Library of emails
May 30, 2020
Rethink your lead-gen performance
Recommended podcast: The State of Demand Gen
What Not to Do: Don’t have a junior marketer or an agency manage your pay-per-click (PPC) ad program unless you know enough to see whether you’re getting ripped off.
I hope May was a better month for you than March and April.
Just 22 work days left in Q2.
In this week’s issue…
This week’s theme is the economics of lead generation.
As businesses reopen, we’re all looking for better ways to replace any revenue or pipeline we’ve lost.
And if we’re lucky enough not to have lost revenue or pipe, we’re looking for ways to cut costs to improve effectiveness, cash flow, and profit.
Lots of B2B companies do a poor job of lead generation. It’s often a source of antagonism between sellers and marketers.
And it’s a top preoccupation for leaders of both sales and marketing.
So this week we hit it hard.
What not to do
In this issue, you’ll find a new section called What Not To Do.
I swiped the idea from a book recently enjoyed, by Jason Jordan. It’s Sales Insanity: 20 True Stories of Epic Sales Blunders (and how to avoid them).
Jordan, a long-time sales consultant, is a skeptic of best practices. (I am too. More on this in a future issue.)
But Jordan is a firm believer in worst practices. These are things you should (almost) never do.
I’ve also started making a list of worst practrices. It’s already long.
I’ll share 1 or 2 with you in each of the coming weeks.
Your reading time this week is about 11 minutes if you read every word at 200 words per minute.
MARKETING | SALES | LEAD GENERATION | METRICS | PROCESS
How many of the leads your marketing generates eventually convert to revenue? (The answer may shock you.)
Something is broken in the way many B2B enterprise SaaS companies generate sales leads. And it may be a problem for your company, too.
Less than 2% of the leads many tech companies generate ever produce any revenue. That means for every $100 they spend on lead generation, they get less than $2 of revenue.
That’s an appalling return on investment.
Can it really be that bad?
The numbers come from a study Forrester Research did in 2012.
“But those must be out of date,” you say. “A lot has changed since then.”
Yes. But many B2B SaaS companies still do lead generation the way it was done in 2012.
This is especially true for sales-led, well-established companies that haven’t invested enough in updating their marketing.
Too many companies think they’re doing a good job when they aren’t.
Their cost per lead looks low relative to their revenue per sale. But they’re looking at the wrong numbers.
Who needs this insight
This article is important reading for chief revenue officers (CROs), marketing leaders, sales leaders, and chief executive officers (CEOs) of B2B SaaS companies of all sizes.
The more your company invests in lead-generation, demand-generation, or sales development activity, the more urgent this topic is for you.
You needn’t read further if your company is among the minority that monitor lead-to-revenue performance.
If you know your numbers and are satisfied with the, this article isn’t for you.
But if you have any doubts about your lead-to-revenue performance, keep reading.
Why it matters now
Following the economic battering that many SaaS companies have experienced since March, they’re short of revenue and looking for ways to cut expenses.
What better time to challenge the status quo in your company? You could look like a hero.
With a low conversion rate for leads to revenue, you need a large number of leads to generate a small amount of incremental revenue.
Your sales team clamors for more and better leads. But in a recession, good leads are harder to come by.
It’s probably easier to improve your conversion rates.
The wastefulness of conventional lead generation drives up customer acquisition cost (CAC).
That’s because sales development reps (SDRs) and account executives waste time with leads that aren’t going anywhere.
When your marketing activity delivers higher-quality leads, your total sales cost can go down dramatically.
Better leads require less effort from both SDRs and account executives.
If you operate anywhere near 90% waste, you might as well flush most of your marketing and business-development money down the drain.
By improving lead-to-revenue performance, your company can both reduce cost and increase revenue.
When you do either, you improve both cash flow and profit. When you do both, it’s like magic.
- The old-school lead funnel persists in many B2B SaaS companies. It’s especially likely to be the norm in sales-led organizations.
- When you consider average conversion rates from lead to revenue, you see how inefficient the conventional funnel is. This is likely to be a problem even for companies that have well-established inbound marketing programs.
- The abysmal performance of old-school lead generation creates antagonism between sales and marketing teams. It feeds mutual mistrust and anger. By doing so, it makes it harder to align your teams.
