6 KPIs Every CMO Should Track and Report
Overview
Whether you’re a newly appointed CMO or an emerging marketing leader, there are specific KPIs that need to be understood and reported to the C-Suite.
I am a firm believer that a contributing factor to marketing leader churn is a lack of understanding of their role at the revenue table. A CMO must track the marketing team’s activity and their corresponding results so that they can create meaning for the CEO and CRO.
In this interview we discuss:
6 KPIs to Track:
1. Net New Revenue from Marketing-Generated Sources (12:27)
The total revenue for a specified period of time (typically monthly or quarterly) of new gross sales from marketing channels only.
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2. Percentage of Contribution from Marketing to Overall Revenue (13:53)
Marketing activity generated income (new and renewal) represented as a percentage of total revenue.
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3. Qualified Pipeline Generated Leads (MQLs) (15:06)
An MQL must meet the criteria of a future customer. Questions to ask as you attempt to ascertain whether a “lead” qualifies to be an MQL, include:
4. Length of the Sales Cycle vs. Win Rate (20:43)
Questions to ask and data to track include:
How long does a lead spend in your funnel? (Count days from the first touch to signed contract.)
What percentage of Qualified Pipeline-Generated Leads convert.
By looking at both numbers at the same time—and in light of the other KPIs—you’ll be able to see the impact of a lengthening sales cycle or a high win rate versus decreasing income.
5. Sales Qualified Leads (26:46)
An MQL shows promise while an SQL is certified by your sales team for meeting your core qualified deal criteria. Some companies divide SQLs into qualified and accepted leads.
6. Customer Acquisition Cost (CAC) (31:17)
How to calculate CAC for SaaS companies that have long sales cycles. Listen to this section for a greater understanding of the number of marketing expenses you must pack into the acquisition cost.?
Quotes
“The CMO role is one of the shortest tenured positions in the C-Suite and there are a number of contributing factors to that.” – Mark Whitlock
“Again, that’s why we put it in my title, because I live, breathe and eat this data. Yum, yum, yum. Call me Pakman.” – Chris Turner
“In some cases where there is a misalignment between expectation and deliverables, it was because there was a fundamental lack of either understanding or just alignment. It’s not because that CMO was not actually a fabulous marketer.” – Mark Donnigan
“Some CEOs fundamentally believe in their core, in their soul that marketing works, that marketing is needed, that that, you know, that that marketing is critical to their business. They just believe it. Even when there’s maybe not too much evidence to that, you know, but they believe it.” – Mark Donnigan
“Those pioneering CMO’s are only pioneers because they’re breaking the mold of the CMO role. They’re saying, hey, let’s be more honest with what data we’re using, and how we’re using that data.” – Chris Turner
Transcript
[00:00:00.090] – Mark Whitlock
As we often mention here, in this context, the CMO role is one of the shortest tenured positions in the C suite and there are a number of contributing factors to that, I think. But one of those factors is certainly how well they embrace their role at the revenue table. It’s a mantle that continues to increase as our ability to track activity and results continues to grow and the B2B sale continues to become increasingly self-service. You know, that’s the reality of the space we’re playing. Right. And so understanding what your results look like, power reporting ends up being a critical element in understanding the specific contribution that marketing is making to the revenue picture. That’s what we’re going to talk about today. Welcome to Studio CMO, the podcast that we set aside to have real-life conversations with marketing leaders about the issues that matter the most, and today we’re going to be diving into something critical for the work that we do in marketing is something that is the lifeblood of how we relate to our customers. That Golden Spiral, the agency that brings you Studio CMO. I want to welcome back to Studio CMO Chris Turner, who is one of our key team members. He’s the senior director of Digital Strategy and Performance Analytics, which means he knows everything and sees all. Chris, we’re glad to have you back on the show with us.
[00:01:46.100] – John Farkus
And he has the longest title, so you know what that means.
[00:01:50.860] – Chris Turner
I like drawing it all out. I like hearing the whole title.
[00:01:56.190] – Mark Whitlock
You’re going to Venmo me the money for saying that, right? OK. And John Farkas, the CEO of Golden Spiral and the Host of Studio CMO, of course, is with us today. John, welcome all you wonderful people out there.
[00:02:08.030] – John Farkus
And our introductions wouldn’t be complete without introducing our guest. Mark Donnigan is back for a second episode of Studio CMO, and Mark co-hosts the podcast, The Video Insiders. He is a video data geek and they talk about everything technical and business-related to making video work the best. He’s formerly the Vice President of Marketing at Beamr and was involved in some of the greatest video startups of all time. Mark, welcome back to Studio CMO.
[00:02:39.220] – Mark Donnigan
Hey, thank you, guys. It’s awesome to be here. Glad you’re back. Thank you for having me back. So this is great.
[00:02:45.370] – John Farkus
We’re here today to talk about KPIs and how do we get from all the tactics and movements and creativity and things that go into a marketing presence? To bringing the results of that to the table and saying, here is where we are, here is where we can go, if we do this, then we’re going to produce these kinds of results. Those are the kind of compelling pictures that it’s really important to create. And so Mark is here because he’s got some really well developed thinking about how to approach that and crisis here. After all, every day he lives, breathes, talks, thinkss of key reporting factors, and so we’re here to kind of put these two in the middle and watch him go.
