Quantifying impact: A deep dive into key marketing metrics for VC investments
As a VC evaluating high growth startups, one of the hardest areas to quantify is marketing. The ambiguous nature of marketing combined with founder hype can make it difficult to objectively measure the health of a company’s customer acquisition engine.
In this blog, we’ll outline the key marketing metrics we shared in our webinar that VCs should leverage to cut through the noise. As marketing leaders and startup founders ourselves, we understand the importance of data-driven decision making when it comes to intelligently funding growth.
We’ll cover everything from core funnel metrics to channel analysis to ways of testing brand investment impact. Whether you’re a VC looking to optimize the return on your portfolio or a founder trying to understand how to deliver the greatest impact for investors, read on to get your bases covered on marketing measurement and analysis.
Defining attribution: Where are customers coming from?
The starting point to any marketing measurement framework is understanding attribution. Attribution refers to tracking where customers originate from and which touchpoints influence their journey. There are three primary attribution models – First Touch, Last Touch and Multi-Touch:
First touch – Gives full credit to the first marketing touchpoint
Last touch – Attributes conversion to the final touchpoint before purchase
Multi touch – Distributes credit across multiple touchpoints along the buyer journe
Multi touch attribution provides the highest accuracy reflecting the true impact of combined brand and performance marketing efforts in influencing customers. However, even using first or last touch can still provide ~80 percent directional accuracy and works fine for early testing.
The most important point when leveraging attribution is to choose one consistent model across channels rather than bouncing between approaches. This provides a standardized baseline for comparisons as you scale efforts.
Calculating CAC: What is the real cost of customer acquisition?
One of the most commonly referenced metrics in any VC pitch deck is Customer Acquisition Cost (CAC). This reflects the average spend required to acquire each new customer. The issue we see time and again with early stage companies is trying to take shortcuts in calculating CAC leading to misleading results.
The accurate way to measure CAC is to incorporate all attributable sales and marketing costs in a given period divided by the number of new customers won.
Common expenses to include:
Advertising spend
Marketing salaries + benefits
Sales salaries + benefits
Lead gen / marketing technology costs
Services (creative, PR, etc)
Combining all associated customer acquisition expenses gives the true investment required to scale the sales engine rather than limiting to only media advertising costs for example. Think about it – if you invested $100K in a startup who only shared they spent $20K on FB ads to acquire 200 customers, you may think they had fantastic $100 CAC. When in reality, there was another $400K in staff costs and services supporting those efforts.
Understanding LTV: What is the potential customer value?
While CAC showcases the customer acquisition investment, Customer Lifetime Value (LTV) quantifies expected financial return from those clients. LTV helps to answer the question – after recovering CAC, how much margin do these customers generate for my business?
The formula for calculating LTV is:
Gross margin is an important metric because it measures true profit versus just tallying top line revenue. Building gross margin into the KPIs gives a better sense of long term potential.
This then leads us to the next pivotal metric for assessing overall marketing and business efficiency...
CAC Payback Period: How quickly is acquisition investment recouped?
Especially for early stage SaaS startups, CAC Payback Period acts as the North Star for quantifying the success of sales and marketing efforts. While LTV paints a picture for the long term value, young companies often don’t have enough data to accurately project churn and lifetime durations. This is where CAC Payback Period comes in handy as a supplementary gauge.
CAC Payback Period measures the number of months required to recoup CAC through a customer’s margin contribution. The formula equates to:
For example, if a company has a $5,000 CAC, $100 average revenue per user and 75% gross margin, it would take 5,000 / (100 * .75) = 6.67 months to recover acquisition cost.
Best in class SaaS companies target CAC payback periods below 12 months. While not always feasible out of the gate, demonstrating a trajectory towards more efficient payback periods can show positive momentum.
Examining funnel conversion rates
Thus far, we’ve focused primarily on big picture cost and return metrics through CAC and LTV. Another area VCs should push startup management teams on is granular funnel conversion performance.
