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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.

Tesla Model S: The Disruptive Marketing of an Electric Car

20 Jan

The most interesting thing about Tesla — the niche luxury electric car maker — is the role of marketing in selling electric cars that cost $100,000 or more. Many people have tried to change the auto industry over the last 40 years and none have succeeded. The process of buying a car is essentially the same as it was a generation ago. And the process has remained unpopular for decades: the typical car dealer receives just 2 or 3 stars on Yelp.

Tesla Model S and Tesla Roadster: Tesla has figured out how to market an electric car

Tesla is creatively using marketing to upend the auto industry business model:

  • There are no Tesla dealers
  • There are no commissioned sales people
  • Tesla cars are marketed and not aggressively sold
  • Tesla transactions are conducted online
  • The price is the price: no negotiation
  • There is no inventory: the Tesla Model S is built to order
  • You can’t test drive a Tesla unless you put down a $5,000 deposit
  • In many parts of the country, you can’t see or drive the car before you buy even if you place a deposit
  • You have to wait in line for months or years to get a car

And the marketing challenges are incredibly difficult:

  • They are building a new luxury brand from scratch
  • They are evangelizing a new type of vehicle: an electric car
  • They are selling a $60,000 – $100,000+ car that can’t go on a road trip
  • They must sell an entirely new model of buying and owning a car

While Tesla is starting with expensive vehicles, they clearly have mainstream ambitions. They are investing to build a big car company.  How hard is it to build and sell cars in the USA? Look at it this way: Tesla is the second oldest publicly traded  auto company in the United States behind Ford. GM went bankrupt and went public four months after Tesla. Chrysler remains private following its own reorganization.

While Tesla has a long way to go to be profitable, producing cars in volume, and moving towards the mainstream, their first home-built product — the Model S — is a success. They have 10,000 – 20,000 orders and have swept the auto industry awards, winning the most recent round of Motor Trend, Automobile, and Yahoo Autos awards for car of the year. Tesla is the first startup car company, and the Model S is the first electric car, to win these awards.

So what can we learn from Tesla marketing?

(1) Start with a great product – Tesla would be dead today if they didn’t build the best car available today. There are too many obstacles — range, lack of road trips, and buyer confusion to name a few. Tesla used electric technology to build a car that can’t be reproduced with a combustion engine. It’s as fast as a Porsche and gets the equivalent of 100 miles per gallon. It has very few moving parts. It is the most aerodynamic car made and has the most cargo space of any car in its class. It’s a sports car that seats seven.

(2) Start high and work your way down — It’s a lot easier to build a lust-inducing $100,000 car than a cheaper model. Tesla started with the $100K plus roadster built on a modified Lotus platform. With the Model S, they started with production of $100K vehicles and are working their way towards the $60K entry-luxury models. By starting high, Tesla is letting early adopters fund technology development. As volume increases, prices are coming down. The early super cars are media darlings endlessly discussed in waves of free Tesla publicity.

(3) Turn auto industry strengths into weaknesses — Historically, luxury cars have been sold and justified based on the quality of their engineering. Most luxury automobile companies tout “performance through engineering” as the one thing that makes them special and desirable. Tesla marketing focuses on performance through technology while touting the simplicity of the platform. The Tesla Model S pitch reframes the auto industry strength as a weakness. Through the highly-effective Tesla marketing lens, traditional gas cars are dirty, complex, unreliable, and difficult to maintain. In a bold marketing move, Tesla service centers are designed with white floors to reinforce that electric cars don’t have oil and other dirty fluids that leak on the floor.

The Tesla powertrain is marketed as simple, reliable, and effective

The Tesla powertrain is marketed as simple, reliable, and effective

Traditional luxury auto makers focus on "engineering" -- Through the Tesla marketing lens, educated viewers see complexity, maintenance, and antiquated technology

Traditional luxury auto makers focus on “engineering” — Through the Tesla marketing lens, educated viewers see complexity, maintenance, and antiquated technology

Tesla Service centers have impractical white floors to highlight that the cars run clean without messy oil and fluids

Tesla Service centers have impractical white floors to highlight that the cars run clean without messy oil and fluids

(4) Create a new multi-channel model: Tesla decided not to build a traditional car dealer network. Nobody likes car dealers: even buying and servicing a high-end car like a Porsche is a dreadful experience. Tesla looked at the car buying process and optimized its sales model to fit the way people buy cars today. Since people start online, Tesla designed their process around online information, commerce, and community. Their site is unusually clear, clean, and effective. For people who want to see the car, they are building kiosk stores in malls with Tesla experts who can’t sell cars and who aren’t commissioned. When a buyer is ready, they place a refundable deposit online. If they want to drive a car, they can arrange a test drive after they’ve placed a deposit. Essentially, Tesla is selling cars the same way Apple sells the iPhone.