[00:03:41.310] – Chris Turner
Again, that’s why we put it in my title, because I live, breathe and eat this data. Yum, yum, yum. Call me Pakman.
[00:03:50.700] – John Farkus
So, Mark, let’s tell our listeners a story here. I mean, how do you start framing your thinking about this?
[00:03:58.200] – Mark Donnigan
You have to have a really strong fundamental understanding and an agreement with your chief executive. What are the objectives of the enterprise now? The understanding piece that I think is so critical for a marketer is that they really need to understand the economics behind the business. I think that in some cases where there is a misalignment between expectation and deliverables, it was because there was a fundamental lack of either understanding or just alignment. It’s not because that CMO was not actually a fabulous marketer. I had to learn how to get into sync with what the objectives are in the company and what the real economic drivers are. And I think this is what’s so interesting about a discussion about KPIs is that I don’t believe that any of the KPIs that we’re going to go through here is that revolutionary or unheard of. But what I would submit or what I would encourage listeners to just think about is do you really understand what’s behind that number and how it connects to your business?
[00:05:11.940] – John Farkus
That’s great. I think that’s the place to start now because that’s the alignment, right. If you’re understanding the drumbeat in this case that’s coming behind what that’s looking like, then you can find that sync, find that alignment because you’re coming from the same base principles and fundamental understanding and what you describe. We’ve seen a number of times where all of a sudden a CMO will find themselves on the wrong side of the equation and kind of be surprised. You know, I’ve had conversations with CEOs shortly after Okemos been dismissed, and they’re like, he just didn’t get it. I mean, we were just not on the same page. And it’s like this mystery. Like, I, you know, we kept going in separate directions. And I wasn’t understanding why that was. And I think it’s because and I’d love your insight on this. You know, I think it’s because they never had that alignment conversation. What would be in the anatomy of that conversation? Like, because there it is. It’s a mirror, right? It’s a sit-down and saying, let’s walk through this together.
[00:06:20.910] – Mark Donnigan
What what does that look like? It’s intentional. And let me also say this, that the onus is on me as the marketing leader, not on the CEO. It is not the chief executive’s job. It’s not my boss’s job to get into alignment with me. It’s my job to get into alignment with that person. And you don’t do that by just, you know, over a series of one-on-ones taking careful notes and then going back in in your corner, you know, huddling and trying to figure out, you know, what that person what he or she means.
[00:06:53.070] – John Farkus
It has to get objectified. You know, it’s very intentional.
[00:06:56.130] – Mark Donnigan
And where there’s confusion or there’s lack of clarity, then it’s being willing to sit down, you know, with your boss, you know, with the CEO and say, hey, you know, so I keep hearing you say this. And yet we’re I feel like we’re doing that, but I feel like we’re not connecting. What am I missing here? And I think that that conversation is just not happening, because if that conversation was happening and the CMO is still failing, then there is a skills gap.
[00:07:26.970] – John Farkus
Yeah, yeah, yeah. And that’s an important factor to understand, especially in the temperament of most CEOs. They don’t want to have to teach. They don’t want to have to sit and explain, I don’t want to have to sit down with this person and kind of bring them through the rudiments if they need it, I need them to come to get it. I need them to have a really specific and pointed agenda, and I need them to pull it out of me because I don’t have time to think for them, nor should they think for us. You think for yourself and bring it to me and let’s make sure we’re moving in the same direction.
[00:08:01.600] – Mark Donnigan
Yeah, exactly. If they’re having to do the thinking, then well, yeah, that’s. Yeah. That person better be sharpening their resume!
[00:08:09.560] – Chris Turner
Hey sir, I don’t know what I’m doing here. Can you tell me what to do? No, but I can tell you to hit that door real quick.
[00:08:17.140] – Mark Donnigan
That’s right. Yeah. Yeah. There’s another element to this sort of crossing of communication, and that is that I’m observing that there is a general attitude that a marketer that marketing skill sets are fully applicable across the industry, across ecosystems. If the marketing leader does not have command of the ecosystem they are operating in and when I say command, I literally mean they have it wired. They know who the players are. They know where the power lines are. They know how money flows. They know how economics are structured. You know this is more than just you know, they’ve done a competitive matrix and they can tell you who the competitors are. If they don’t understand that, then that’s going to make it super hard, again, to really know the business. And this, I think, is, you know, I think someone who wants who’s a VP of Marketing or a Senior Director of Marketing, and they have aspirations to grow into the CMO chair. My advice and, you know, I see too much of, like, default to, oh, I should go get my MBA because that’s going to prove that I really know something. Absolutely not. There are so many MBAs who do not know the businesses they operate in and they’re failing. Some people don’t even have a degree and are rocking. Why? Because a lot of times, because they become students of the ecosystem and then they can sit down. And when the CEO is talking about some change in the business, some change in the distribution alignment in the market, the CMO can relate to that and then is in a great position to say, wow, you know what we need to do? We need to craft a campaign. And that’s where the CEOs like this is awesome. The person gets it. But if somebody doesn’t understand how the market is operating, then they can be a phenomenal marketer. Again, the mechanics they can have down cold and be very proficient at, but they’re going to be doing things that don’t impact the business.
