029 | 6 KPIs Every CMO Should Report in the C-Suite | Studio CMO

John Farkas: (00:00) 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. Uh, 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-served. You know, that’s, that’s the reality of the space we’re playing in. And so understanding what your results look like, how we’re 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.

Mark Whitlock: (01:05) 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 that is critical for the work that we do in marketing and something that is the lifeblood of how we relate to our customers at 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.

John Farkas: (01:46) And has the longest title. So you know what that means?

Chris Turner: (01:49) I like drawing it all out. I like hearing the whole title.

Mark Whitlock: (01:56) You’re going to Venmo me the money for saying that. Right. Okay. And John Farkas, the CEO of Golden Spiral and the host of Studio CMO, of course, is with us today. John?

John Farkas: (02:05) Welcome all you wonderful people out there.

Mark Whitlock: (02:07) And our introductions wouldn’t be complete without introducing our guest. Mark Donnigan is back for a second episode of Studio CMO. 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.

Mark Donnigan: (02:38) Hey, thank you guys. It’s awesome to be here.

Mark Whitlock: (02:41) Glad you’re back.

Mark Donnigan: (02:42) Thank you for having me back. This is great.

John Farkas: (02:44) We’re here to today to talk about KPIs and how do we get from all the tactics and movements and creative and things that go into a marketing presence to bringing the results 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, uh, Mark is here because he’s got some really, well-developed thinking about how to approach that. And Chris is here because every day he lives, breathes, talks thinks key reporting factors. And so, uh, we’re, we’re here to, uh, kind of put these two in the middle and watch them go.

Chris Turner: (03:41) Yeah, again, that’s that’s, that’s why we put it in my title because I live, breathe and eat this data. Yum, yum, yum. Call me, Pac-Man.

John Farkas: (03:51) Let’s tell our listeners a story here. I mean, how do you start framing your thinking about this?

Mark Donnigan: (03:58) 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 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 are 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? I think that’s the place to start.

John Farkas: (05:14) Yeah, because that’s the alignment, right? If you’re understanding the drum beat in this case, that’s coming behind what that’s looking like, then you can find that sync, find that alignment, uh, because you’re coming from the same base principles and fundamental understanding. And I’ve, what you described. We’ve seen a number of times where all of a sudden a COO 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 a CMO’s been dismissed and they’re like, he just didn’t get it. I mean, we were just not on the same page and, and it’s like this mystery, like I, you know, we kept, we kept going, you know, 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, ’cause there, there it is. It’s amazing, right? It’s us sit down and saying, let’s walk through this together. What, what does that look like?

Mark Donnigan: (06:22) It 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’ 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 and in your corner, you know, huddling and trying to figure out, you know, what that person, what he, or she means

John Farkas: (06:53) It has to get objectified.

Mark Donnigan: (06:55) You know, it’s very intentional 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.

John Farkas: (07:27) Yep. 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 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

Mark Donnigan: (07:52) nor should they be thinking for us.

John Farkas: (07:54) You think for you and bring it to me and let’s make sure we’re moving in the same direction.

Chris Turner: (08:01) Then what’s the point?

Mark Donnigan: (08:01) Yeah, exactly. If they’re having to do the thinking then, well, yeah. That’s yeah. That person better be sharpening their resume.

Chris Turner: (08:09) Yeah. Hey sir. I don’t know what I’m doing here. Can you tell me what to do? Um, no, but I can tell you to hit that door real quick.

Mark Donnigan: (08:17) That’s right. Yeah. Yeah. There’s another element to this, um, 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 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 the economics are structured. You know, this is more than just, you know, they’ve done a competitive matrix and they can tell you who, 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, 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.

Mark Donnigan: (09:23) 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. There are people who don’t even have a degree and a 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, uh, 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 CEO is like, this is awesome. The person gets it. But if somebody doesn’t understand how the market is operates, then they can be a phenomenal marketer. Again, the mechanics they can have down cold and be very proficient out, but they’re going to be doing things that don’t impact the business.

