How can functional leaders be viewed as a strategic partner to the CEO and board? Many leaders in the organization want to be the CEO someday. If that’s the case, you must be able to break down the functional silos and get the entire executive team focused on what really matters. Increasing revenue growth and creating shareholder value.
Often functional leaders are focused on hitting their individual goals. And getting as many resources and dollars as they can in order to do it. For example, there may be a product leader who wants more money to spend on R&D. Or a marketing leader looking for more dollars for demand generation and website optimization. Or a sales leader who wants more money to hire more reps, and so on. But there is only so much money to go around. With everyone focused on different initiatives organizations cannot evaluate investments properly and make the right allocation decisions. Instead, how should companies determine how to allocate funds in order to grow revenue and make their number?
2 Key Metrics
There are two key metrics you should consider: customer acquisition cost, and customer lifetime value.
First, look at customer acquisition cost. This is defined as all costs that are required to acquire a new customer. It allows you to break down the inputs you control and the impact of the costs. For example, are you selling through high-cost channels, and therefore, can’t make your products profitable? You can calculate the acquisition cost by using activity-based costing. In simple terms, how much effort is exerted and spent, and what is the associated cost to acquire the new customer?
Next, consider customer lifetime value. This is all about the average sales price and ongoing revenue stream received from a customer. The acquisition cost needs to be lower than your lifetime value. It’s the ratio that really matters. For example, a common range in the SaaS industry is about 3 to 1. Simply put, if you spend $1 to acquire a customer, that customer should spend $3 over the lifetime of being your customer.
Creating Shareholder Value
Improving both of these key metrics will lead to creating more shareholder value. And increase the likelihood of becoming a strategic partner to the CEO and board.
One way to do this is to improve the lifetime value of a customer. For example, say you are able to improve the lifetime value by 6% per customer. If the average lifetime value is currently at $1 million, 6% would add an additional $60,000 of lifetime value. When this additional value is multiplied by the number of net new customers, you can really see the revenue lift. In our example, let’s say you’re going to bring in 100 new customers in the next year. 100 customers multiplied by the $60,000 additional lifetime value creates $60 million in shareholder value for the company.
How to Become a Strategic Partner
Too often executive leaders tend to point to quick fixes to create value. They have a lot of demands and pressures, and default to tactical activities to improve results. But if you’re really trying to make your number, and become a strategic partner, this is not the way to do it. Instead, elevate your thought process, and think across all functions. Don’t get stuck at the functional goal level. Consider factors like customer acquisition cost and lifetime value that have an impact across the entire organization. Consider ways to really create shareholder value in order to articulate why you need more budget or resources to execute your growth strategy. This will allow you to experience revenue growth, and be seen as a partner to both the CEO and the board.