[00:10:33.580] – Chris Turner
Yeah, because ultimately they have the tools, but they don’t have the rationale, the reason behind those tools. And really going back to what you were saying about the CEO and the role of the CEO and the marketers, mine is the CEO is driving the ship. He’s not talking about the sea. He’s not talking about the ocean. He’s not talking about who’s the crew members on board. He’s driving the ship. The marketer is supposed to be looking at the ocean and saying, we’re going in the right direction and we got to anticipate where things are going and then pull the right tools out of his tool kit to get it done. And that’s what these KPIs are supposed to be helping him do because they’re helping you see the waves as they’re crashing against the ship and anticipating where everything’s coming. It comes down to a relationship. It’s a relationship with the CEO, the CRO, the CFO, but also a relationship to the ecosystem.
[00:11:21.430] – Mark Whitlock
Yeah. So step one, we’re taking the initiative to have an intentional conversation to align to eliminate the subjective factors and ensure you’re speaking the same language around performance.
[00:11:32.830] – Mark Donnigan
Mm-hmm.
[00:11:33.340] – Mark Whitlock
Step two is taking the time to know the ecosystem that you’re swimming in. Get a great picture of it, understand how the org flows, and where the revenue comes from, how it’s produced, where the where profit lives. Yeah. And what makes a difference to really move the needle. And then step three is our next chapter, which is formulating the KPIs to make sure you can get it there.
[00:11:59.200] – Mark Donnigan
There’s six that regardless of whether you are in a more high-velocity SAS type sales environment where maybe it’s a pretty heavy mix of self serve and some inside sales, or if you swing all the way to the other side where it’s pure account executive, you know, multi-year, multi-touch, you know, very heavy duty. Most of these can apply. But let’s start out with marketing sourced net new revenue.
[00:12:27.490] – Chris Turner
Yeah, the idea here is that at the level of sophistication that most of these organizations are going to be operating, they have to be able to grab this data. Again, it’s just a tool in your toolbox until you make a relationship with it, and that’s why your point about connecting the dots with the CRO/CFO.
[00:12:45.270] – Mark Donnigan
Yes. Also the CFO. That’s right. I didn’t mention the CFO, but that person is very important.
[00:12:50.340] – Chris Turner
But the connect the relationship dots between all three of those individuals makes sense because the KPIs that you are likely reporting on is coming from a lot of different sources. But it’s still a number is still a data point that’s meant to help inform decision making. So a lot of the market sourced revenue will come from looking at, like you mentioned, any marketing automation, like a HubSpot, or a Salesforce. The idea is that if you’re identifying the source of the conversion and the conversion is becoming an SQL and all these great numbers and it ultimately results in revenue, then you can apply that source to ah, and you can give it attribution and you can say this marketing activity drove a new client and it’s worth X amount. When you can do that as a marketing executive, you become indispensable because not a lot of people are doing that.
[00:13:44.670] – John Farkus
All right. So the first KPI we need is net new revenue from marketing sources. OK, Mark, what’s number two then?
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[00:13:53.820] – Mark Donnigan
I like to report on percentage contribution. So marketing’s contribution to total net revenue. Now, what I think is interesting here, of course, you know, I understand there could be some selling environments where basically marketing is performing the sales function, in which case, you know, you could say, well, it’s pretty much 100 percent coming from marketing, but generally there’s going to be somebody, whether that’s an SDR BDARS account execs. There’s going to be a sales team working as well. And, you know, I think it’s it’s always very useful to just look at this percentage of all net new revenue is marketings. Percentage of what’s being generated growing? Is it is it static? Is it declining? Now, this is more again, depending on the business context, certainly declining is probably not good, although depending on the business model, you know, that may be understood, but you need to be able to report on this because it is it’s one thing to just say, hey, quarter over quarter, you know, marketing is growing, you know, net new revenue by X percent, whatever that is, that’s great. But what is the total percentage of net new revenue and what is marketing’s influence on that? So you know, I don’t think we have to spend a lot of time talking about this, but I think it is a piece of the first metric that is important and where I think we’re going to really get into the meat of reporting is in the qualified pipeline. So this is kind of the third metric, not necessarily that in order, but this is the third one that we’ll talk about. Qualified pipeline generated is what I think most people would call an MQL. Except in my observation, most MQLs are I got a name and email address, you know, hot dang. I got me an MQL, you know, let’s chalk one up for marketing. You know, we generate three thousand emails and, you know, we’re rockin’ this month, you know, and come on in. Most of it’s just junk. They’re not even real emails.
[00:16:09.420] – Mark Whitlock
Right, exactly.
[00:16:10.620] – Mark Donnigan
So this is why I really like using the words qualified pipeline. And the way I define a qualified pipeline is obviously I have to know who they are. So I have to have at least a first name and an email address. If I have more data, that’s great. You know, more information. But I have very high confidence that A: They can be a customer, that they really could be a customer. Now, I don’t know if they will be yet. You know, it’s a marketing qualified lead, but they could be a customer. They could use they could benefit from what we have to sell from our product or service, whatever that is. But B: I have pretty high confidence based on probably the first part that they can be a customer as to what the revenue possibility is.