Chris Turner: (10:33) Yeah. Because ultimately they have the tools, but they don’t have the rationale or 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 marketer’s mind 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 toolkit 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 relationship. It’s a relationship with the CEO, the CRO, the CFO, but also a relationship to the ecosystem.

John Farkas: (11:21) 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. Step two is taking the time to know the ecosystem that you’re swimming in. Uh, 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 and, uh, and, 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

Mark Donnigan: (11:59) 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, multitouch, you know, very heavy duty. Most of these can apply, but let’s start out with marketing sourced, net new revenue.

Chris Turner: (12:27) 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. The data again is just a tool in your toolbox until you make relationship with it. And that’s why your point about connecting the dots with the CRO slash CFO. Yeah.

Mark Donnigan: (12:45) Us also the CFO that’s right. I didn’t mention the CFO, but that person is very important. Yeah.

Chris Turner: (12:51) The connecting of relationship dots between all, all three of those individuals make sense because the KPIs that you are likely reporting on are coming from a lot of different sources, but it’s still a number it’s still a data point that’s meant to help inform decision-making. So a lot of the, the market sourced net revenue will come from looking at, like you mentioned, any marketing automation, like a HubSpot, like a Salesforce. The idea there 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 ARR 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

Mark Whitlock: (13:44) All right. So the first KPI we need is net new revenue from marketing sources. Okay. Mark, what’s number two.

Mark Donnigan: (13:53) Then I like to report on percent of contribution. So marketing’s contribution to total net revenue. Now, what I think is interesting here, uh, 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 a hundred percent it’s coming from marketing. Um, but generally there’s going to be somebody, whether that’s an SDR BDRs account exacts, there’s going to be a sales team working as well. And, um, you know, I think it’s, it’s always very useful to just look at this percentage of all net new revenue is marketing’s percentage of what’s being generated growing. Is it, is it static? Is it declining? Now this is more, uh, again, depending on the business context, um, certainly declining is probably not good, although depending on the business model, you know, that may 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, is growing, uh, you know, net new revenue by X percent, whatever that is.

Mark Donnigan: (15:06) That’s great. But what is the total percentage of net new revenue and what is marketing’s influence on that? So I, you know, I don’t think we have to spend a lot of time talking about this, but I think it is a, a piece of kind of the, you know, the first metric, um, that is important. And my, um, 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, um, um, metric, uh, not necessarily that they’re an order, but, uh, this is the third one that we’ll talk about qualified pipeline generated is what I, I think most people would call an MQL, except in my observation, most MQ Wells are, I got a name, an email address, you know, hot dang. I got me an MQL, you know, let’s chalk one up for marketing.

Mark Donnigan: (15:58) You know, we generate 3000 emails and, you know, we’re rocking this month, you know, and, uh, come on. He, most of it’s junk, they’re not even real emails. It’s like, you know, like, exactly. So this is why I really like using the word qualified pipeline. And the way I define 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, um, 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.

Chris Turner: (16:54) And you’re saying that from your perspective, as part of the business, what revenue could be generated by this? Yes. Yes.

Mark Donnigan: (17:02) I don’t mean that the size of their business, that’s easy to get. I mean, you know, Clearbit will give you all that information, right? What’s

Chris Turner: (17:09) The impact to us.

Mark Donnigan: (17:10) Yes, yes. Now the reason why I argue that this is really the right way to define an MQL is again, you know, most MQL is, are just a name and an email address, or in some cases, just an email address and, 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 like Clearbit, for example, and any of the hundreds or thousands of other tools that are out there, um, then, then, you know, now you’ve got something to begin to work with. I consider this an MQL.

Mark Whitlock: (17:45) At Golden Spiral. Well, we had to do was create a whole graphic to show the six criteria of a lead. And if, if, uh, a contact did not meet those six criteria, we could not call it an MQL. And that was part of it. 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, uh, when you report on them, everybody can have confidence in that. I love that.

Chris Turner: (18:22) Exactly, exactly. Cause 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, I’m 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, 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 convert.

