How Marketing Creates Revenue

What are the mechanics of how Marketing creates incremental revenue within a business?

The answer is NOT "to get leads," or to "create demand," or even "make people aware of our brand." Those are superficial explanations of what you hope might happen, not the machinery of how marketing actually grows revenue.

What follows is a simplified description of a B2B startup as it grows revenue step-by-step. The details are secondary, but the numbers and percentages are not unreasonable for an early grow-stage company.

The article is somewhat complex (about a 10-minute read), so has been broken into three major parts if you want to read it in pieces:

• Part I – Modeling Revenue Creation
• Part II – The Power of Brand to Drive Revenue
• Part III – Putting All the Pieces Together

The article is well worth reading through to the end because it's NOT the typical story that's told in B2B marketing circles about marketing's contribution to revenue creation and how it should be thought about and measured.

As a bonus, you'll get a peek at what a Marketing Mix Model (MMM) actually models and the insights that an MMM analysis can bring to a business.

PART I – Modeling Revenue Creation

So let's start with a very simple company.

Stage-0: You have a Product (but no revenue)

You have a lovely website that no one's coming to and a fabulous product that no one knows exists. All you hear are crickets! ?? (boo!)

We can model this simply as:

Revenue = $0

Not terribly exciting, but that's where every startup starts. At this point is when the CEO says, "We need some sales...let's hire a Sales Team!"

Stage-1: We Hire a Sales Team

No marketing at this point; there are just a few Sales Reps who will go out and do their own prospecting and close their own deals – old school style.

Now, we have some Revenue, but it comes at a cost – the cost of running the Sales Team.

Let's say we now have $1M in Revenue (yay!), but that Sales Team is costing us $250,000. So, we see $4 of revenue for every dollar of sales costs. We can model that with something like this:

Revenue = 4 × [Sales Costs]

(we're going to ignore things like sales from word-of-mouth for the moment)

Sales is well incentivized and working hard, so it's unlikely that we will suddenly get those sales reps to start prospecting twice as many leads each week or making twice as many sales calls.

So, if we want to double our revenue, we will need to double the number of sales reps we hire.

But if we could magically make Qualified Sales Leads appear out of thin air, those reps wouldn't need to spend nearly as much time prospecting and could spend more time closing deals (yay!).

Let's fix that with some old-school lead-gen Performance Marketing.

Stage-2: Let's Do Some Marketing

So, we hire an SEO/Paid Search agency to get us noticed in Google Search and generate some leads.

Since all marketing agencies promise instant results, we suddenly start getting prospects to show up on our website and raise their hands to talk to Sales (yay!)

However, the marketing agency and the paid search cost us $50,000, so this doesn't come free ("Instant results done on the cheap" – that's their tagline!)

(to keep things simple, we're ignoring lag and decay effects for the moment)

Previously, our Sales Reps spent 50% of their time prospecting for leads and 50% closing deals. This new pipeline of leads has shifted the sales efforts to 25:75 prospecting-to-closing.

So we're now getting 50% more deals closed with the SAME number of Sales Reps (yay!) and now closing $1.5M in deals but with some additional costs.

What we did differently was add the $50,000 in costs for some Performance Marketing, and we saw an additional $500,000 in revenue, or about $10 in incremental revenue for every dollar spent on the marketing.

Our Revenue Model is starting to get a bit more complicated:

Revenue = 4×[Sales Costs] + 10×[Paid Search]

Incrementality

So, where does this "incremental revenue" actually come from?

Notice what we just did! We spent money on Paid Search, driving qualified traffic to our website. Some of that traffic converted to leads that the Sales Team didn't have to expend time and resources to prospect for on their own.

Now, each sales rep can be more efficient by spending less time prospecting for new leads and more time closing deals with leads who are highly likely to buy.

Although the "Performance Marketing" did not directly generate revenue, it disproportionately impacted the Sales Team's ability to generate more revenue!

If we had wanted to reach $1.5M in revenue by simply expanding the Sales Team, that would have required an additional $125,000 to the Sales budget (4 × $125k = $500k in additional revenue).

But by adding $50k to a marketing effort, we've created the same impact as adding $125K directly to expand the size of the sales team.

That means for a given level of incremental revenue, Marketing was able to provide a 2.5x greater leverage vs. simply expanding the Sales budget to achieve the same results.