[00:16:54.480] – Chris Turner
And you’re saying that from your perspective as part of the business? What revenue could be generated by this? Yes. Yes. Yeah. I don’t mean the size of their business. That’s easy to get.
[00:17:05.400] – Mark Donnigan
I mean, you know, clear. I’ll give you all that information.
[00:17:08.820] – Chris Turner
What’s the impact on us?
[00:17:10.320] – Mark Donnigan
Yes. Now, the reason why I argue that this is really the right way to define and Maxwell is, again, you know, most MQLs are just a name and an email address or in some cases just an email address. And that’s nothing. But if you know that they can be a customer and if you, you know, have enough information about them or through data enrichment tools, you know, like the clear bit, for example, and any of the hundreds. There are thousands of other tools that are right there then, you know, now you’ve got something to begin to work with. I consider this an actual golden spiral.
[00:17:45.640] – Mark Whitlock
Well, what we had to do was create a whole graphic to show the six criteria of a lead. And if a contact did not meet those six criteria, we could not call it an actual. And that was part of it goes to not only do you have to have an intentional conversation with the C Suite about all these terms, it probably needs to filter down in some way to the guys doing the hardcore marketing, because that way, you know, they know what a qualified pipeline lead is. And when you report on them, everybody can have confidence in that. I love that.
[00:18:21.850] – Chris Turner
Exactly. Exactly. Because a lot of it again, I’m a big relationship guy. Everything I do in marketing is a relationship. It’s meant to be that way. That’s what I’m marketing and marketing a relationship. I’m building relationships with our clients and helping our clients build relationships with their clients. And the idea here is that there’s a relationship between marketing and sales, but ultimately there’s a relationship between marketing and revenue. And if you’re not articulating that and there’s any ambiguity, it goes back to what we said at the beginning. The CEO doesn’t understand what you’re doing and he doesn’t see the value of it. And so I think I think that’s a great definition at that mid-level, as we’re talking about, you know, net new, we’re talking about MQLs is really being honest with yourself about what an MQL is. It’s not just someone completing a form that’s not even a lead. That’s a conversion.
[00:19:10.210] – Mark Donnigan
And this also really helps in that sometimes contentious CMO/CRO relationship or, you know, you know, head of marketing, head of sales. I think this is becoming, you know, less of an issue. But, you know, five, 10, 15 years ago, there was the common, you know, kind of battle between the VP of marketing, VP of sales. And, you know, they’re always suspicious of each other. And, you know, that’s just we have to break all that down, you know, because let me tell you, the business is not going to work if you have these two critical partners in your revenue engine fighting each other.
[00:19:46.570] – Chris Turner
Exactly. Exactly. I mean, I lean towards what Accenture was using as a terminology about pioneering CMO’s. Those pioneering CMO’s are only pioneers because they’re breaking the mold of the CMO role. They’re saying, hey, let’s be more honest with what data we’re using, and how we’re using that data. When we say data-driven, what does that actually mean?
[00:20:08.920] – John Farkus
And we’re going to link to that Accenture report about pioneering Simos. Come on over to studio CMO Dotcom Slash 029 that studio CMO Dotcom Slash 029 and check out the show notes. So let’s recap here. There are six KPIs. Every CMO should report in their C suite number one marketing-generated net new revenue number two percentage of contribution of marketing to overall revenue. Number three, MQL, or what is a qualified pipeline generated lead.