Mark Donnigan: (19:10) And this also really helps in that, uh, sometimes contemptuous, uh, COO CRO relationship or, you know, you know, head of marketing, head of sales. Um, 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, you know, the VP of marketing, VP of sales and, you know, they’re always suspect of each other and you know, that’s just, um, uh, we, 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.

Chris Turner: (19:46) Yeah, exactly, exactly. I mean, I lean towards what Accenture was using as a terminology about pioneering CMOs. Those, those pioneering CMOs are our 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, how we’re using that data. When we say data driven, what does that actually mean?

Mark Whitlock: (20:09) And we’re going to link to that Accenture report about pioneering CMOs, come on over to studiocmo.com/029 that’s studiocmo.com/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.

Mark Donnigan: (20:43) Now let’s talk about the fourth, uh, reporting, you know, metric or KPI that I think is very useful to use, and this is sales cycle length and win rate. Um, and if you have, you know, multiple channels that you’re really investing in, um, then you really need to break this out by channel because, um, not only can, it, it, it will inform where you invest. Um, but it, it’s just, it’s important to know because not all channels, uh, have unlimited, uh, capacity or output. And so you might have a channel that’s just rocking, you know, where you’ve got, um, 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 95% 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.

Mark Donnigan: (21:46) That’s all you’re going to get from that particular channel. I’ll get practical here. Vudu. I built a sales channel that was through these custom installers. Well, there were really only about one to 3000 really viable, uh, 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, um, you know, tens of thousands of quote unquote dealers who sold their products on their, you know, on their distribution lists. But the reality was there were like one to 3000. So part of what actually caused us to even pivot away from that channel is it, is it, I simply ran the numbers. I mean, I just simply did the math. And I said for our consumption model, when you’re renting a three to a $5 movie and, and, and it has nothing to do with, uh, you know, with, with how wealthy someone is in terms of where they can afford to rent movies.

Mark Donnigan: (22:47) 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 at what my revenue is and it wasn’t going to make the number. So we ended up pivoting to a whole different strategy, but, um, that’s, that’s an example where sales cycle and wind rates, you know, very, very important. Now there’s two things I like to think about relating to this, and that is efficiency and effectiveness. So efficiency. Um, we don’t have as much control over, you know, so I’ll just use an example, um, uh, out-of-home advertising so billboards, right. Um, you know what I can’t track who saw it, I can’t, the best I can do is get some information like 50,000 cars a day drive past billboard.

Mark Donnigan: (23:45) That’s it? That, that that’s it. So, so is it efficient? Um, I don’t have any control of 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’s 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, uh, or, you know, or the, uh, or the communications vehicle, but effectiveness that is where, you know, we can, we can tweak our targeting, we can tweak our creative tweak, our copy, tweak our offer. We, we can do things that are in our control to improve the effectiveness of whatever it is that we’re doing.

Mark Donnigan: (24:35) Um, and so this is, um, uh, you know, I, I really think the tracking the sales, uh, uh, cycle length and also the win rate is just, you know, it’s, it’s really, it’s important. It’s very important. And it’s important to be specific. It’s important to look at it channel by channel, um, 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 rate is going up. Yeah. But why is our revenue number going down? You know, like what’s happening there, you know? So in some cases, um, 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 sales cycle length.

Chris Turner: (25:49) Yeah. 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 were kind of using billboard— traditional media, you can sign off now,

Mark Donnigan: (26:09) I’m not using efficiency as a, um, comparison, uh, to say, Hey, this particular channel, um, 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, that’s what, 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

Chris Turner: (26:36) There’s only so much that that that channel will produce no matter what material, what marketing elements you throw at it, it has a, and that threshold will never be exceeded.

