Here’s how to reflect your customer acquisition strategy in numbers
Every year, a lot of financial models are submitted to us for our review. Driven by amazing concepts and great aspirations, each model is unique in its own way. However, one common issue stands out frequently in all these second models. Guess what it is? It’s the complete absence of any detailed sales & marketing strategy or any fully developed customer acquisition plan.
It may seem strange not to pay enough attention to this crucial driving force for attracting new clients to your business. But alas, it’s the reality we see on the ground.
Here at Waveup, we are determined to make financial models great again. As part of this, any sound financial model will have a bullet-proof, numbers-driven sales and marketing component. So, let’s dive into our key tips & tricks on how to make your sales & marketing activities an integral part of your forecast and explain why it’s so essential to investors.
Why is sales & marketing so important for investors?
Quite often, startups will gloss over complicated calculations with a sketchy shortcut such as simply taking a stab at the number of new leads or clients or outlining an estimated monthly sales & marketing budget plan (hopefully, there will be some growth rate included!).
This is an incredibly risky move since investors are bound to ask you a whole bunch of questions regarding your S&M strategy in a drive to understand how you plan to attract and onboard new customers. Any gaping hole in your customer acquisition strategy will most likely jeopardize your entire fundraising effort. Either you won’t get any funding at all, or any investment received will simply be insufficient to cover the real-life sales & marketing costs required to capture enough customers.
But there’s a pretty simple explanation for all this. Let’s go behind the scenes to explore why investors always look for evidence of detailed customer acquisition calculations in your model.
1. Sales & marketing show whether or not your overall strategy is realistic
Sales & marketing expenses are a vital primary source of potential clients and a critical foundation for future revenues. To come across as realistic, you must consider every minuscule aspect of your business. In simple terms, you must detail each type of marketing strategy and channels deployed, as well as show clearly that your sales engine is in line with:
your industry/sector (obviously, it makes no sense to advertise your expensive and complex B2B solution on TikTok);
your client type/size (most probably you won’t be searching for new enterprise clients with the help of Instagram ads);
the level of complexity in both your product & user onboarding (you don’t need a full-scale sales team if your product offers self-onboarding).
2. Sales & marketing explain what intermediary steps are included
Let’s remind ourselves of the primary goal of all sales & marketing efforts – to capture as many new customers as possible while keeping our related costs as low as possible. This is not as easy as it looks – and investors know it. You’ll need to go through many steps before capturing a lead and then converting it to a user or client. So, in order to understand whether your selected customer acquisition strategy for startups will allow to reach this goal, an investor will need to see every stage of your customer acquisition funnel – in detail. That’s why it’s crucial to show that your calculations are well thought through and accurate.
Make sure your model explains how your business will turn its sales & marketing budgets into traffic, leads, new signups, downloads and/or new clients. Just start with the type of strategy that best matches your business and then add all the necessary elements such as cost per action, conversion rates, number of salespeople required and so forth.
If you are not sure what details to add, keep in mind the ‘Rule of Three’:
Show all the sources of potential leads & respective budgets such as digital ads, referrals, and outreach campaigns.
If possible, classify your potential customers and explain how they will move from one category to another in order to become a new user/client. Don’t forget to add conversion rates such as traffic to user conversion, Marketing Qualified Lead, Sales Qualified Lead to Client conversion, and so on.
Make sure your model realistically reflects the team you need, such as having enough SDRs to handle all the incoming leads.
3. Sales & marketing tell how large your final customer acquisition cost is
CAC (customer acquisition cost) is the number one metric to track closely when analyzing your S&M engine’s efficiency. In short, it shows how much you need to spend in order to attract one new customer or user:
This metric can tell investors three important things:
Your company’s performance, compared with the competition/sector (don’t forget to check your CAC against benchmarks).
Any changes in your CAC over time (whether it’s possible to decrease CAC over the years or it will increase, forcing you to come up with a way to compensate for it).
The validity of your unit economics.
What are unit economics? Basically, they allow us to compare a company’s revenues and costs of a particular business model on a per-unit basis. The calculation is crucial for understanding whether your sales & marketing machine works efficiently or whether you’re just burning through money.
Here, you’ll need two key metrics to track: the LTV/CAC ratio and the CAC payback period.
Lifetime Value (LTV): a metric showing how much value each customer/user creates for your business over time.
Benchmark: For SaaS businesses, the perfect LTV to CAC ratio is 3X. This means that you should get $3 back for every $1 you spend on sales & marketing.