[00:20:42.700] – Mark Donnigan
So now let’s talk about the fourth reporting metric or KPI that I think is very useful to use. And this is sales cycle length and win rate. And if you have, you know, multiple channels that you’re really investing in, then you really need to break this out by channel, because not only can it inform where you invest, but it’s just it’s important to know because not all channels have unlimited capacity or output. And so you might have a channel that’s just rockin’, you know, where you’ve got, you know, the shortest sales cycle length, you know, very high percentage of win rate. You’re feeling like. Yeah, but you know what? If you’re like ninety-five percent of capacity for that channel, well, you need to know that, you know, because otherwise if you’re just looking at kind of an aggregate across all your channels, you could be pushing, pushing, pushing, wondering why things aren’t moving. And you have a couple channels that are basically just tapped out. That’s all you’re going to get from that particular channel. I’ll get practical here, voodoo. I built a sales channel that was through these custom installers. Well, there were really only about one to three thousand really viable custom installers in the country. Now, even though you could go to the trade shows, you could see, you know, some of these manufacturers had, you know, tens of thousands of, quote-unquote, dealers who sold their products on their distribution list. Sure. But the reality was there were like one to three thousand. So part of what actually caused us to even pivot away from that channel is that I simply ran the numbers. I mean, I just simply did the math and I said for our consumption. Well, when you’re renting a three to a five-dollar movie and it has nothing to do with, you know, with how wealthy someone is in terms of whether they can afford to rent movies, you only have so much time. You’re going to watch movies, you know, and so you run the numbers and you say, if I can only get a thousand or 1500 outlets to sell my particular solution, that’s going to then enable movie consumption. I can pretty easily model with high confidence what my revenue is and it wasn’t going to make the number. So we end up pivoting to a whole different strategy. But that’s an example where sales cycle and win rates, you know, very, very important. Now, there are two things I like to think about relating to this, and that is efficiency and effectiveness. So efficiency, we don’t have as much control over, you know, so I’ll just use an example out of home advertising. So billboards, right? Yeah. You know what? I can’t track who saw it. I can’t. The best I can do is get some information, like 50000 cars a day, drive past this billboard. That’s it. That’s it. So so is it efficient? I don’t have any control over that. It’s not like I can somehow put a beacon on there and scan their license plates and then email them stuff or send them stuff, you know, so. So I can’t do anything about that now for, you know, there’s a lot of reasons why it still makes a ton of sense to to to to use billboards in certain businesses. That’s not what I’m talking about. But efficiency is where, you know, the channel just is what it is, you know, or the or the communications vehicle. But effectiveness, that is where, you know, we can tweak our targeting. We can tweak our creativity, tweak our copy, tweak our offer. We can do things that are in our control to improve the effectiveness of whatever it is that we’re doing. And so this is you know, I really think the tracking the sales cycle length and also the win rate is just, you know, it’s really it’s important. It’s very important. And it’s important to be specific. It’s important to look at the channel by channel because there’s also a situation that you have to look out for. And this is a big gotcha. You can see, for example, your win rate improving. But if your sales cycle length is elongating or it’s decaying, your actual revenue could be declining. So if someone’s only reporting on win rate and this is again, where it can be a trick that people play like, yeah, look, our win rates going up. Yeah, but why is our revenue number going down? You know, like what’s happening there, you know, so in some cases, you know, it might even make sense in certain types of, again, business objectives, like if if if we’re in a situation where we need to produce cash, then you know what? I probably need to be really looking at sales cycle length. How can I impact the sales cycle length?
[00:25:49.640] – Chris Turner
And that goes back to what you were saying about efficiency and effectiveness. I would say and I would argue the point, though, that in a digital environment, it’s easier to have more efficiency because you have a lot more data points that you can evaluate. But I think I get what you were pointing to when you’re kind of using billboard traditional media, you can sign off now.
[00:26:09.310] – Mark Donnigan
I’m not using efficiency as a comparison to say, hey, this particular channel is more efficient than the other. What I’m saying is, is that the efficiency of the channel is kind of fixed. You know, that’s what I’m really saying. Like, I can’t. Yeah, I guess I could get a video billboard and probably more eyeballs would look at it. And, you know, but what I’m saying is –
[00:26:36.040] – Chris Turner
– There’s only so much that that that channel will produce no matter what material, what the marketing element you throw at it, it has a threshold and that threshold will never be exceeded.
[00:26:45.880] – Mark Donnigan
Yeah, that’s right. You know, these are very interesting KPIs that we just talked about. But now let’s get into how we calculate costs. Specifically, I’d like to start with SQL and then we’ll go to CAC. And I, I think that it’s very important for marketers to think about the fact that let’s just looking at SQL first. So one of the traps that’s easy to fall into is looking at too narrow of a window and not taking into account your sales cycle length. So, for example, you know, if I’m reporting on it, whether it’s a monthly or quarterly basis if I’m reporting quarterly and my sales cycle length is roughly sixty days, seventy-five days, you know that we kind of know that by the time we first engage with somebody, they’re either going to have bought or fallen out. You know, they’re going to be one lost, you know, in kind of sixty or seventy-five days. Then I guess you could argue that if I’m calculating a sales qualified lead, cost SQL cost, you know, over 90 days, then it’s close. It’s close enough. But what happens a lot is that the sales cycles actually longer than the window. And especially if I’m running this calculation monthly, then I can almost guarantee that with few exceptions, the sales cycle is longer than 30 days. I don’t care what people say, you know, it’s just there’s so much choice in the market. There are so many competing factors. There is just nothing that is closing in 30 days, at least in my experience. But let’s set that aside. So the first thing that marketers should really be aware of is, is that you need to take into account the period of time your investment in marketing over the period of time that it really takes for that prospect to make a decision. So here’s what a calculation would look like. And let’s just use the example of a 60 day. You know, we know that it takes about 60 days for someone to really make a decision. OK, so let’s say that I want to calculate SQL cost for March. OK, just in this illustration. So what I would do is I would take my previous two months or 60 day period, so I’d take January and February. I would take the marketing expense that I spent. Now, again, we have to be careful that we’re including everything. You know, this isn’t just paid spend. This is, you know, what have I spent on out of home? You know, since we’re just talking about that, what have I spent all of my marketing. Now, of course, you can calculate SQL by channel, but that is really incomplete because no one just stays in a single channel. You know, they’ve been you know, they encounter us, you know, when out of the home. And then they go to our website and then we retarget them on Facebook and then and then they see something else on LinkedIn and then, you know, they’re bouncing all around. Right. So we have to look at our really our total spend on most businesses. So we look at our total marketing investment in January and February, and then we divide that by the number of schools that were produced in March. OK, and then that gives us what the school is roughly for that period of time that we were you know, we were marketing to the prospect and then they raised their hand and said, hey, yes, I’m interested. I want to talk to a sales rep or I want a demo or, you know, whatever, whatever, that whatever that step is where we say, hey, this person is a real leader, you know, real sales qualified lead.