- Every business function on the extended revenue team pays a price for this inefficiency.. Marketing generates useless leads. Sales stops calling most Marketing-Qualified Leads (MQLs) because they’re a waste of time. Marketing and Sales point fingers at each other. Companies waste a lot of money on employing and managing SDRs. SDRs have the unenviable, high-burnout job of trying to find gold in heaps of rubble.
- The key performance metrics (KPIs) for old-school lead generation are likely to reward further inefficiency. Use of such KPIs may prevent marketers from testing innovations that could improve performance.
- The longer your sales cycle, the harder it is to track your lead-to-revenue performance. That’s because during a long decision process, customers are likely to have many interactions with marketing content and sellers. It’s hard to know which contribute to revenue.
- You need good attribution data to link specific revenue to specific marketing tactics. If your company is a startup, you may not be able to afford such data. Or if your marketing budget is small, it may not be worth the cost. Don’t worry, you can still track leading indicators, such as marketing contribution to sales pipe.
- Account-based marketing (ABM) can help improve performance by offering a different approach, with new KPIs.
- Besides ABM, other methods can also help. Product-led growth (PLG) offers an alternative. But adding a PLG strategy can be hard for legacy SaaS companies that sell high-ticket, complex products to big companies.
- Paradoxically, your lead-to-revenue performance can improve if you focus more on branding and less on lead generation. More on this in future issues.
The awful lead-to-revenue funnel in detail
Figure 1 shows a conventional lead-generation funnel. The conversion rates come from Forrester Research’s 2012 study.
They surveyed about 200 B2B tech companies with 100 or more employees in the United States and Europe.
(See Sources, below, for details.)
Note that these are the conversion rates for top-performing B2B companies.
Forrester defines top performers as companies where marketing contributes more than 50% of total sales pipe.
They found that the average rate for all companies was a miserable 0.75%.
How these numbers relate to your company
It’s not so important whether Forrester’s 2012 numbers are still accurate today
Here’s what’s much more important to you:
- Your own conversion rate for leads to revenue
- The implications for your customer acquisition cost (CAC) compared to your customer lifetime value (LTV)
The table in Figure 2 shows how Forrester’s pipeline metrics might translate into dollars and key performance metrics for your business.
Figure 2. Conversion metrics applied to hypothetical costs and revenue
The numbers in the pale yellow cells are variables for your business. The spreadsheet calculates all the other numbers from the variables.
(For a copy of this simple Google Sheet spreadsheet to model your own numbers, go here.)
Note that in this case, the average cost per lead ($450) seems reasonable for a product that sells for $75,000. But you need 100 leads to close a sale of $75,000.
That’s a total cost of $45,000 for enough leads to close just one sale.
Factor in your customer acquisition cost
Then add in your total sales and marketing cost per sale, or your customer acqusition cost (CAC).
Your CAC includes all sales and marketing costs per sale, including salaries, commissions, and travel for all members of the extended revenue team. Plus the cost of all marketing initiatives.
Your average CAC could easily be $65,000 per sale (including the $45,000 per sale for leads).
Your company’s CAC will vary with these factors:
- The size of your revenue team
- Your compensation plans
- Your marketing budgets
- The number of deals you close in a year.
Let’s say your CAC is $65,000. That’s plausible, considering that you spend $45,000 to produce 100 leads for a single sale.
So you spend almost as much to acquire a customer as you get from your first year of revenue.
When you add in your operating costs, it probably takes more than a year for your new customer to be profitable.
Now consider your average customer lifetime value
These numbers don’t sound great. But they look better when you consider average customer lifetime value (LTV).
If your average customer retention rate is 3 years, your LTV is $225,000. (That’s 3 years X your ACV of $75,000.)
What’s your LTV-to-CAC ratio?
David Kellogg, David Skok, and other seasoned investors in SaaS companies look at the LTV-to-CAC ratio.
They say it’s among the most important metrics for checking the health of a SaaS company.
The rule of thumb is that your LTV:CAC ratio should be 3 or higher.
The higher the ratio, the better for the valuation of your company.
With an LTV of $225,000 and a CAC of $65,000, your LTV-to-CAC ratio is about 3.5.
That’s outside the danger zone.
And you know you have plenty of room to improve.
You know it from your terrible lead-to-revenue conversion rate.
