Are CFOs from Mars, and CMOs from Venus? Part III - Developing Marketing Budget and Metrics

Let’s now shift to sizing the marketing budget and developing the metrics to gauge ROI. The first step is to determine as an executive team, CFO and CMO included, what the company should be spending on marketing relative to top line growth. Often, there is a reasonable sense, given industry and peer comparisons of competitive spending ratios. These can be adjusted based on events such as a major product announcement. But assume the following P&L breakdown:

Figure 1

The executive team, in our example, has determined, based on profitability goals, that 10% of revenue is available to invest in customer acquisition and success. This includes Sales, Marketing, and Customer Success. The conversation between the CFO and CMO might now turn to lifetime-value-of-a-customer. This measures how much revenue an average customer might be expected to deliver over its lifetime as a customer of the company. If one doesn’t know the answer, being conservative is wise, placing much more weight on the current year.

Let’s build an example. Start by assuming the lifetime-value-of-a-customer equals $50,000. Figure 2 depicts the revenue streams generated over the course of several years from such a customer. Applying the percentages above, we’d be willing to spend $5,000, or 10%, to land such a new customer. We’d obviously need to carve out the Sales and Customer Success budget to determine how much is available for Marketing. But let’s assume for illustration purposes that the entire $5,000 should go to Marketing (this CMO has clout!). For the sake of ease, we’ll ignore time-value-of-money considerations. But in the real world, we might choose to discount the cash flows, especially when sales cycles span several years (which can happen for big ticket, complex sales).

Figure 2

The next step is for the CMO and her team, working in conjunction with Sales, to model the funnel and deal stages. Part of this effort is to settle on conversion percentages for each deal stage. Let’s assume that we have five simple deal stages:

  • Stage 1: Starts with an unidentified visitor to the website and ending with an unqualified lead. For this team, a lead requires having a name. To acquire a name requires that the person filled out an online form to retrieve content, sign up for a newsletter, or a general contact form.
  • Stage 2: Starts with the unqualified lead and ends as a qualified lead. Marketing generally refers to these as Marketing Qualified Leads (MQLs). This entails behaviors on the part of the lead that demonstrates that they match the behavior of a legitimate buyer. We have this potential buyer’s name and they are engaging with us.
  • Stage 3: Takes our Qualified Lead and Converts it to an Opportunity. What’s happening here are a couple of things: First, Sales has accepted the lead (SAL) from Marketing and second, they’ve worked it and deemed it a legitimate sales opportunity. This means that it’s been assigned to a Sales professional work as a deal. It’s generally tracked within the CRM system by this stage. Sales assumes ownership.
  • Stage 4: Takes our Opportunity to the Proposal Stage. By the end of this stage our prospective buyer is ready to be presented with an official proposal.
  • Stage 5: The prospect views the proposal, any required adjustments are made, and hopefully ends with the prospect becoming our customer.

Assume that the team now comes up with the following conversion model, based on history and working assumptions:

  • 25% of raw leads actually are qualified leads and enter stage two.
  • Of the qualified leads, flowing from stage one, 50% are deemed a sales opportunity.
  • Of the opportunities being worked, 50% actually move on to the proposal stage.
  • Of the proposals generated, 80% end up closing. A working funnel could look something like the following (Figure 3):

Figure 3

Given revenue goals in mind, we can now reasonably size the marketing spending needed to achieve the revenue goals. We know approximately how many closing deals we need and how many raw leads we need at the top-of-the-funnel. We should have some approximations of deal stage time horizons. We should also know the targeted-cost-of-acquisition we’re willing to pay at each stage. The marketing budget both in terms of people and programs is carved out among these stages. Naturally, there are iterations to the models. If we under spend in marketing, chances are we won’t hit the revenue plan. In addition, the modeling could point to skills gaps that need to be addressed in the revenue pipeline. It’s all about right- sizing the numbers, backed by assumptions, that communicates cause and effect, backed by an execution and accountability plan that delivers.

In our example, assume that the executive team wants to take the company from $20MM to $30MM in revenue, year over year. The average deal size is $20K and the sales cycle averages two months. Our fiscal year matches the calendar year and we find ourselves in September, planning for the next fiscal. The team targets to build $12MM in incremental orders in the pipeline, assuming a straight-line month to month order rate (yes, it rarely works that way), to have a reasonable chance of generating $10MM in incremental revenue. The number of new deals we need, assuming that we can count on $20MM from our run rate installed base accounts, is 600 ($12MM incremental orders/$20k average deal size).