For well defined B2B startup models, here are example target ranges at each funnel stage:
Website visitors to leads: 2-5%
Leads to marketing qualified leads: 20-30%
Marketing qualified leads to sales accepted opportunities: 6-12%
Tracking conversion rates by funnel stage shows where things may be breaking as marketers scale volumes and can uncover areas needing optimization. If the top of the funnel is underperforming against expectations, it signals more volume and investment is required. Weak bottom funnel conversion indicates messaging misalignment with buyer priorities.
Evaluating marketing performance by channel
Rather than solely evaluating marketing metrics in aggregate, investors should insist management teams share performance segmented by channel. The following marketing channels that teams segment by refer to digital media, events, referral partners, really any source driving acquisition. Examples of common acquisition channels include:
Organic inbound
Paid search (Google, Bing etc)
Channel partners
Direct
Social media
Documenting channel specificity gives clarity into true marketing attribution. It also shows whether budget and team resource allocations mirror actual performance.
Some questions VCs should ask for channel analysis:
What are your best and worst performing channels by CAC Payback and LTV?
How do conversion rates and funnel velocity differ by channel? Where are drop offs?
How does budget and team investment map to channel contribution?
What we often see is companies disproportionately over or under-investing in channels relative to their output. If organic content was driving 50%+ of pipeline at strong efficiency metrics, but only had two team members supporting it, that may indicate misalignment. On the flip side, large channel partnerships eating up budget without delivering material revenue should also raise concerns.
Measuring brand building efforts
Thus far we’ve focused predominantly on performance marketing metrics tied to direct customer conversion actions. However, especially as companies scale, brand building activities play an integral role shaping buyer awareness, perception and preference.
Common brand metrics for startups should include:
Unaided brand awareness surveys (3rd Party)
Brand sentiment tracking (social monitoring)
Share of voice vs. competitors (Press Visibility)
Organic vs paid site traffic growth
The challenge with brand efforts is they manifest indirectly over long periods of time, making them difficult to accurately quantify. Just because a billboard campaign or sponsorship drove minimal directly attributable sales doesn’t mean it didn’t expand awareness for future business.
How do we know that to be true? We actually have firsthand experience with the unquantifiable benefits of brand marketing from our own Managing Partner, Mitch Wainer’s early startup days at DigitalOcean. In the infancy of building the now-publicly traded cloud infrastructure company, Mitch spent $25,000 hiring an illustrator to bring to life and refine its brand mascot – Sammy the Shark. At the time, the other Founders questioned the decision to spend such a large amount on an animation, thinking there was no measurable way to justify the expense.
Yet here we are years later and Sammy has become an iconic brand ambassador appearing on millions of t-shirts, laptop stickers, and hundreds of other variantions of swag around the world. What originally seemed a risky and maybe even irrational brand investment has created exponential awareness and developed a cult-like following from the community well beyond expectations.
Moral of the story: While still prioritizing measurable direct response, don’t completely discount long term value of strategic brand building.
Set realistic targets leveraging industry metrics
The final piece of effective marketing management and measurement is establishing appropriate targets. Having quantifiable goals helps focus execution and provides a baseline for assessing progress.
When setting marketing metrics benchmarks, analyze comparable industry ranges. As an example, here are some SaaS business targets:
Gross Margin: 80%+
Monthly Churn: < 3%
LTV : CAC – 3:1+ Ratio
CAC Payback Period: < 12 Months
As another guide, marketing budgets typically align to 14-40% of company revenue depending on business model, funnel efficiencies and gross margin. More expensive, complex products warrant budget allocation towards the lower bound where higher volume transactional offerings support larger investments.
Keep in mind these aren’t hard and fast numbers, just a benchmark, so don’t be afraid to tweak for unique situations and for different industries. Always remember that metrics serve to inform, not strictly constrain decisions.
By leveraging these metrics, both VCs and founders can make informed decisions that fuel growth and navigate the competitive landscape with confidence. Remember, data is your ally, empowering you to unlock the true potential of your marketing efforts.