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It’s Time to Kill the Marketing Budget and Think About a Marketing P&L

8 Mar The Magic of the Marketing P&L

To their own detriment, many traditional marketing departments are organized around the annual marketing budget.

Every year the budget is passed to the CMO and subdivided among marketing functions and geographies to meet business and constituent needs. In these traditional organizations, the structure and hierarchy of the marketing team is often organized around the details of the budget allocation.

The problem with being oriented around the marketing budget is that it disconnects marketing from the real business needs. Many companies that focus on the marketing budget view marketing as a cost of doing business and not a measurable investment in growth. The pattern of investment in marketing in these types of organizations mirrors investment in other things that feel like discretionary costs: In tough years the budget is cut mid-year and in good years budget growth is based on based on the CMO’s ability to lobby and build a case for investment.

In today’s era of marketing and “growth hacking,” a focus on the marketing budget is a sign of a weak marketing department. The alternative is to focus on a marketing P&L.

A marketing P&L allows businesses to invest infinitely in the portion of the marketing that drives profitable growth within the financial reporting period

A profit and loss approach to marketing works for the portion of the marketing budget that directly drives near-term revenue. The question comes down to how much a company is willing to spend within a financial period to drive incremental revenue in that period. That number will be different in different businesses: it may be worth spending $1,000 to drive $1,000 in incremental quarterly revenue if that means thousands of additional dollars in future quarters. It may be worth just $50 to drive $1,000 in incremental revenue if your business has low margins and a low rate of repeat purchase or revenue.

No matter what the number is — almost every business has a customer or revenue acquisition cost at which they should buy as many customers or much revenue as they can during any financial period. By limiting spend with a fixed budget and applying budget cuts during tough times, businesses unnecessarily handicap their growth. Instead, businesses should invest infinitely in the portion of the marketing budget that drives profitable growth within the financial reporting period.

Here are examples of types of investments that work perfectly with a marketing P&L approach to investment:

– Search engine marketing expenses to drive profitable online ecommerce transactions

– Lead generation expenses that drive incremental net profit in the financial reporting period

– Expenses that drive profitable incremental absorption of any perishable product such as unsold theater tickets, unsold hotel rooms, unsold airline capacity, open tables at a restaurant, etc

But the list is really endless: the key is that the investment drives incremental profit that is greater than the incremental marketing spend during the financial reporting period.

How to switch from a traditional budget to a marketing P&L

How does this work in practice? the first step is for marketing and finance to split the budget into two categories of spend:

(1) spend that directly drives measurable incremental near-term revenue and

(2) other investments

The “other” part of the budget can remain a traditional fixed budget allocation. But for the spend that drives incremental revenue, marketing and finance should agree on a target return on investment and a timeframe for that return to be realized. Once this is done, smart organizations will let marketing acquire as much incremental revenue as possible at the target ROI without traditional budget constraints.

I’ve seen many profitable, visionary, typically private companies take this further by letting all customer acquisition activities scale without fixed budgets — even if the returns come over multiple future financial reporting periods. If it costs you $500 to acquire a customer in Q1 that will result in a $400 loss during Q1 but $2,000 in incremental profit over three years, you can maximize growth by buying as many of these acquisitions as your cash flow will support. In public companies which need to carefully balance current period earnings and future growth, these sorts of investments are much more difficult to make.

The marketing P&L changes the focus of marketing

As marketing teams align more of their marketing budgets to drive incremental revenue and growth, the way marketers organize and optimize is also changing. Marketing organizations with infinitely scaling acquisition budgets figure out how to drive as much growth as possible within their profitability constraints. By focusing on cost per acquisition and revenue per acquisition and testing multiple acquisition channels to improve profitability and scale, the marketing P&L allows marketing to take the lead in driving long-term growth.

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Revenue Marketing: 6 Essential Rules for Success

30 Oct

Over the last decade, I’ve helped to build B2B revenue marketing teams spanning from a few marketers supporting a few sales people to global models supporting 10,000+ sales representatives. While the challenges of different organizations are often unique, I think there are a few key revenue marketing rules that transcend B2B organization size.

