The Profit-First Approach to Securing Your B2B Marketing Budget
One of the biggest challenges B2B marketers face when setting their budget is connecting marketing efforts directly to revenue. Executives expect marketing departments to deliver bottom-line results, but many marketing leaders struggle to justify their budget or clearly define profitable marketing metrics. How can you, as a B2B marketer, build a compelling business case for your marketing budget?
The key lies in shifting the focus from short-term results to long-term customer value. To do this effectively, you'll need to prioritize two essential metrics: Customer Lifetime Value (LTV) and Allowable Acquisition Cost (AAC).
What is Customer Lifetime Value (LTV)?
Customer Lifetime Value (LTV) represents the total value a customer brings to your business throughout their relationship with your company. Unlike traditional marketing ROI, which may only capture the value of an initial sale, LTV accounts for every purchase a customer makes over time, as well as their potential to generate ongoing revenue.
Example: Let’s take the example of a manufacturing company. Imagine it costs the company $10,000 to acquire five new customers through a paid media campaign. In the first month, those customers generate $9,000 in profit, making it seem like the company is running at a loss.
However, when you calculate the lifetime value of these customers—taking into account cross-selling and upselling over the next five years—each customer might bring in an additional $7,500 in profit. With this perspective, the $1,000 loss becomes a $37,500 gain over the long term.
By understanding LTV, you can better assess the true profitability of marketing campaigns and make a stronger business case for your budget.
Calculating Customer Lifetime Value
Calculating LTV requires collaboration across multiple departments, such as sales, accounting, analytics, and IT. You’ll need to align on key factors, such as whether you calculate based solely on revenue or also include other customer actions like referrals and advocacy.
For B2B companies, especially in industries like manufacturing, the complexity of customer relationships can make LTV calculations tricky. But it’s essential to ensure that only the revenue and profit generated by the specific marketing investments are included in the calculation.
Once you’ve calculated your LTV, you’re one step closer to defining your marketing budget. The next step is determining how much you can spend to acquire each new customer without losing profitability.
What is Allowable Acquisition Cost (AAC)?
Allowable Acquisition Cost (AAC) represents the maximum amount your business can afford to spend to acquire a new customer while still maintaining profitability. As LTV increases, so does the amount you can justify spending on customer acquisition.
Example: If a business calculates that a new customer has a lifetime value of $10,000 and they want to maintain a 20% profit margin, they can spend up to $8,000 to acquire that customer. The higher the LTV, the more room you have to invest in attracting and retaining that customer.
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How to Calculate Allowable Acquisition Cost
To calculate AAC, you typically work closely with your CFO or finance team. While the formula for AAC might seem straightforward, the real challenge lies in determining which costs should be included. For instance, some companies include facility costs in their value stream, while others do not.
Here's a simplified version of the AAC formula:
AAC = LTV - (Total Cost of Acquisition + Value Stream Costs)
The result will provide you with the exact amount you can spend to acquire a new customer without eating into your profit margins.
Building Your Business Case for the Marketing Budget
With your LTV and AAC clearly defined, you're now ready to build a solid case for your B2B marketing budget. Presenting these profitability metrics to executives allows you to:
For example, if your marketing campaign’s cost-per-acquisition is lower than your allowable acquisition cost, you can confidently scale your efforts. If your campaign is underperforming, you can adjust your tactics to optimize profitability.
Real-World Impact
Let's look at a tech startup example. Suppose the company invests $50,000 in a digital marketing campaign that brings in 100 new customers. The initial profit from those customers is only $45,000, making it seem like a loss. But when the company calculates its customer lifetime value—$2,500 per customer—they realize these 100 customers will bring in $250,000 over five years. This insight allows the marketing team to justify further investments, as the long-term gain far outweighs the short-term expense.
Conclusion
To build a compelling business case for your B2B marketing budget, it's crucial to focus on long-term metrics like Customer Lifetime Value and Allowable Acquisition Cost. By calculating these metrics, you'll be better positioned to justify your marketing spend, demonstrate profitability, and drive business growth over the long term.
Leveraging profitability metrics not only helps you gain executive buy-in but also ensures that your marketing efforts are aligned with your company’s broader financial goals. This data-driven approach transforms marketing from a cost center into a growth engine for your business.