[00:30:45.120] – Chris Turner
So, going back to what you just said a second ago. Yeah, you could break it out and do attribution modeling for the channels. But remember, we’re reporting this all up to the CEO. He’s got time to talk about per channel SQL’s. Again, I think we would also want to caution the listeners to make sure that they understand all these definitions and they are defining that against their C-suite members, you know because we also have SQL alongside an SAL, you know, sales accepted lead and a lot of different organizations will have several different definitions.
[00:31:17.100] – Mark Donnigan
So I’m actually glad you brought that up. And even the SQL versus SAL and, you know, let me just say that you know, I think simplicity always wins. I don’t get hung up on whether an organization uses SQL’s or uses SAL or is marketing unqualifiedly just kind of you know, they skipped the whole SQL thing. It’s just like, hey, you know, I don’t get hung up on that. It’s as long as, again, there’s an agreement, there’s understanding, there’s mutual understanding. That’s what is most important. But now let’s move to calculate the customer acquisition cost: CAC. And this is one and first of all, I have to give a massive shout out if the listeners, anyone listening who has not been turned to Andrew Chen at Andreessen Horowitz. He ran growth at Uber. Andrew Chen is is is a foremost thinker in this whole area of growth and calculating customer acquisition costs. And looking at it, SAS business models, very, very worth going and reading. He’s written a lot, you know, really, really, really super sharp guy. He has done a lot of work with a guy named Bryan Balfour, who I believe was vice president of growth at HubSpot, he’s no longer there. He now runs an organization called Reforge. These guys have put a lot of great information out. And so I’m giving them a shout out because though I’ve got kind of my own twist on this, you know, these ideas I’m about to present around how to calculate CAC really came from them. And what they pointed out is that the weakness in almost all CAC calculations is exactly what I just said about skills. And that is that many calculations most do not take into account the sales process time. And therefore they can really steer you in the wrong direction. They can either lead you to believe that you’re over-performing or you’re underperforming when you’re not. And the worst part is, is if you’re taking action on that and you’re turning on or off campaigns or you’re ramping campaigns based on this, you can you know, when you’re small and you’re spending five thousand a month, that’s probably meaningful to you. But the error is not as great as when you’re spending five million a month, you know. And yeah. And, you know, it’s old, you know, the analogy of if you just half a degree off and you only walk ten feet, you know, you’re really not far off from where the baseline is. Right. But you go ten miles, you go 100 miles, you go a thousand miles. And next thing you know, you’re like, wow, I’m way, way, way, way, way off the delta’s bad.
[00:34:16.040] – Chris Turner
Yeah. The Delta. I was just about to say your delta is extremely bad.
[00:34:19.340] – Mark Donnigan
It’s extremely bad. Yeah. So I think it’s worth taking, you know, just a minute here to look at how to calculate, and what I’ll try and do is just make this super practical. And, you know, I’m sure we can link up to some information here also because there’s some you know, there are some really great articles have been written about this where if someone wants to dig in, but if we think about what you know, the common CAC formula is that we’re all familiar with, right? It’s super simple. It’s total marketing, plus sales expenses divided by new customers acquired over some time. So, you know, if I’m just going to make it super easy just because, you know, I’m not the greatest at math, you know, if I’m calculating this on a monthly basis and I spent a thousand on marketing, I spent a thousand on sales. So I have two thousand, you know, I produced, you know, 200 customers, you know, net new customers. Then my cost was ten bucks. Right. So, so really easy to understand. The problem with that, again, as I just said, is it does not take into account the fact that if I have a 60-day sales cycle, those new customers and I’m counting for in that period actually were a result of what I spent up to two months previous. And so what if I actually tripled by marketing spend for that period for whatever reason? Well, now I’m going to be underreporting. Right? So or what if for that period that I calculated, I actually increase my spend in anticipation of, you know, hey, we really want to put the pedal to the metal, so let’s pour a lot more into Facebook ads or LinkedIn or, you know, or Google banners or whatever it is. Then also I’m going to be over-reporting. So, here’s what you know what I think the formula really should look like. And here’s what I like to use, is you basically take the let’s talk about this in terms of the real world. So let’s say that I want to calculate CAC for March, OK, so for March. So I’m going to take my marketing expense for January and I’m going to add it to the marketing expense for February because that’s because let’s assume I have a 60-day sales cycle. So let’s just say for sake of illustration, I spent ten thousand dollars on marketing in January and I spent twenty thousand dollars in February. OK, so again, I’m calculating CAC for March so that that’s thirty thousand, right, for marketing. Now I’m going to add it to my sales expense in March. OK, so that would be thirty thousand that I spent. Let’s just say, for example, let’s say I spent, I spent thirty thousand. So now I spent sixty thousand dollars and then I divide it by let’s say that I got 600 new customers in March. OK, so now I have sixty thousand divided by 600, which gives me a cap of one hundred dollars. OK. And what this does is this accounts for the sliding window there that just helps me understand exactly where my how my expenses are really lining up in terms of customer acquisition costs. One other comment I want to make about customer acquisition costs that I see is that and this is difficult to do, but often salaries and kind of loaded expenses are left out. And and and again, this is these are the games that can get played, you know, to show like, hey, look how efficient we’re being. And in reality, you know, I’ve got a 20 person marketing team over here, but, oh, just forget the fact that you know, the average salary might be 80 or 100 thousand dollars. And I got 20 people over there, so I’m burning two million dollars a year, you know, but don’t pay attention to that. You know, we’re just going to count. So we really do, especially in the earlier stage and in the middle stage. We really do need to take into account the whole picture when we’re calculating, you know, what the customer acquisition cost is. And we’re reporting on that.
