was when you just needed to be an idea guy to be a great CMO. When it came to academic strong suits, English was desirable, and maybe Art if you were really good. But marketing has changed. Numbers are much more important than words or pictures. To be a great CMO, you need to be great at math, too. This shift to numbers is even more pronounced when it comes to running marketing at subscription businesses like SaaS.
That may be a tall order for some. You can’t just decide to become a Jacob Bernoulli overnight (and probably not even if you go to night school). You can get better by focusing key metrics important to SaaS, like churn and the magic number, aka the CAC ratio.
For CMOs looking for a leg up, I offer three quick math tricks. You will find these not only useful in the day-to-day oversight of your business, but used judiciously, you might even get a raised eyebrow or nod of opprobrium from your CFO in the boardroom.
Calculating Customer Lifetime – I have Joel York from Markodojo to thank for this one. When reviewing an early draft of The SaaS Marketing Handbook, he rightly told me that this is the only true way to calculate customer lifetime.
To calculate your customer lifetime, divide 1 by your churn rate. The formula is used to calculate exponential decay, and in addition to customer lifetime is also used to calculate credit payments and how long radioactive material will last (throw that one out if you really want to impress your head of R&D). If your annual churn rate is 20%, then your customer lifetime is 1 ÷ 0.20, or five years. Not only is this a handy trick, but it’s crucial for a new business or product line, when you have not even existed for as long as a potential customer lifetime.
Translating CAC Ratios to ROI – Though a simple concept, many people just can’t quite grasp what a Customer Acquisition Cost (CAC) ratio is. If you are a SaaS marketer, you should (and can find out more in my “Becoming a Metrics Ninja” chapter here). But as a SaaS CMO myself, I’ve been in situations where I’ve explained it to a colleague and just got that MEGO look back.
What to do? Most people can understand ROI. So here’s a quick way to state a CAC ratio in terms of ROI. A CAC ratio of 1 means your company will take a year to make your money back, and 13 months to be ROI positive. CAC ratios over 1 are great because you are ROI positive in the first year, and all of the out years on your customer lifetime (see above) are gravy. Here’s the quick math for your Rain Man moment.
.5 CAC Ratio is ROI positive in 25 months
1 CAC Ratio is ROI positive in 13 months
1.25 CAC Ratio is ROI positive in 10 months (9.6 actually, for those who relish precision)
1.5 CAC Ratio is ROI positive in 9 months
100% Annual Growth – If you want to grow 100% a year, you need to grow 19% a quarter. I think it’s cool to have such an arbitrary number in your head, and you won’t sound like those numbnuts who think 25% QoQ growth equals 100% a year.
Here’s how it works. Let’s say you end Q4 with $100 in sales. We’re going to multiply the previous quarter’s revenue by 1.19 each quarter. Watch:
Q1: $100 x 1.19 = $119
Q2: $119 x 1.19 = $141.61
Q3: $141.61 x 1.19 = $168.51
Q4: $168.51 x 1.19 = $200.53 (consider the 53 cents a tip)
Keep these tips at the ready. Faster than taking STAT 510 – Statistical Inference or becoming your CFO’s golfing buddy.
And for those former poets and artists among you who want to jump into the decimal deep end, I highly recommend the wonderful little primer Beyond Numeracy by John Allen Paulos.
Know another good trick? I’d like to hear it.