(5) Build the community & focus on the experience: From the beginning, Tesla has made user forums and user community a key part of the online experience. Tesla marketing highlights the unique Tesla buying and ownership experience and encourages owners to interact with the company and each other in full public view on the Tesla site. This provides a rich base of content — and owner passion — on view for prospective buyers.

(6) Leverage the media and traditional press: While much is new about the Tesla Model S and the accompanying sales and marketing model, one thing is not: the dependence on traditional media. Tesla has been a master at driving press coverage, reviews, and awards for its cars. It’s clear that the company has worked hard to position the brand with the media and to make sure the right messages come through. The company’s #1 message is that they are trying to build the best car ever made and not just the best electric car. This message is frequently repeated by the press.

Tesla Marketing: Likely more lessons to come

While it’s early and many many risks remain, Tesla is the first company to have the potential to become the Apple computer of the car industry. Like Apple, they are selling a product that is very different than what has come before. Both companies focus on great products and innovation. They are both building their own ecosystem (Tesla’s super charger network is akin to Apple’s build-out of iTunes and the Apple Store) and both are challenging traditional sales models with their own direct distribution system. In fact, Tesla hired Apple’s previous retail chief to build out the new distribution model.

Whatever does happen with Tesla, the marketing lessons to come are certain to fascinate.

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.

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Analysis: Just 28% of B2B Sales Compensation Pays for Selling

15 Jun

In the movie industry, smart investors measure how much of each dollar “hits the screen.” Money spent on the product — film production, actors, sets, and the like — has the potential to generate a return. Money spent off the screen on insurance, cars, administrative staff, paperwork, lawyers, accountants, security, and other back office functions typically doesn’t generate any return.

The same is clearly true for managing sales organizations. Sales compensation budgets, in particular, have the biggest impact on revenue and margin when the dollars  pay for selling. They have less of a direct impact when they pay for sales operations, sales administration, and sales time spent on non-selling activities.

So how much of every sales compensation dollar “hits the screen?” In a typical B2B sales organization the answer is: shockingly little. Based on my analysis, roughly 28% of sales compensation actually pays for selling. The rest pays for other peripheral activities.

What are the biggest syphons of sales resources?

(1) Non-Selling Time: According to a recent Accenture study, just 41% of sales rep time is spent on selling via the phone or face-to-face. 59% of sales time is spent doing other things. In particular, nearly a quarter of sales time is spent in meetings and on administrative tasks. The remainder of time is spent in training, account service, and account research.

(2) Sales Operations and Administration: It’s not uncommon to see sales support budgets of 20% or more. Sales support teams often handle everything from quoting to order-takign and fulfillment. In some large organizations, team manage go-to-market structure, sales compensation, sales training, and other sales related functions.

(3) Turnover and New Rep Training: According to the Accenture study, 25% of sales representatives changed jobs last year (11% left voluntarily, 14.8% were terminated). With a typical new representative hiring and ramp time of 6 months or more, at least 12.5% of sales compensation is spent on ramping new sales representatives to productivity.

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Categorizing Sales Prospects: Understanding Propensity & Engagement

12 Jun

As the sales process becomes digitally observable, smart sales and marketing organizations are developing sophisticated mechanisms to electronically score leads and prospects.

A typical business-to-business sales person manages 1,000 – 2,000 sales contacts. If they are lucky, they’ll also interact with hundreds of new leads each year. In sophisticated organizations, leads and prospects “travel” with electronic scores that help sales people prioritize outreach and focus on the highest value accounts. This scoring information is typically one dimensional: often a single score or categorization that captures demographics facts, project details, qualification information, and measures of engagement.

A much better approach is to evaluate and score prospects based on two discrete dimensions: propensity and engagement:

  • Propensity Scores: For any lead or prospect, a propensity score compares collected demographic information to that of other prospects to determine the probability of a purchase and potential opportunity value. If you sell hammers, a construction contracting company might be a high propensity target while a dry cleaner may not. By considering attributes such as industry, employee size, contact title, budget, revenue, headquarter country, company revenue, and company profitability, propensity scores qualify leads and prospects based on their fundamental attributes and statistical propensity to buy.
  • Engagement Scores: The problem with propensity scores is that they aren’t able to differentiate a cold lead that doesn’t know you exist from a prospect that has done their research and is ready to buy. Engagement scores, on the other hand, vary in real-time based on electronic measurement of prospect activity, increasing whenever a prospect takes an action that indicates interest in your products or services. A sophisticated engagement score might measure a prospect’s web visits to your site, calls to your office, participation in online communities, mentions of your company in social media, interaction with an electronic product demo, content downloads, online video consumption, and email communication. If they stop interacting, the score would automatically decline.

For most companies, propensity and engagement scores are discrete and mutually beneficial. A prospect that is high engagement / low propensity may be eager to talk but unlikely to buy. A prospect that is high propensity / low engagement will be hard to reach and unready to engage with sales. Propensity scores tend to be relatively static while engagement scores should be continually changing.