The marketing budget carved out for this effort is $1.2MM (10% of $12MM). Based on the deal flow pipeline percentages above, Sales and Marketing need to determine the split in focus at each funnel stage. In our example, once leads hit the opportunity stage, Sales takes control. This doesn’t mean that Marketing’s job is done, as many of these prospects will view content relative to vendor comparisons. Our CMO in this example commits to generate 12,000 unqualified leads and 3,000 qualified leads (MQLs). To achieve this designation means we’ve separated the “tire kickers” from serious buyers. Sales commits to take those 3,000 leads and convert them to 600 closed deals. The CMO carves out the Marketing budget in the following way, creating a cost per lead profile that can be measured, per Figure 4.

Figure 4

To help the CFO understand what marketing activities, content, and projects correlate with pipeline stages, we’ve included the Buyer’s Journey Content Map Example, per Figure 5. This content map can be correlated with the above pipeline stages. Think of the pipeline as being the directional map a buyer will follow and the content as being the fuel that propels the buyer along. Content addressing awareness generation fits within the unqualified lead stage. Content geared towards investigation aligns with both the unqualified and qualified pipeline stages. The comparison content requirements of the buyer’s journey suggests that the prospect is comparing solutions among competitors and bridges the qualified lead and opportunity stages. The developed consideration oriented content suggests that the prospect is seriously “considering” parting with their money for value. This aligns with the proposal and purchase, or closing stages.

Buyer’s Journey Content Map Example:

Figure 5

The entire marketing organization needs to have a clear understanding of how they fit into and optimize the Buyer’s journey such that the funnel stages are optimized for growth. There should be clear metrics, roles and accountabilities. For example, if someone is chartered with managing social media, they understand this to be primarily a top-of-funnel activity - engaging in relevant, on-line conversations with targeted buyers and influencers that drives engagement and the “right traffic” to the website. They should have goals in not only views and engagements, but also how much web traffic is being funneled into the website, and ultimately converted to a lead. It should be noted that with modern marketing automation tools, such as HubSpot, once a person’s identity is discovered through matching content registration (filling out a form), the historical path this person took is now visible (matching to IP addresses), including when they first came in from a social media site, and which one. Over time, the marketing team should have a pretty good idea as to which lead sources (E.g. referrals, social media, organic search, paid search, etc.) is driving not only the most traffic, but downstream conversions that result in revenue.

One of the big ROI challenges for CMOs is attribution. Simply put, attribution is about being able to associate conversions and ultimately sales closures to activities throughout the pipeline and the cost for those activities. Above, we addressed carving out the marketing budget along the lines of the buyer’s journey. But within each stage could be multiple touch points with the prospect. Each of these touch points, say for example, the download of a white paper, has an investment that ties to it. The challenge is to determine how many touch points took place with prospects and to assign weight to each one. There are numerous methodologies for accomplishing this, some very simple, some quite complex. This is an area, where partnering between the CMO and CFO is critical for good decision making. The FP&A staff might be able to weigh in and offer suggestions or methodologies for measurement and reporting. The key is to come to an agreement on ROI metrics and be consistent.

I’ll share one simple methodology just as an example: Full Path Unweighted Multi-Touch Attribution. In this model, credit, that is share of revenue, is split evenly between the sales stages, per figure 6. Assuming our five sales stages, each stage would be assigned one-fifth the revenue. In reality, there could be way more touch points with the prospect than we need to account for. In Figure 7, for example, we’ve refined the Figure 6 diagram, adding 14 touch points to account for, and using this as a basis for attributing revenue evenly to each.