Here's the math:

To grow Revenue from $1,000,000 ? $1,500,000 (or $500k in incremental growth), we have two potential paths for achieving this target:

• Plan A (cost = $375,000) – Increase the Sales budget by 50% from $250k ? $375k ($125k increment)
• Plan B (cost = $300,000) – Add $50,000 to Marketing & keep Sales the same

Marketing is a Non-Linear Multiplier of other Linear Business Functions like Sales

So now, by layering in a Marketing effort to support the Sales effort, our revenue model has gone from:

Revenue = 4 × [Sales Costs] ? 5 × [Total Sales & Marketing Costs]

$1.5M in Revenue = 5 × $300,000 in total Sales & Marketing costs

From the CFO's viewpoint, the Sales Team has suddenly become much more efficient in terms of the number of deals each rep can close in a given period.

The reality is that Marketing has become a non-linear (2.5x) multiplier for the otherwise linear business function of Sales.

PART II – The Power of Brand to Drive Revenue

Now let's add in the brand marketing, where we begin to talk to the 95% of our ICP who are future buyers rather than the 5% who are in-market at the moment.

Stage-3: We Try Some of that Brand Stuff

At this point, the ONLY people who know we exist are just those the Sales Team can directly prospect and those who are already in-market and found us by accident via Paid Search.

That's still playing the game on hard-mode!

We'd like future customers to already know who we are and want to consider us as they come in-market. The ONLY way to achieve that is via Brand Marketing.

By creating awareness of the brand along with recall triggers tied to buying situations along with differentiated reasons to buy inside the minds of future buyers BEFORE they're ready to come in-market and buy.

How Prior Brand Awareness Impacts Incremental Revenue

Having buyers already know and trust your brand impacts incremental revenue in four distinct ways:

1. More Hand-Raisers – Now they come looking for us via organic Branded Search rather than just accidentally stumbling across us in generic search.
2. Higher Close Rates – If buyers already know and trust your Brand and want to buy from you, then Sales will close a greater percentage of those deals.
3. Shorter Sales Cycles – If buyers already know who they want and who they want to buy from, the purchase cycle will be much shorter.
4. Higher Pricing – If you're a known and trusted brand, then Sales will need to offer fewer discounts to close marginal deals.

So, let's break this out in terms of the impact on everything we're already doing with Sales and with Performance Marketing.

Impact on Search Efficiency (average CPC)

Because buyers know that you exist as an option and are directly searching for you, this will show up as increased traffic from organic brand-aware search.

Instead of searching for a generic term like "Accounts Payable Software," they're now increasingly searching for "[YourBrandName] Payables Software."

More total search click-throughs for the same level of Paid Search budget means increased cost efficiency for the Search efforts.

Impact on Search Effectiveness (higher buying intent)

Because more buyers now know who you are, they're more likely to click your brand name on a search page than on the name of an unknown competitor.

And because more buyers are now specifically looking for YOU (because they're now brand-aware and have some measure of brand trust), there will be a higher level of buying intent in the clickthrough traffic.

So, your organic and paid search has an overall increased effectiveness. Each appearance of your brand in search results is more likely to be clicked on, and each click is more likely to translate into close-won revenue.

Impact on Sales Efficiency

Faster sales cycles mean each Sales Rep can work more deals in a given period, increasing Sales efficiency.

• Less Prospecting – more high-intent hand-raisers means more highly qualified leads to work and less time wasted on cold prospecting.
• Faster Pipeline – less average time to close due to higher levels of brand-specific buying intent among the pipeline prospects.

The Sales Team is now handling a much larger pipeline of deals with no additional increase in headcount, increasing total sales efficiency.

Impact on Sales Efficiency

Handling deals faster is great, but "Sales Effectiveness" is about how well that effort translates into revenue and not just looking busy.

The far greater impact of Brand Marketing is on sales effectiveness!

If you have more high-intent hand-raisers who already know and trust your brand and are look specifically for YOU, then Sales suddenly become far more effective in their efforts:

• Higher Close Rates – buyers with higher brand-specific intent means more deals result in close-won, making each Sales Rep a more effective revenue generator.
• Increased Pricing Power – if buyers are looking for YOUR brand and not just a generic category solution, the sales reps will have less pressure to offer discounts to push deals over the finish line. Brand awareness and brand trust are key drivers for this.

PART III – Putting All the Pieces Together

For the purpose of this discussion, let's assume the Brand Marketing costs us an additional $50,000 (in keeping with the research that suggests an optimal 50:50 to 60:40 split between Brand and Performance).

1. Brand Impact on Performance Marketing

Let's say the enhanced brand awareness doubles the flow of high-intent leads from search results, increasing the effectiveness and efficiency of our Performance marketing (not an uncommon occurrence).

This means we've just added another $500,000 in incremental revenue at the cost of an additional $50,000 in new Brand Marketing expenses.

So, another 10-to-1 lift in incremental revenue, which we can model as:

Revenue = 4×[Sales Costs] + 10×[Paid Search] + 10×[Brand Marketing]

or

$2M Revenue = 4×[$250k Sales] + 10×[$50k Performance] + 10×[$50k Brand]

But we're not done yet. This was simply looking at how Brand Marketing increased the effectiveness of Performance Marketing. We still need to examine Brand Marketing's impact on Sales effectiveness!

