We’re almost halfway through the year, and before you know it, marketing management will be putting forth arguments for increased budgets for FY12. Over the years, I’ve seen many suspect revenue projections from marketing for budget justification. The problem gets acute during budgeting cycles. Suddenly, all revenue is “incremental.”
Quite often, it isn’t easy to know if a particular marketing investment actually increased revenue. Yes, marketers have an array of useful operational metrics. Even if the company consistently closes the loop on leads, which is often rare, the evidence for incremental revenue contribution is often inconclusive. Naysayers make an obvious counterargument: we would have gotten most of that revenue anyway. And it’s hard to argue with that point of view.
Key Factors in Driving Incremental Revenue Growth
But I wonder if revenue contribution is the best way to think about investments in lead generation. I’m not saying that lead generation doesn’t contribute to this area. But product strategy and customer loyalty are probably much bigger factors in growth. So is the company sales model.
To be sure, the rare, ingenious advertising campaign lights a bright fire that truly sparks demand. (The old “Red X” advertising campaign comes to mind when Intel, back in the late ‘80s, first marketed their computer processor directly to end-users, which led eventually to the Intel Inside concept. Ditto for the first iPad commercials last year. Brilliant examples of demand generation at its finest.)
Still, I wonder if the financial focus of demand generation shouldn’t be on cost savings.
I’m not talking about the tired old cost-per-lead metric. Cost per lead can be terribly misleading as the conversion of leads to sales often falls as the cost per lead falls. This kind of measurement is too self-referencing. The real economics of demand generation connect to sales costs.
This article, Measuring Lead Generation Effectiveness: A Case for a New Approach, details the expense. While measuring the hard-dollar investment in that activity can be a little bit fuzzy, the cost is real. It’s also often a huge number. For that reason alone, it’s worth measuring. If nothing else, the size of that investment will bring a lot of clarity to the executive suite on the potential benefit of making demand generation a real factor in the revenue and profit growth instead of the sideshow in most companies.
The Ultimate Metric for the CFO
From this perspective, the key metric is this: can the company more cost-effectively drive revenue through a particular sales team by scaling lead generation efforts sufficiently to free real sales capacity and revenue production? Let’s state it as two equations, one for each scenario:
X = (sales expense + greater investment in scalable lead generation)/revenue contribution
X = (the sales and marketing expense for the current approach)/revenue contribution.
“X” stands for combined sales and marketing expense-to-revenue ratios for each scenario.
Which scenario yields the better expense-to-revenue ratio?
That’s the million-dollar question. Or the billion-dollar question for many companies.