In my last post, I walked through an overview of B2B Revenue Marketing. Now, here are my five key tenets to making sure that your revenue marketing programs are as good as they can be:

(1) Focus on revenue: While this seems incredibly obvious, most B2B marketing organizations focus on other things. While leads and pipeline often lead to revenue, focusing on leads and pipeline metrics can create conflict between marketing and sales. The most important metrics for revenue marketers are (a) the amount of marketing-sourced revenue driven by marketing programs and (b) the effectiveness of the marketing investment (ROI). While pipeline goals are important to see how thing are progressing — they are not a substitute for revenue goals. In my experience, lead goals such as the quantity of leads or the number of qualified leads tend to be completely counterproductive.

(2) Sign-up for accountability: Revenue marketers should be paid like sales people. They should have a  quota based on the level of investment that they control and a significant portion of their pay should be variable based on performance (i.e. revenue). Great revenue marketers should be highly compensated. the key to this, however, is true marketing accountability for revenue and results.

(3) Make marketing & sales as a single integrated function: Every dollar spent on revenue marketing is a dollar that could have been spent on sales. For revenue marketing to make sense, it needs to provide leverage to the sales team and allow the sales organization to scale cost-effectively. If you are a young company and want to grow sales at 100% or more per year, you’ll need to get the right balance of sales and marketing investment to support hyper-growth. No matter what your goals are, it’s important to look at marketing and sales as a single continuous function (hopefully with different owners), with joint planning, shared goals, and a clear model for resource allocation.

(4) Design a process that eliminates conflict: Too often, marketing organizations sabotage themselves by putting in place lead generation processes that create conflict with sales. A bad lead process creates a rapid death spiral that looks like this: (a) marketing sends tons of leads, (b) sales says the leads are weak, (c) sales stops calling the leads, (d) marketing says sales is weak, (e) marketing stops getting any ROI from its investments, (f) people get fired.

From my experience, the number one source of friction tends to be the definition of a qualified lead. If sales and marketing are arguing over whether a lead is really qualified — or whether lead quality is high enough — you likely need to fix your definitions and processes. You can find my thoughts on lead qualification best practices here.

Continue reading →

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Revenue Marketing: The Future of B2B

17 Oct

Marketing means different things to different people. For me, marketing is about solving business problems. Sometimes that means building awareness, sometimes it means better understanding customer requirements, sometimes it means investing to generate revenue, and sometimes it means galvanizing employees around a common purpose.

But over the last decade, B2B marketers have made an unprecedented shift of resources to focus on revenue generation. Today, B2B marketing program managers, lead generation experts, event teams, search marketers, content creators, and database marketers all align to drive revenue with the highest possible ROI. This is the core of “Revenue Marketing.”

What is Revenue Marketing?

Revenue Marketing is the development of repeatable prospecting programs that new drive customer acquisition and measurable sales.  The key to revenue marketing is a predictable return on investment: if you know the impact of marketing investment then it’s possible to link marketing plans to specific revenue objectives.

The rise of Revenue Marketing as a discipline is the direct result of new CRM tools and models. In sales-driven B2B companies, marketers have earned a seat at the table by tracking the bottom-line impact of every dollar invested.  CRM systems now make it easy to track how campaign investments generate leads, how leads become opportunities, and how opportunities become revenue-paying customers. The result is a new focus on ROI: optimizing the marketing mix to drive as much revenue as possible from a given marketing investment.

In the most sophisticated companies, revenue marketing now drives the entire sales pipeline. Sales people don’t make cold calls. Instead, inbound leads are automatically nurtured until they are right for sales. In these companies, marketing programs people are paid like sales: they have pipeline and revenue goals and substantial at-risk compensation built around these goals. The quarterly planning process begins with the revenue goal and backs into required marketing program investments and sales staffing.

The Revenue-Focused CMO

Over the last few months, I’ve had the opportunity to talk to dozens of B2B marketing and sales executives about their approach to revenue generation. I was surprised to see how similar revenue marketing practices are across a diverse set of companies. The tools, roles, tactics, language, and best practices are becoming firmly entrenched. Today in B2B, revenue marketing is a clearly-defined discipline. And like any high-value, growth discipline, expert practitioners are both hard to find and well-paid.

This new focus on revenue is one of the reasons that CMO influence is on the rise. Continue reading →

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