Mark Donnigan: (26:46) Yeah, that’s right. You know, these, these are very interesting KPIs that we just talked about, but now let’s get into how we calculate costs. Uh, specifically I’d like to start with SQL and then we’ll go to CAC. And, um, I, I think that it’s very important, uh, for marketers to think about the fact that, um, let’s just look at SQL first. So one of the, one of the traps it’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 a quarterly basis, um, if I’m reporting on a quarterly basis and my sales cycle length is roughly 60 days, 75 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 last, you know, and kind of 60 or 75 days, then I guess you could argue that if I’m calculating, um, a, um, a sales qualified lead cost SQL cost, you know, over, over 90 days, then, uh, it, it, it’s, it’s close. It’s close enough, but what happens a lot is that the sales cycles actually longer than the window.

Mark Donnigan: (28:09) And, and, and especially if I’m running this calculation on a monthly basis, 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’s so many competitive factors. There is just, nothing 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, um, 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. Um, 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.

Mark Donnigan: (29:02) Okay. So let’s say that I want to calculate a SQL cost for March. Okay. Just in this illustration. So what I would do is I would take my previous two months or 60 day periods. So I’d take January and February. I would take the, uh, 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, on out-of-home? You know, since we were just talking about that, what am I spent all of my marketing now, of course you didn’t calculate SQL by, but that is really incomplete because no one just stays in a single channel. You know, they’ve been, you know, they, they, they encounter us, uh, you know, an out of home and then they go to our website and then we retarget them on Facebook.

Mark Donnigan: (29:55) 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 for most, most businesses. So we look at our total marketing investment in January and February, and then we divide that by the number of, uh, of SQLs that were produced in March. Okay. And then that gives us what the SQL is roughly for that period of time that, um, we were, you know, we were marketing to the prospect and then they, 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, is, is a real lead, you know, real sales qualified leads.

Chris Turner: (30:45) 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 ain’t got time to talk about per channel SQLs. 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, cause we also have SQL alongside and an SAL you know, a sales accepted lead, and a lot of different organizations will have a number of different definitions.

Mark Donnigan: (31:17) 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, on what an org, you know, whether an organization uses SQLs or uses SAL or, or, or marketing qualified lead, 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 agreement, there’s understanding there’s mutual understanding. That’s that that’s what is most important, but now let’s move to calculating the customer acquisition cost CAC. And this is one. And I, first of all, I have to give a massive shout out. Um, if, if the listeners, uh, anyone listening has not been turned on to Andrew Chen at an Andreessen Horowitz, uh, he ran growth at Uber. Andrew Chen is, uh, is, is a foremost thinker in this whole area of growth and calculating customer acquisition costs and looking at it, SAS business models, um, very, very worth going and reading. He’s written a lot, um, uh, you know, really, really, really super sharp guy. He, um, has, has done a lot of work with a guy named Brian Balfour, who, uh, I believe was president of growth at HubSpot. Uh, he’s, he’s no longer there. He now runs an organization called Reforge. Um, these guys have, 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, um, you know, these ideas I’m about to present around how to calculate CAC really came from them. And, um, what, what they pointed out is that the weakness in almost all CAC calculations is exactly what I just said about, uh, uh, about SQLs.

Mark Donnigan: (33:14) And that is that many calculations most do not take into account. Um, the, the, the, the sales process time, and therefore they are completely, um, uh, they, 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, wait, 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 5,000 a month, um, that’s probably meaningful to you, but the error is not as great as when you’re spending 5 million a month, you know, and, and, and yeah, and, you know, it’s the old, it’s the old, um, you know, analogy of, uh, if you just half a degree off and you only walk 10 feet, you know, you’re, you’re really not far off from where the baseline is. Right. But you go 10 miles, you go a hundred miles to go a thousand miles. And next thing, you know, you’re like, wow, I’m, I’m way, way, way, way, way off the Delta’s bad.