CAC Payback Period: the time the business needs to earn back its customer acquisition costs.
Benchmark: When it comes to this metric – the faster, the better. Generally, companies need to earn back CAC in 12 months or less. Super performers can do it in 5-7 months. Large enterprises can have a longer CAC payback period.
4. Sales & marketing impact you ask significantly
Since sales & marketing is one of the most important categories of expenses for a startup in the first few years post-launch, you’ll need to boost your customer acquisition funnel, spend a lot on building brand awareness, implement new business acquisition strategies and tactics, onboard new customers, and maintain enough resources for every other aspect of the business.
Trying to approximate your sales & marketing budgets based on a gut feeling will come back and haunt you in terms of the actual funds you’re raising from potential investors. Your company will always run into new issues along the way, and you just can’t afford to run out of funds sooner than anticipated. That’s why it’s worth paying close attention to this vital aspect of your business and making sure your investment ask is realistic.
Key elements to include
By now, we hope that we’ve managed to persuade you of the vital importance of detailed and thorough sales and marketing calculations. Your next step is to know what to show in your financial model when fundraising, so make sure the following elements are included in your customer acquisition calculations:
Marketing channels deployed, such as paid advertising channels, content marketing activities, events, affiliate programs, and any other channels that help build brand awareness.
Traffic generation logic such as channels used and calculation methods of paid & organic traffic.
Conversion rates, such as traffic-to-lead conversion, types of leads, and lead-to-customer conversion.
Sales pipeline status, such as Marketing/Sales Qualified Lead (MQL/SQL), opportunity, closed/won.
Sales cycle length, such as < one month, one month, several months, > six months.
The team involved, such as the Sales Development Representatives, Business Development Managers, Account Executives.
Top 3 things to avoid
Often, it’s not just a case of what to show in the model. It’s also useful to know what to leave out. Here’s a quick checklist from Waveup on the core things to drop if you really don’t want to risk losing an investor:
1. Too many ‘other’ or ‘miscellaneous’ items in your expenses
Reviewing your model shouldn’t be guesswork for the investors. You may know what’s included in the ‘Miscellaneous’ bucket, but they won’t. Besides, it comes across as lazy. Always try to categorize expenses as much as you can, leaving only a tiny percentage for ‘other’ category.
If you don’t do this, the investor might think that you’re too lazy to finalize your business strategy planning and don’t know how to allocate the budget in the best way. Or they’ll think you simply grabbed your assumptions out of mid-air. In the worst-case scenario, they might even suspect you’re trying to hide something behind these numbers, such as your large salary.
2. Unconfirmed assumptions
One of the worst things that can happen during a presentation is when investors ask you what your assumptions are based on. You’ve really no excuse for not being able to handle this inevitable question. These days, there are lots of resources on the web with different benchmarks, so just make sure you’ve double checked all your sales & marketing assumptions against the competition, industry standards, and any regional indicators.
3. Overcomplicated calculations
In the same way that overly simple calculations can trigger additional questions, an overloaded sheet with a complex structure and lots of questionable assumptions will definitely cause a torrent of queries. Try to make your sheet logical, consistent, and understandable, especially if it needs to be sent directly to the investor via email and you don’t have an opportunity to present and comment on it. The easiest way to check yourself is to ask yourself, “Would I understand this part of the model if I saw it for the first time without any explanation?”
From time to time, some complicated financial models from startups really blow our minds. We’ll never forget the startup that offered SaaS solutions for SMB and Enterprise clients with a gigantic sales funnel and six categories of leads in their forecast, with each one having its own conversion rate. Having six categories of leads in the forecast isn’t a problem at all if you already have this funnel in your company and historical data on which to base your conversion rate assumptions. But in this case, it was a startup planning to launch within six months – no data to back up numbers and some very rudimentary assumptions. Fortunately, our Waveup superheroes intervened and saved the client from the investor’s anger. We simplified the sales funnel down to two types of leads and used benchmarked data for all assumptions.
Your sales & marketing activities are a vital component of your business. Without this, there’s just no other way to attract new customers to your product or service. Obviously, most investors you present to will need to know how you’re going to build your customer acquisition engine, so for each fundraising story, it’s extremely important to ensure this part of the conversation is seamless. That’s why you need a solid financial model with a detailed sales and marketing component.
Waveup has already helped 500+ projects in their fundraising stories. If your business needs a bullet-proof financial model for investors, our superhero team is always here. Just drop us a message. We’re looking forward to hearing from you.