May 14

Is Revenue Contribution the Best Executive Metric for Demand Generation Investments?

Marketing Strategy

7  comments

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.

A Better Financial Yardstick for
Demand-Generation Investmentslead measurement

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.

 

About the author 

Brian Carroll

Brian Carroll is the CEO and founder of markempa, helping companies to convert more customers with empathy-based marketing. He is the author of the bestseller, Lead Generation for the Complex Sale and founded B2B Lead Roundtable LinkedIn Group with 20,301+ members.

  1. Wow, you hit the nail on the head.

    In order to get a seat at the table, too many CMOs have unfortunately bet their badges on revenue – something over which they have limited control for many of the reasons you stated in your companion article. No wonder the average tenure is now about 20 minutes.

    So you’re right that good lead management is first and foremost about sales productivity. And I would add, efficiency. It’s a bit like applying lean principles to the lead management and sales process where you keep the pipeline full, keep leads engaged, move them along when their ready, and constantly check for quality. It optimizes sales by preventing them from waiting on leads that will never buy and leaving quality leads at the side of the road. Incremental revenue, then, becomes a natural consequence of the process, not the selling point.

  2. My favorite metric is very similar.

    I take (bookings or gross margin) / (total investment in marketing + total investment in sales) in the period. This CAC (customer acquisition cost ratio) is the single best way to measure a company’s revenue engine effectiveness, and it lets you make investment decisions that move money between marketing and sales to the optimal allocation to generate top-line growth.

    But unlike your metric, it still keeps the main focus on growth, not cost. Thoughts?

  3. JM
    I think you could enhance the CAC measure with a market share metric, universe of accounts and a Revenue Per Account (RPA) metric as well. With these three the marketer can estimate the available opportunity in terms of numbers of accounts, aggregate revenue and per account revenue. Your CAC metric could also be expressed on a per account basis then allowing the marketer to relate revenues and market penetration scenarios to costs and, ultimately, to profit. Most CRMs track new vs existing accounts which is another filter that can be applied on both sides of the ledger. With this understanding the marketer could make better judgements about the effectiveness of current as well as incremental CPL programs.
    I think the main point this post reminds us is that lead gen metrics need to be analyzed in the context of the other components of sales and marketing system rather than in isolation. Thanks to the author.

  4. What I like about David’s and Jon’s metrics the fact that they incorporate costs/investments in both Sales and Marketing. While Sales can more easily be held accountable to revenue contribution, Marketing wears multiple hats that goes beyond lead generation; awareness, thought leadership, product roadmap, etc are often part of the Marketing mandate. Accordingly, Marketing can only truly be held accountable for direct revenue contribution relative to their direct marketing programs supporting those initiatives. Ironically, the remaining programs will indirectly influence revenue but Marketers and Operations people have been trying to quantify that for years without consensus. Perhaps the more logical and practical way of looking at Marketing ROI is to determine the objectives your’e trying to achieve and ascertain the investment required to achieve them. Revenue is simply one objective. I think you’ve just given me inspiration for a new blog post at http://www.myleadagency.com/blog – hope you don’t mind if I credit you in my article. Thanks for sharing your thoughts.

  5. @Darryl Praill
    Thanks for the conversation, Darryl. You make a good point about things that are less directly revenue related. Marketing Research is a good example. And I couldn’t agree more about objectives. Still, I think marketing is a business, one that the investors need to see a return on. And the thing that marketers can’t lose sight of is their financial connection to sales. And at the end of the day, someone is going to look at the top level numbers and ask what kind of return the company is getting. So I think marketing needs better ways to put their investment into a broader context.

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