Figure 6


Figure 7

Let’s assume that we just closed March. Given a two-month sales cycle, we should be seeing the fruits of our labor in the form of revenue generated from marketing activities. Assume we closed 200 incremental transactions that can be attributed to Marketing. Assume that revenue-per-deal aligns with our average deal size assumption of $20K, translating into $4MM in incremental revenue. The marketing costs, assuming our standard, would have equated to $2,000 per deal (Per Figure 4), or $400K. The simple composite ROI, assuming a 40% gross margin would be:

300% = ((($4MM*.4)-$400K)/$400K)

We could break it down further, via the attribution model to measure the ROI on the marketing investments required to transform an existing unqualified lead (raw captured lead) to a qualified lead. Per Figure 7 there are 3 touch points in-between these two stages, we would attribute 21.4%, (3/14), of the generated margin to this phase, or $342K, (21.4%*($4MM*.4)). In our model, to close 200 deals would require 1,000 qualified leads, at a cost of $140/lead (Per Figure 4). The ROI for this stage of the funnel would be 144%, (($342K-$140K)/$140K). Now one might ask, wouldn’t we want to show the cumulative ROI at this stage, because aren’t we addressing two key conversions (capture of raw unqualified lead and captured lead)? Technically, yes, we would record and track both. The cumulative ROI would be 101% (($684K-$340K/340K).

The example of above used a relatively straightforward attribution model. There are other models that are quite complex. For example, some CMOs will make use of attribution models that incorporate machine learning. The key is to continuously measure and strive to make improvements. If the ROI is below expectations, analyze why. I usually recommend starting small and testing campaign components before scaling. Continuously survey audiences and perform A|B tests through experimentation to learn and optimize. If there are significant issues with the product or services that prevent traction, address them quickly and honestly.

As a CFO you ‘ll want to recognize the early warnings signs around product market misalignment, and partner with the CMO and VP of Sales to generate market informed financial projections. Including the CMO at the table early on provides far greater visibility into outward quarters. On the other side of the coin, you might find that results are far better than expected! In fact, you may want to invest even more in marketing to generate incremental pipeline. Having a sense of investment returns and the associated timing of those returns are critical. Going to your board and indicating that you want to spend 3 more points in marketing this year because you expect solid returns in Q1 is made easier when you have the data. And even better when the CMO and CFO are both speaking from the same playbook.

Here are some other key metrics that are worth tracking including the following:

  • # Of Names and number of new names captured in the pipeline. Until a prospect provides their contact information through a conversion, their identity is unknown. CMOs and their staffs work hard to create a compelling reason for people to volunteer their information.
  • # Of Leads/Prospects and % of Leads/Prospects that convert to being a Marketing Qualified Lead (MQL). To become a lead or prospect, we’ll need a name. Some companies will look for specific behavior that takes one from being just a name to a lead/prospect. For others, name and prospect could be synonymous. It’s important to track the conversion of leads/prospects to MQLs. What determines this is typically a set of agreed upon rules, based on prospect behaviors (E.g. downloading two white papers). The conversion to MQLs is a key metric and the bar has to be set high enough such that Sales, when they receive MQLs from Marketing can trust that they’ve been vetted and have a reasonable chance of turning into a sale.
  • # Of MQLs and % of MQLs that convert into a Sales Accepted Lead (SAL). What we’re measuring here is the level of MQLs (net of new and outgoing) and more importantly, Sales acceptance of those MQLs. Important point here. Sales can reject or accept MQLs. If conversion is low it’s an important warning sign for the CMO. Nothing is worse than giving sales poor leads.
  • # Of SALs and % of SALs that become Opportunities. These are Sales metrics. We want to track the number of SALs and how many convert into Opportunities that are actively tracked and worked by Sales within the CRM system.
  • # Of Wins. Simply tracking our wins (and even taking the time to celebrate)
  • # Of Losses. We learn a great deal about losses. We want to both track the number and understand why we lost. A key insight for CMOs is to understand why people choose not to move forward and look for corrections to bring the number down.
  • # Of Churn. This typically addresses the number of accounts that do not renew subscriptions (typical in SaaS environments) or terminate their accounts. Like losses, we want to track this number and analyze whey people churn and look for ways to reduce it. Keeping a customer is generally easier and less expensive than acquiring a new one.

Conclusion

A good deal of information has been provided in this paper. We’ve outlined how marketing has changed over the years. CMOs increasingly are expected to contribute towards revenue generation and have the metrics and disciplines to attract buyers and shorten sales cycles. The role of the CMO and CFO have changed over the years and like many leadership positions success is function of understanding and teamwork. A strong working relationship between the CFO and CMO, based on common metrics and great communication can truly scale companies.

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Special acknowledgement to Kent Lewis, CEO of Anvil Media, for his helpful contributions to this paper.


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