Speaker 7: (34:16) Yeah. The Delta that I was just about to say that your Delta is extremely bad, extremely bad. Yeah. So

Mark Donnigan: (34:22) 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. Um, and, you know, I’m sure we can link up to some, some information here also because there’s some, uh, you know, there’s, there’s some really great articles that have been written about this, where someone wants to dig in. But, um, uh, if we think about what the, um, 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 period of time. So, you know, if, if I’m just going to make it super easy, um, just because, um, you know, I’m not the greatest at math. Um, you know, if I’m calculating this on a monthly basis, and, and I, you know, I spent a thousand on marketing, I spent a thousand on sales, so I have 2000, you know, I produced a, um, uh, you know, 200, uh, customers, you know, net new customers, then my cost was 10 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,

Mark Donnigan: (35:34) Those, uh, new customers, and I’m four in that period actually were result of what I spent up to two months previous. And so what if I actually tripled my marketing spend for that period, for whatever reason, well, now I’m going to be under reporting, 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 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. Um, then also then I’m going to be over-reporting. So, so here’s what, um, uh, 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 a real world. So let’s say that I want to calculate CAC for March. Okay. 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 the cause let’s assume I have a 60 day sales cycle.

Mark Donnigan: (36:45) So let’s just say for sake of illustration, I spent $10,000 on marketing in January, and I spent $20,000 in February. Okay. So again, I’m calculating CAC from March, so that that’s 30,000, right. For marketing. Now I’m going to add it yeah. To my sales expense in March. Okay. So that would be 30,000, uh, uh, that I spent, let’s just say, for example, let’s say I spent, I spent 30,000, so now I spent $60,000 and then I divide it by, let’s say that I got 600 new customers in March. Okay. So now I have 60,000 divided by 600, which gives me a CAC of a hundred dollars. Okay. And what this does is this accounts for the sliding window there. That just helps me understand exactly where my, uh, 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, um, and this is difficult to do, but often salaries and kind of loaded expenses are left out.

Mark Donnigan: (37:59) 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 a hundred thousand dollars. And I got 20 people over there. So I’m burning $2 million a year, you know, but, 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, and in the middle stage, um, we really do need to take into account the whole picture when we’re calculating, um, uh, you know, what the customer acquisition cost is. And we’re reporting on that.

Chris Turner: (38:39) So Mark, once they’ve defined this and they 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 in 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, help them think up, help them sync up. At that point,

Mark Donnigan: (39:07) I have observed that there are basically two types of CEOs. There are, uh, relative to this discussion, uh, obviously, you know, um, it can be varied, but relative to this discussion, there are CEOs that fundamentally believe in their core, in their soul, that marketing works, that marketing is needed, that, um, that, uh, you know, that, that marketing is critical to their business. Okay. They just believe it, even when there’s maybe not too much evidence to that, you know, but they believe it because most of them have lived. Exactly, exactly. That. 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, 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, or they, their experience is not maybe as complete, they’ve not seen at work, or maybe they’ve had some quote unquote bad experiences where they invested.

Mark Donnigan: (40:16) And they felt like, gee, I got just absolutely nothing. And, and depending where they are, how far they are towards the marketing is not needed. And, and doesn’t work, um, really depending where that CEO is on this spectrum is how the CMO needs to, um, apply this data. There also is the, um, you know, just the, the, the, the personality and the behavior type, right? So if the CEO is a very numbers driven metric, left-brain leaning person, then I’m probably going to present this information very much just by the numbers, less, uh, narration. And, um, but, but be ready and available to explain, you know, if they say, okay, why is this number important? Or, Hey, last quarter you told it was here. Why is it now here? What does that mean to us? I better be able to, but, but I’m not going to pack my slides with a bunch of that.

Mark Donnigan: (41:17) 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, for the CMO or excuse me, the CEO for the CEO that is fundamentally believes in marketing. I’m going to present data in more of a here’s how here’s, w 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, and the resources that we have. I have been fortunate enough to work for. Um, and, 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. No CYA there. Yeah, exactly, exactly. However, 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, um, um, aquas.

Mark Donnigan: (42:37) It was actually a cost per action is what I was really testing because it was way too early to say, Hey, we’re acquiring a customer, uh, because our sales cycle was in some cases multi-year. So, um, 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,

Chris Turner: (43:00) No, that’s excellent. Just to stop you there for a second. That’s a great point. Because as we’re talking about some of these sales cycles and some of these closed new business, it may be 1820 months before a business closed deal happened.