To understand the efficiency of your sales and marketing operations, you must know these numbers for your SaaS business:
- Your lead-to-revenue conversion rate
- Your marketing contribution to sales pipe
- Your customer acquisition cost
- Your customer lifetime value
- Your ratio of customer lifetime value to customer acquisition cost.
“The New Physics of Lead-to-Revenue Management.” Lori Wizdo. Forrester Research. March 28, 2013. [Downloadable PDF. 14 pages. No charge. This document is hard to find online if you’re not a Forrester subscriber. I found a free copy here, but I didn’t download it because of security and privacy concerns with the hosting site.]
“The Ultimate SaaS Metric: The Customer Lifetime Value to Customer Acquisition Cost Ratio (LTV/CAC).” David Kellogg. Kellblog. July 30, 2014.
“Startup Killer: The Cost of Customer Acquisition.” David Skok. ForEnterpreneurs blog. Undated post, but apparently published in 2010. [The 150+ comments that follow the post are almost as valuable as the post itself.]
“The Demand Gen Waterfall.” State of Demand Gen podcast. Chris Walker and Gaetano Di Nardi. Episode 12.
Try the State of Demand Gen podcast
If you value insights about the strategies and tactics of lead generation, I highly recommend a podcast I discovered this month.
It’s called “The State of Demand Gen.”
Its host is Chris Walker, CEO and founder of Refine Labs.
They’re a consulting and services firm that specializes in demand-generation strategies for B2B companies.
Chris is one of the sharpest demand-gen markers I’ve found.
Gaetano Di Nardi is often a co-host. He’s director of demand gen at Nextiva, a company that provides cloud services for voice.
I love the data-driven views of this pair. I’ve geeked out on all 12 episodes, and they’ve fueled ideas for plenty of future Driven articles.
So if demand gen is your thing and you’re looking to shake things up in your company, give this podcast a try.
“The State of Demand Gen” is available through Apple, Spotify, and other podcast distribution sources.
WHAT NOT TO DO
Don’t pay the Google ‘stupid tax’ for pay-per-click ads
Pay-per-click (PPC) advertising can be a great way to generate leads for your business.
But it can be tricky. There are a lot of ins and outs to understand.
Perry Marshall, who wrote one of the top books on PPC, talks about the “stupid tax” many companies pay to Google and ad agencies for not understanding what they’re doing.
If your company spends more than $50,000 a year on PPC, you could be paying much of that as stupid tax.
So don’t put an agency or a junior marketer in charge of a substantial pay-per-click (PPC) ad budget. Unless, that is, you know enough about PPC to see if they’re wasting your money.
I hadn’t noticed until last week that Driven subscribers in other countries have reached about 11% of total circulation.
Driven subscribers outside the United States live in these countries:
Welcome to Mahogany, Yasmine, Yamen, Elvin, and Costas—all recent or new subscribers outside the U.S. .
You have my commitment to be less exclusively U.S.-centric in our coverage. I’ll try to use fewer local references and less U.S. slang and jargon.
But please understand that it’s often hard to find SaaS industry data for other countries.
Thanks for referrals
Thanks to H.S., J.S., and a handful of others for referring new subscribers.
Even with your help, Driven subscribers remain a small tribe. Many more people could and should be getting value from this weekly information.
How are we doing?
In the past 31 issues, only 2 readers have unsubscribed. And average open rates are abiout 55%. These are crazy good statistics for a weekly email.
As circulation grows, open rates normally plummet to around 5%.
So thanks for your loyalty and continued interest.
But you confuse me. Although your open rates are great, Driven’s growth rate doesn’t correspond.
My goal in January was to have 3,000 subscribers this year. That’s a very long way off, and the year is nearly half over.
Only a few readers click on links. So it’s hard to know how much you value specific articles.
Are you too busy? Indifferent? Satisfied with the amount of detail I’m providing?
Please share or unsubscribe
I need your feedback to keep making Driven better.
If it isn’t providing the value you expect, please unsubscribe now.
In the absence of referrals and clicks, cancellations provide more useful feedback than nothing.
If you value Driven, please take a moment to share it with someone you work with.
Belated kudos to subscriber A.G., who recently took a new job as chief revenue officer (CRO) at a U.S. provider of SaaS supply chain software for the retail industry.
We’ve known each other for about 20 years.
A.G., your new employer is lucky to have you..
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