2. Brand Impact on Sales Performance

The increased level of brand awareness among buyers entering the market impacts Sales in the following ways:

1. Less Prospecting – because there's now a pipeline of hand-raisers with high brand-intent, each salesperson can now devote 100% of their time to closing deals, effectively doubling each salesperson's efficiency.
2. Faster Close Cycles – for the sake of this model, let's say that the average sales cycle length drops by 25% (not an uncommon outcome of high brand awareness and brand trust).
3. Less Discounting – further, let's assume that the average sales price increased by 15% entirely due to a reduced need for discounting by Sales due to higher brand trust and brand affinity.

So, the same Sales Team has twice as many qualified leads as it was originally generating when it was spending 50% of its time on cold prospecting.

This is already baked into the model in terms of the increased qualified traffic from Search, partly driven by increased organic and paid brand-aware search driven by Brand Marketing efforts (everything is inter-related here!)

The Sales Team is effectively TWICE as efficient now that Marketing is in the picture, closing $2M in revenue instead of the original $1M simply because Marketing is generating the leads instead of Sales spending 50% of its time doing prospecting.

But there's more!

Because of the shorter Sales Cycles (down by 25%), each salesperson can now close 1/3 more leads in the SAME time!

Here's the math:

Previously, it took 100 days to close 10 leads. I can now close those same 10 leads in 75 days (25% shorter close cycle), which means I can now close 133 leads in 100 days with the shorter close cycles or a 1/3 increase in total deals closed.

So we should be able to see $2.6M in Revenue with the SAME sales team due to increased effectiveness due to a higher fraction of brand-aware high-intent leads flowing into the sales pipeline and the shorter sales cycle.

But there's even more!

There's also less discounting, so we see (in our model) an average of 15% more revenue per closed-won deal due to less pressure for sales reps to discount.

So that $2.6M becomes $3M in total revenue!

So by adding $100,000 in Marketing ($50k in Performance + $50k in Brand), we've taken Sales from a 4-to-1 ratio of revenue production to a 12-to-1 ratio of revenue production.

Here's the math:

• Originally – $250k in Sales cost ? $1M in Revenue (4:1)
• Now – $250k in Sales cost ? $3M in Revenue (12:1)

The $100,000 in additional Marketing costs have created $2M in incremental net-new revenue at a 20-to-1 ratio for the additional Marketing costs.

But this has been done entirely by being a non-linear driver of the Sales Team's efficiency and effectiveness!

The New Revenue Model

The new Revenue Model is:

• $1M in baseline revenue due to Sales
• $500k in incremental revenue due to Performance Marketing
• $1.5M in incremental revenue due to Brand Marketing (due to Brand's impact on increasing the effectiveness of BOTH the Performance and the Sales)

So now, Revenue = 8.6 × [Total Sales & Marketing Costs]

or

Total Sales & Marketing Costs = ~12% of Total Revenue (which is close to the industry benchmark for B2B companies based on Gartner's annual B2B Survey)

This means that Marketing has generated $2M in incremental revenue for a cost of $100,000 or a 20:1 return, compared to Sales, when operating by itself, offering only a 4:1 return.

1. Sales Alone ? 4:1 return ($1M incremental revenue for $250k in costs)
2. Performance Marketing ? 10:1 return ($500k incremental revenue for $50k)
3. Brand Marketing ? 30:1 return ($1.5M incremental revenue for $50k in costs)

So for an additional $100,000 in cost (the Marketing budget), we've increased the return on our investment in the Sales Team by a factor of THREE (from 4x to 12x return).

That additional $100k invested in Marketing drove $2M in net new incremental revenue or a 20-to-1 return.

These are the details of exactly what is meant by – "Marketing is a non-linear driver of those linear business functions like Sales."

What the Final Revenue Model looks like

The final incremental revenue model for Sales + Performance + Brand looks like this:

Revenue = 4×[Sales Costs] + 10×[Performance Costs] + 30×[Brand Costs]

The impacts of ALL those marketing investments are reflected in the increased efficiency and effectiveness of the Sales Team. Marketing produces ZERO direct revenue but facilitates Sales to producing revenue far more effectively and efficiently!

Btw...that final Revenue Model equation is what an MMM Model looks like and the sorts of business insights that an MMM-type analysis can offer!

This also highlights how utterly amateurish and simplistic the Mutli-Touch Attribution (MTA) Models are by comparison.

If you're interested in this sort of analysis of your Sales & Marketing efforts, please reach out to me here on LinkedIn, and let's have a discussion.