Mark Donnigan: (43:15) 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 mean?

Chris Turner: (43:30) What does it mean? Like,

Mark Donnigan: (43:33) And what are the key steps that, that needs to happen before revenue results? If they don’t understand that, then they’re just going to be kind of spraying and praying

Chris Turner: (43:43) It’s to understand that client’s journey what’s what does the usual process, the buyer’s journey, but it’s really understanding those things.

Mark Donnigan: (43:51) So I wanted to test cost per action. And so, um, you know, I, I took budget. I mean, I didn’t have a massive budget, but I, 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, I took, I don’t know, I think it was a couple thousand bucks and I, and I ran some, some, 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 and LinkedIn ads. And, and here’s what found, and the numbers actually aren’t that bad. It’s like, it’s a hundred 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, yeah, we would to do that. So this makes sense, but here’s why I’m not going to do it.

Mark Donnigan: (44:49) And so that was, you know, and twist, that was 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’s 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,

Chris Turner: (45:13) That when we’ve run some of these, I don’t want to call them tests or some discretionary funds. But when we’ve, when we taken a look at a channel and said, let’s, let’s go down this path. We’ve actually identified ways and times that that channel works and ways and times when it does it 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 tide that Rose during a period of

Mark Donnigan: (45:46) Even all of these metrics, all this stuff that we’re talking about, like what is the business results? And at the end of the day, um, if, if it, 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, you know, they, they, 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.

Chris Turner: (46:24) I’m a big movie guy. So I was going to say, Loki in one of the last Avengers movie said, “Experience is experience.” It doesn’t have a color. It’s an experience. And data is data. Again, it’s, it’s part of the tool set. 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 that 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 them direct the path. And I think it comes back to an ethical understanding that even when it’s bad performance, by making sure everyone knows it’s bad, you’re preventing them from going down a path that will ultimately end, 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 SQLs, look at these open rates, and you’re not saying this was new business generated by email you’re, you’re, you’re creating the division between sales and marketing, but also a division between success and failure of your company. And if you care about your company, you care about winning new business.

Mark Donnigan: (47:32) 100%. Boom, drop the mic.

John Farkas: (47:33) Great mic drop moment there. That’s awesome. This is some of the most essential understanding that a CMO can have as you look at, uh, at your position in the organization, how you maintain that position in the organization and how you understand what it means to grow. Uh, and as you look at the horizon line of your, uh, of your company and your role in helping move that horizon, uh, to a better and better place, I think that, uh, we’ve cut. There’s a lot that we’ve covered here, obviously. Um, and there’s lots of subtext below each one of those six points. We’re going to be, uh, providing a number of resource links.

Mark Whitlock: (48:16) You bet the show notes for this episode are going to be very important to you. So come on over to studiocmo.com/029 that’s studiocmo.com/029. And check out the show notes. We’re going to link out to an excellent article on KPIs 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 a number of factors, but you’ll see more of his insight and genius in that PDF. And finally, we’re going to link you to an ebook written by Chris Turner on SEO. Chris is our SEO genius, and he’s put together a one, two, 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 studiocmo.com/029 and download one or all of these resources.

John Farkas: (49:14) Hey Chris, thanks for carving some time out of what I know to be your exceedingly busy schedule to join us here today. And, uh, Mark, thank you again for bringing some real world experience in here with some very quantifiable and implementable insight.

Mark Donnigan: (49:35) Well, you’re very welcome. And thank you for having me again,

Chris Turner: (49:39) 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.

Mark Whitlock: (49:47) I appreciate you guys. Coming up on the next episode of studio CMO, the head of marketing at event bright, the head of growth at Prezi and somebody who led marketing at companies like Vonage and Chartcube, Jack Mardack. 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.

John Farkas: (50:17) and make your buyer the hero.

Mark Whitlock: (50:20) We’ll see you next time on Studio CMO.