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How to Manage Sales & Marketing Spend Like an Investment Portfolio

Sep 2, 2020 11:42:10 AM

Most early and growth stage SaaS companies squander precious time and expensive capital thrashing through sales and marketing approaches that constantly change without any reliable data to inform their decision-making.

According to venture capitalists, at least 50 percent of sales and marketing spend by growth stage SaaS companies is nonproductive, resulting in skyrocketing customer acquisition costs (CAC), shortened capital runways, depressed growth, and ultimately lower valuations.

This article isn’t about blaming sales and marketing people, because it’s (usually) not their fault.

This is about reframing the way SaaS CEOs and revenue leadership teams manage their investments in new customer acquisition.

Here’s what we’ll cover:

Let’s first look at what SaaS companies typically invest in sales and marketing in order to acquire customers.

 

How Much Should SaaS Startups Invest in Sales and Marketing?

For venture capital-backed SaaS companies, customer acquisition investments range anywhere between 24 and 384 percent of revenue. That really narrows it down, doesn’t it?

The truth is, the answer largely depends on company size, stage and growth rate. It also depends on who you ask!

The Edison Partners 2019 Growth Index reported that fast-growing companies in their portfolio spend on average 50 percent of their revenue on sales and marketing, whereas slower-growth companies spend on average 24 percent of their revenue on sales and marketing.

Edison Growth Index SaaS Sales and Marketing Spend as Percentage of Revenue

Tomasz Tunguz of Redpoint Ventures reported that the very fastest SaaS growers he’s observed spend more than 300 percent of their revenue on sales and marketing when they are in the early growth stages.

Redpoint TT SaaS Sales and Marketing Spend as Percentage of Revenue

With those reference points in mind, let’s look at an example of a $10 million ARR SaaS company that is investing 50 percent of their revenue ($5 million) on new logo acquisition.

 

Intro to Managing Sales and Marketing Spend Like a Portfolio Manager

A typical SaaS company would view that $5 million sales and marketing budget as money to split between marketing people, programs and advertising and sales people. Sales would measure pipeline against their goal and separately, marketing would measure leads against their goal.

How to Manage Sales and Marketing Spend Like a Portfolio Manager

A data-FIRST SaaS company would view that $5 million as an investment portfolio, where the collective leadership team serves as the portfolio manager. Together, they would work to allocate their available cash into customer sourcing strategies that yield the most new customers in the most cost effective way.

Managing growth like an investment portfolio manager isn’t for the faint of heart.

It requires precise end-to-end process mapping and measurement of every strategy, a tedious exercise that growth stage SaaS companies don’t typically prioritize as they build their go-to-market engine.

 

Shortcomings of Typical SaaS Sales and Marketing Management

Typical SaaS companies pay attention to their costs per lead and how that CPL varies across different lead generation strategies.

Unfortunately, strategy-specific measurement generally stops with the top of the funnel (leads/MQLs) and does not continue through to the middle of the funnel (meetings set and meetings held) and bottom of the funnel (opportunities and deals).

Most companies use Google Analytics, Hubspot/Marketo to track lead sources at the top of the funnel, then they lump all of their leads together and use Salesforce or a pipeline analytics tool to measure sales cycles, pipeline conversion rates and other bottom of the funnel metrics.

These reporting silos create a situation where what appears to be an awesome strategy based on top of funnel lead volume and costs per lead may in fact be an incredibly inefficient strategy when middle and bottom of funnel resources are considered.

Perhaps certain lead sources don’t convert into deals at a high rate, or maybe resources are being applied to low yielding strategies at the expense of more productive strategies.

Most SaaS companies are completely blind to the end-to-end cost effectiveness of each strategy.

They (might) know what they pay for leads in each ‘asset class’ but they don’t know what the total return for each one is. It makes it impossible to ever compare the effectiveness of each asset to each other!

Going back to the portfolio manager analogy...can you imagine a portfolio manager knowing what they paid for each asset, but the only return number they can see is the total portfolio return? No visibility into the returns for each underlying asset in their portfolio or the hidden costs or fees associated with each one, just the cost and total return.

That would never happen.

The main responsibility of an investment portfolio manager is to allocate capital into assets that will yield the highest risk-adjusted returns. That demands understanding both the cost of the asset and the relative return on an asset by asset basis.

⇒ The bottom line: For each strategy, you have to understand the top, middle, and bottom of funnel economics combined. Only then can you compare your strategies for their relative effectiveness and make good decisions on how to invest your money and put more cash behind the more productive customer sourcing strategies...

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Real-Life Example: Managing Sales and Marketing Spend Like a Portfolio Manager

Recently, one of our customers was pouring advertising dollars, SDR resources and AE resources into an inefficient Facebook Ads strategy, which was pulling resources away from other more effective strategies.

Sadly, it was leading to lower performance across the entire business.

Here’s the recent SellScience™ insight report that we wrote for them:

Insight: Consider scaling back resources applied to Facebook Ads Strategy - we're over investing at the expense of near-term bookings.

Over June and July, ~28% of SDR resources and ~43% of AE resources were applied against the Paid Social - Facebook strategy, but that strategy only yielded 7% of total company MRR bookings. Had those resources been applied against more productive strategies, the June/July bookings would likely have been materially higher.