[00:38:39.470] – Chris Turner
So, Mark, once they’ve defined this and they’re doing it the right way this time and they’ve got a CAC and they’re presenting that to their board or they’re presenting that to the CEO. And one of these relational conversations, how should the CEO interpret that CAC? What would you recommend to a new CMO who’s stepping into this role and really defining the CAC for an organization –
[00:39:02.270] – Mark Whitlock
– to help them sync up, yeah.
[00:39:04.280] – Chris Turner
Yeah, help them sync up at that point?
[00:39:07.250] – Mark Donnigan
I have observed that there are basically two types of CEOs there are relative to this discussion, obviously, you know, it can be very but relative to this discussion. Some CEOs fundamentally believe in their core, in their soul that marketing works, that marketing is needed, that that, you know, that that marketing is critical to their business. They just believe it. Even when there’s maybe not too much evidence to that, you know, but they believe it.
[00:39:44.810] – Mark Whitlock
Because most of them have lived.
[00:39:46.500] – Mark Donnigan
Exactly. Exactly. I’m not saying they give marketing a free pass. I’m not saying they’re writing unlimited checks. That’s not what I’m saying. But I’m saying that fundamentally they believe it. They have a fundamental belief. There’s the other type that is anywhere from they don’t believe in marketing. They literally just don’t believe or their experience is not maybe as complete. They have not seen it work or maybe they’ve had some, quote-unquote, bad experiences where they invested and they felt like, gee, I got just absolutely nothing. And depending on where they are, how far they are towards the marketing is not needed and doesn’t work really, depending on where that CEO is on this spectrum is how the CMO needs to apply this data. There also is just a personality and behavior type. Right. So if the CEO is a very number driven metric left-brain learning person, then I’m probably going to present this information very much just by the numbers, less narration and but be ready and available to explain, you know, if they say, OK, why is this number important? Or, hey, last quarter it was here, why is it now here? What does that mean to us? I better be able to, but I’m not going to pack my slides with a bunch that I’m going to put the data out and I’m going to let the person look at it and then and then kind of respond to it for the CMO or I mean, excuse me, the CEO that fundamentally believes in marketing. I’m going to present the data in more of a here’s how this information is informing what we’re doing so that we can get more efficiency, greater impact, greater out of the investment or out of the time in the resources that we have. I have been fortunate enough to work for you know, most recently I worked for a really great CEO that fundamentally believed in marketing. I never, ever once felt that I had to, you know, justify to him why what we were doing was important.
[00:42:10.700] – Chris Turner
No CYA there, huh?
[00:42:12.710] – Mark Donnigan
Yeah. Yeah, exactly. Exactly. However, I brought data into the discussion very frequently, but I used it as a way less about, hey, look, we’re really over-performing on this particular campaign or this, you know, but more about, hey, you know you know, I ran LinkedIn – like there was one example where I wanted to test. Actually, it was a cost per action, which is what I was really testing, because it was way too early to say, hey, we’re acquiring a customer. After all, our sales cycle was in some cases multi-year. So we had to look at everything as sort of more like a cost per action, like, hey, we know the steps someone needs to walk down. So, you know, how much do we have to spend to get them to do step one and then step two and then, you know, no, that’s just to stop you there for a second.
[00:43:03.220] – Chris Turner
That’s a great point, because as we’re talking about some of these sales cycles and some of these closed new businesses, it may be 18 – 20 months before a business closed deal happens.
[00:43:15.370] – Mark Donnigan
Yeah, absolutely. Absolutely. If the CMO is not really into the dynamics of the business and for example, you know, of course, they’ve heard, you know, oh, yeah, we have a long sales cycle. But what does that really mean? And what are the key steps that need to happen before revenue results? If they don’t understand that, then they’re just going to be kind of spraying and praying.
[00:43:43.120] – Chris Turner
You have to understand that client’s journey. What is the usual process journey, the buyer’s journey? Yeah, it’s really understanding those steps.
