article | August 14, 2016
How to Calculate the Impact of Strategic Alignment
What are the benefits to having fully aligned strategies? There are many. First, our research indicates you increase your chances of making your number by 4x through strategic alignment. This is quite a significant boost to the probability of making your number. Additionally, organizations that are in strategic alignment typically experience a lower customer acquisition cost and an increase in customer lifetime value. But unfortunately, an overwhelming 91% of organizations fail to exhibit internal and external alignment.
Let’s start by discussing two key indicators, customer acquisition cost and lifetime value. Why should executives care about these metrics? And how should they be measured?
First, why is customer acquisition cost (CAC) important? It really comes down to creating shareholder value. And one way to do this is by lowering the cost to acquire new customers. The benefits to reducing your CAC are significant. But first, you must figure out how to calculate this key metric.
Let’s use a simple scenario to illustrate the calculation process. In our example, we will be referring to Acme Corp, a software company. Their average deal size is $500,000, and they sell about 50 new deals per quarter, or 200 deals annually. If you do the math, that equates to $100 million in annual revenue for net new customers. For simplicity sake, assume the company spends about $20 million on their hunter sales team. They also spend $5 million on marketing, and about $9 million on R&D for a total go-to-market spend of $34 million. With 200 new customers, it comes to about $170,000 per customer (see chart below).
The above model is a simple, first step method to calculating your customer acquisition costs. For those more advanced, consider looking at activity-based costing. Take your sales, marketing, and products costs and break them out into each activity. The sum total of those activities gives you a granular view of what your customer acquisition cost really is. Begin by identifying all activities associated with acquiring a new customer and move on from there.
So, what happens if you are able to reduce your CAC? In this example, let’s say Acme was able to reduce the cost down to $119,000 by having fully aligned strategies. Assuming the same number of deals by year, this would be a total cost savings of about $10.2 million. This results in instant shareholder value. This is why you should care about this important calculation.
Customer lifetime value is another key metric that is impacted greatly by the alignment of your strategies. We have found that companies in strategic alignment have a 26% higher customer lifetime value. This directly impacts top-line revenue growth for years to come. And as a result, each year it gets easier to attain the organizations revenue growth objectives.
In the above example, the average deal size was $200,000. By ensuring your strategies are aligned both internally, and externally, customer lifetime value, and value for the shareholders, increases. For example, a slight increase to $252,000 at 200 deals per year gives you an increase of $5.2 million.
Ultimately, when a decreased customer acquisition cost is combined with an increase in customer lifetime value, you are provided the most value possible. And the only way to do this is through strategic alignment. Leverage the How to Make Your Number in 2018 to access a revenue growth methodology to hit your number quarter after quarter, and year after year.