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Beware the 4 Unintended Consequences of the “DGR” Sales Role

31 May

With the meteoric growth of electronic B2B demand generation over the last decade, many organizations have restructured their sales organizations to optimize the division of labor.

Now, there is often a dedicated “demand generation representative” (DGR) that calls and qualifies sales leads. They are typically paid a bonus for each qualified lead accepted by sales and sometimes they also receive a percentage of the eventual sale. They are often put in place to provide leverage to the core sales team: they allow the primary sales reps to focus on active opportunities and offload lead qualification to a lower cost dedicated lead follow-up specialist.

Is this a good idea? Sometimes it is — but the additional of a demand generation rep role often creates bigger problems than it solves. Here are the top 4 risks of multi-tier lead follow-up structure:

(1) DGR models are often designed for the benefit of the core sales rep and not for the customer: If you staff this position with lower paid, lower skilled “junior” sales reps, then you risk creating a subpar customer experience. A better approach is to make sure that the best leads receive a call from a  highly skilled expert who can immediately add value to the prospect and who will be likely to answer initial questions.

(2) The addition of a DGR can create inefficient sales handoffs: Sales is a relationship business, and a change in ownership often means a reset in the sales relationship. By definition, multi-tier lead follow-up structures require sales handoffs. With each handoff, you’ll lose good prospects and add time and complexity to the sales process. You’ll also likely ask prospects for the same information multiple times, creating a subpar customer experience.

(3) The best prospects will not go through a multi-stage qualification process: In the rare chance that a senior executive comes in as a lead, you will typically have one chance to get the message right and move the sales cycle forward. If the first call is focused on qualification and doesn’t add enough value to the buyer, the sales process will quickly end.

(4) Multi-tier sales structures are setting-up your sales teams for a battle: It’s inevitable that a demand generation representative will uncover a great lead and pass it to sales only to have sales sit on the lead or screw-up the transition or botch the follow-up. When this happens, the demand generation rep doesn’t get paid. When a core sales person resigns or moves to a different role, the corresponding demand generation representative often loses 6 months of productivity and revenue.

So what is the alternative? One alternative is to rethink lead qualification (try this approach) and to send sales ready leads directly to the core sales teams. With this approach, demand generation representatives would focus on outbound calling campaigns and lower tier leads that still require development. I’ve successfully implemented this approach at companies ranging in size from 50 employees to 100,000+.

How can you design a DGR model that works? The starting point should be the customer experience and not sales opex optimization. If the DGR offers specialized expertise or focuses on prospects that wouldn’t otherwise get a call, then the addition of the role may offer real value to customers.

Beyond Lead Gen: Marketing-Driven B2B Calling Campaigns

29 May

Before electronic lead generation became the normal mode of operation for B2B companies, sales people dialed for dollars. Even today, the best sales people fill time between leads with outbound calls to the best names that they can find.

In my previous role managing demand generation for a 1,000+ person salesforce, we created parallel programs for lead generation and outbound calling. In any given quarter, the volume of leads was typically limited by the amount of budget allocation to lead generation. Our outbound calling campaigns, however, could cost-effectively reach many more prospects and as a result would generate 3x – 5x the pipeline of our lead generation efforts, albeit at a lower amount of pipeline per call.

Here are a few key best practices for running outbound calling campaigns:

– Keep leads (inbound) and targets (outbound) separate: a cold target is not a lead. Mixing terminology for the two creates confusion and devalues the high priority leads.

– Think of calling campaigns programatically: Start with a theme or play, use business intelligence to target the right lists, customers and prospects, develop talking points, and create marketing materials to support sales.

– Always call leads first: Inbound leads expect a quick response, dont’ keep them waiting. Calling canpaign targets don’t know that you will be calling, so they can always wait until all the leads have been covered.

– Use a tool to track campaign progress: You’ll need software to load targets, queue outbound calls, collect outcomes, and tie calls to pipeline.

– Train your sales teams on every campaign: You’ll want to make sure that your teams understand why the campaign is vbeing developed, what the desired outcome is, and the key things they will need to know tobe successful.

– Get the script or talking points right: The most effective calling campaigns make a crisp and compelling pitch to prospects. test campaigns before launching and quickly kill campaigns that aren’t driving significant conversion.

– Use an offer to drive conversion: A calling campaign is nothing more than an organized series of cold calls on a common theme to a defined set of targets. To improve cold call conversion, provide sales teams with one or more special offers that they can use to lure prospects into a valuable conversation.

– Make calling campaigns part of your holistic nurture efforts: Outbound calling campaigns are a great way to systematically follow-up on old leads and contacts or to nurture customers or prospects in a systematic, measurable way.

While your lead generation budgets will inevitably limited — outbound calling campiagns are a great way to drive incremental measurable pipeline and revenue while helping sales teams improve productivity and revenue / FTE.

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