[00:43:51.910] – Mark Donnigan
So I want to test the cost per action. And so, you know, I took budget. I mean, I didn’t have a massive budget, but I had enough money and it was fully discretionary. I mean, I spent it the way I felt needed to be spent. So I took I don’t know, I think it was a couple thousand bucks. And I ran a particular kind of campaign on LinkedIn. You know, I know someone will argue and say, oh, that’s not enough to you can’t get enough data off that, whatever, whatever. But you know what? I was able to get enough information to say to come back and say, you know you know, we’ve been kind of talking about maybe some targeting and the value of LinkedIn, LinkedIn ads. And here’s what I found. And the numbers actually aren’t that bad. It’s like it’s 100 bucks and we can get someone to do what we want. And in the scheme of things like would we pay somebody a hundred bucks like we would to do that? So this makes sense. But here’s why I’m not going to do it. You know, and so that was, you know, an example of where you have data, but it’s not presented as, you know, like, hey, here’s my data. And wow, this is great, we’re going to keep doing more of it. Or it was presented as, hey, here are the learnings from it. But I think there’s even a better way. And here’s why. You know, you know, we tested it. Here’s what the information told us and here’s what we’re going to do.
[00:45:12.250] – Chris Turner
Yeah. And I know that when we’ve run some of these, I don’t want to call them tests or some discretionary funds, but when we’ve taken a look at a channel and said, let’s go down this path, we’ve actually identified ways and times that that channel works and ways and times when it doesn’t. Seasonality has a role in all of the things that any business does from any standpoint, including a marketing perspective. And without that data set to help inform when and why and where you’re always kind of behind the eight ball at that point because you may have missed the tie that rose during a period of time.
[00:45:46.810] – Mark Donnigan
Even all of these metrics, all this stuff that we’re talking about, like what are the business results? And at the end of the day, no matter how good or even how bad the metrics look, if we’re achieving the business result or if we’re not, that’s all that matters. Are we achieving or are we not? The metrics just give us directional cues. They help guide our steps. They’re very important. We’d spent a whole, you know, however, many minutes now talking about it, but it’s the business result that matters.
[00:46:24.220] – Chris Turner
I’m a big movie guy, so I was going to say Lokey in one of the last Avengers movie said experience is experience. It doesn’t have a color, it’s experience and data is data. Again, it’s part of the toolset. It depends on how you look at the data that determines if it’s good or bad. All data is data. It can be good. You can use those failings or the lack of performance, but you have to know it’s a lack of performance. And when you’re reporting that back up to the C suite that’s going to help them drive the ship, you know, that’s going to help direct the path. Yeah. And I think it comes back to an ethical understanding that even when it’s a bad performance, by making sure everyone knows it’s bad, you’re preventing them from going down a path that will ultimately in ruin. And so, you know, not to go that way. And I think in some cases, when you’re reporting falsehoods, when you’re saying, oh, look at all these SQL’s, look at these open rates, and you’re not saying this was new business generated by email, you’re creating the division between sales and marketing, but also a division between success and failure. If your company and if you care about your company, you care about winning new business.
[00:47:29.950] – Mark Donnigan
Yeah. Hundred, 100 percent. Boom, drop the mic.
[00:47:33.850] – Mark Whitlock
Great mic drop moment there! That’s awesome. These are some of the most essential understanding that a CMO can have as you look at your position in the organization, how you maintain that position in the organization and how you understand what it means to grow. And as you look at the horizon line of your company and your role in helping move that horizon to a better and better place, I think there’s a lot that we’ve covered here, obviously, and there’s lots of subtext below each one of those six points. We’re going to be providing several resource links.
[00:48:15.990] – John Farkus
You bet. The show notes for this episode are going to be very important to you. So come on over to studio CMO Dotcom 029 That’s Studio CMO Dotcom Slash 029. We’re going to link out to an excellent article on KPI’s as a whole, written by our chief operating officer, Peter Smith. We’re also going to link out to a PDF that Mark Donnigan has provided for us related to many factors, but you’ll see more of his insight and genius in that PDF. And finally, we’re going to link you to an e-book written by Chris Turner on SEO. Chris is our SEO genius, and he’s put together a one to three, step by step how to build SEO into what you’re doing. And KPIs are all through this ebook. So come on over to Studio CMO Dotcom Slash 029 and download one or all of these resources.
[00:49:15.600] – Mark Whitlock
Hey, Chris, thanks for carving some time out of what I know to be your exceedingly busy schedule to join us here today. And Mark, thank you again for bringing in some real-world experience in here with some very quantifiable and implementable insight.
[00:49:35.730] – Mark Donnigan
Well, you’re very welcome, and thank you for having me again.
[00:49:38.910] – Chris Turner
Always a pleasure to talk shop and spend some time with some of these experts that we are blessed to have come on, Studio CMO.
[00:49:46.860] – Mark Whitlock
Appreciate you guys. Coming up on the next episode of Studio CMO, the head of marketing at Eventbrite, the head of growth at Prezzie, and somebody who led marketing at companies like Vonage and Chart Cube. Jack Mardak, now the co-founder of fast-growing startup Oyster, will be our guest on Studio CMO. Until then, remember to understand your buyer’s problems at a deep level and lead out of that empathetic understanding and make your buyer the hero. We’ll see you next time on Studio CMO.