Outbound Economics Made Simple

The mechanics of getting outbound to work are deceptively complex, and it turns out the economics are too: even at a relatively small scale, it can be a little daunting to understand the math of outbound. But, without properly looking at the numbers, it’s not possible to make a rational decision about spending on the outbound.

As with other customer acquisition channels, for outbound to work, the unit cost of acquiring a new customer by outbound needs to “pencil out” —  which is to say that the cost of acquiring the customer has to be less than the profit that will be generated over the customer’s life.

But how much less? And what’s the best way to think about how to calculate the numbers here?

Lifetime Value

To start to get at an answer here, we need to understand the lifetime value of a customer.

The simplest way to think about lifetime value is to call it the value of a prospect that’s just been converted into a customer, in today’s dollars. This number is pretty easy to estimate incorrectly.

For product-driven businesses, the math is straightforward: it’s basically the total revenue of the typical sale, minus the costs of manufacturing and delivering the product. For example, if you’re a t-shirt company, and your typical customer buys an order 1,250 shirts from you at $10 per shirt, and your cost is $4/shirt, a simplified view is to say that an average customer has a lifetime value of $7,500 ($6 in profit per shirt times 1,250 shirts).

In thinking about acquiring customers, this becomes a good place to start. If you could pay $1,000 to acquire an “average” customer (basically, get them to place an average order), should you? Of course — the $1,000 cost to acquire is much less than the $7,500 you will make on the order.

What if your cost to acquire an average customer is $10,000? In that case, of course, you shouldn’t be willing to spend it — you will only make back $7,500 on your $10,000 spent to acquire a customer.

So, once lifetime value has been calculated, you have a good starting point for figuring out how much you should be willing to pay in sales and marketing activities to acquire a new customer.

LTV to CAC

Many entrepreneurs and investors look at the ratio of lifetime value to customer acquisition costs to make decisions about acquisition channel spend. If as in the above example the lifetime value of a typical customer is $7,500 and you are paying exactly $7,500 to acquire a new customer, the LTV: CAC ratio is 1:1.3. If you spend only $2,500 to acquire a new customer, then the LTV: CAC ratio is 3:1, which turns out to be the “sweet spot” LTV: CAC ratio that many investors and entrepreneurs look for: it’s high enough that there is profit left over to make the rest of the business going but low enough that the channel isn’t likely to get swamped by competitors quickly.

Outbound Funnels

So we now have a basic understanding of the relationship between lifetime values and acquisition costs for all acquisition channels, so it’s time to take a look at the specifics of outbound.

Outbound campaigns are designed to create engagement with prospects that lead to qualified sales conversations with your sales team. While what defines a “qualified” conversation may vary a bit from company to company, essentially these should be conversations with people that are known buyers of your product or service.

In order to see how outbound works, we need to work backwards from a closed customer.

Returning to the example of our t-shirt seller, let’s say that that seller is targeting gift shops and curios stores in the US, and that there about 10,000 of them. They know that if they have a good conversation with the buyer at one of these shops, they have about a 1 in 8 chance of getting an order from them within a month or two.

That means that they need 8 sales conversations started with potential buyers in order to get to one sale.

Meanwhile, let’s assume that an effective cold outbound email, call, and social touches campaign can take a list of 100 prospective buyers and get conversations set up with 4 of them. That means that the outbound campaign needs to be run against 300 leads in order to generate those 8 sales conversations (that ultimately turn into 1 deal).

Enter The SDR

Sales Development Reps (SDRs) are the sales specialists charged with the responsibility of doing (mainly cold) prospecting to help a sales team generate sales conversations.

In our example here, we would need an SDR to do the work of running the campaign and making the calls in order to generate sales conversations for the sales team.

While the number of sales meetings that can set by an SDR varies a lot by product offering, target audience, and SDR capabilities, according to the Bridge Group (an analyst in the space), 16 new qualified sales appointments per month is not far out of range for a good cold prospector — and in our fictional example here, it’s about right for this kind of target market (note: there are some very hard to target markets where 3 appointments PER MONTH are hard to achieve; there are other markets where it’s trivial to get to 20+ per month).

So, our t-shirt company might be able to get a US-based SDR to deliver 16 appointments to the sales team every month, of which 2 could be expected to close over time. So, should they make the investment?

SDR Costs In The US

Well, it depends.

The typical cost for a US-based SDR ends up being around $11,500 per month, when the costs of the SDR ($6,200 + $1,200 variable), research ($2,000), copywriting ($750), a manager/analyst ($1,000) and software/data access ($350) are all considered.

So all in, that SDR function costs $11,500 and can generate 16 meetings, that turns into 2 deals, which represent $15,000 in lifetime value for the business. That’s profitable, but the LTV:CAC ratio is 1.3 — too low to be a great customer acquisition channel.

SDR Costs With CIENCE

But what if this same business could achieve the same results at a lower cost? That’s essentially the promise at CIENCE — by seamlessly blending off-shore and on-shore resources, automation, and a bit of machine learning, we are able to deliver the same or better results for less than ½ the costs of a US-based approach.

So let’s run the math again, but this time at a cost of $5,000 per month.

At $5,000 per month, with a system producing 16 meetings per month, our t-shirt company would still generate $15,000 of value in the form of closed deals — but now the LTV:CAC ratio would be right in the sweet spot at 3.0 (LTV of $15,000 with costs of $5,000).

Conclusion

Outbound can be tricky, but if you get it right, it’s one of the most interesting channels there is. Because it’s difficult to get right, many companies avoid it. But those who figure it out tend to find that it pays long term dividends — it’s one of the least limited, lowest cost renewable acquisition channels out there. So what are you waiting for?