Facebook Ad targeting issue or selling issue?

So the question with the Facebook strategy is do we have an ad targeting issue or a selling issue?

The conversion rate from call attempts to Meetings set is similar between the Inbound Unpaid strategy and the Facebook strategy, suggesting that targeting may be appropriate.

However, the bottom-of-funnel (BoFu) conversion rates in the Facebook Ads strategy have been very poor and the current amount of both SDR and AE resources applied to this strategy are not sustainable unless the BoFu conversion improves. This would suggest that we need to enhance our selling skills.

There appear to be two possible attack paths to improve this situation:

  1. Use less costly resources than existing SDR team to process Facebook Lead 1s into meetings (e.g. Conversica, offshore first responders, etc.)
  2. Enhance the sales team's skills at selling to these particular prospects.

In the meantime, it is recommended that the resources applied against this strategy be scaled back until overall conversion rates improve dramatically. Otherwise, short-term aggregate bookings will continue to be at risk.

Another alternative is to add selling capacity so we aren't detracting from the productive strategies while we try to optimize the Facebook strategy.

Facebook bottom-of-funnel conversion rate drains AE resources

As the figure labeled Facebook vs. SDR Prospecting below shows, the April-July combined conversion rate from Meetings Set to Deals was 3.3% for the Facebook strategy. Contrast that with 17% for the SDR Prospecting strategy. This implies that 30.6 Meetings Set are required from Facebook leads to generate a deal while only 5.9 Meetings Set are required from SDR Prospecting to generate a deal.Facebook v. SDR Prospecting

With a ramped AE capable of handling 52 set meetings per month, this implies the Facebook strategy requires 0.59 ramped AE per deal which equates to ~$7,062 at a $12K/month fully-loaded cost, while the SDR Prospecting strategy requires only 0.11 ramped AE per deal which equates to ~$1,355.


Facebook Bottom-of-Funnel Cost SDR Prospecting Bottom-of-Funnel Cost
$7,062 per deal $1,355 per deal

 

 

Facebook leads also drain SDR resources to generate required # of Meetings

From the Facebook funnel flowchart snippet below, you can see It takes approximately 79 calls against the Facebook ad leads to set a Meeting. 

Paid Facebook L1 Calls to Set a Meeting

And as the SDR Prospecting flowchart snippet shows, it takes approximately 110 calls in SDR Prospecting to set a Meeting.

SDR Prospectring L0 Calls to Set a Meeting

Given the BoFu conversion rates referenced in the "Facebook v. SDR Prospecting" chart above, this implies ~2,379 calls to get a deal in Facebook vs. ~655 calls to get a deal in SDR Prospecting.

At roughly 1,300 calls/month/SDR this suggests that it requires 1.83 SDR staff-months to generate a deal in the Facebook strategy vs. 0.50 SDR staff-months.

At an estimated $6K per SDR staff-month, this implies $10,980 to source a deal in Facebook vs. $3,000 in SDR Prospecting.

Facebook top-of-funnel costs much higher

The ad spend to generate the Facebook leads for the period was ~$17,200 not including marketing agency costs of ~$4,300 per deal. The lead costs for the SDR Prospecting strategy were ~$8,000 which translates to ~$222 per deal.

Accordingly, top-of funnel costs are:

Facebook Top-of-Funnel Cost SDR Prospecting Top-of-Funnel Cost
$15,280 per deal $3,222 per deal


This makes total cost for each strategy as follows:

Facebook Total Cost SDR Prospecting Total Cost
$22,342 per deal $4,577 per deal

 

Facebook resource drains are at the expense of more productive strategies

The CAC associated with the Facebook strategy has obviously been quite high relative to other strategies.

⇒ The real risk: As the charts below show, we've allocated more SDR and AE resources to the Facebook strategy and that has come at the expense of the SDR Prospecting strategy and accordingly has probably resulted in less total deals closed.

SDRs have spent more time making calls to Facebook leads...

Paid Facebook Lead 1 Calls

Which has come at the expense of those same SDRs making outbound Prospecting calls...

SDR Prospecting Lead 0 Prospecting Calls

And as the SDRs have set more meetings from Facebook leads...

Paid Facebook Meetings Set

AE resources have been pulled away from working SDR Prospecting sourced opportunities...

SDR Prospecting Deals Closed

It’s one thing to generate leads, but if you’re not aware of how many resources you have to apply to turn those leads into meetings, or turn those meetings into deals, you’ll continue blindly wasting sales and marketing dollars and resources.

 

7 Additional Ways Managing Like a Portfolio Manager Transforms Revenue Teams

Here are a few outcomes we have observed when leadership teams start collectively operating like an investment portfolio manager.

Forces great data tracking

In order to determine how to allocate your budget into high-performing customer sourcing strategies, you'll need precise measuring tools to determine the relative performance of each strategy. Both sales and marketing will need to reference one source of truth and commit to upholding data integrity so that investment decisions can be made with confidence.

Forces more detailed planning

The old-school enterprise philosophy that growth is simply driven by increasing sales person headcount doesn’t apply to velocity SaaS companies. Just as asset managers develop a detailed wealth management plan with their clients, CEOs and revenue leaders must make detailed top-down plans about how they’ll source leads and close deals.

Unifies teams around shared goals

When sales and marketing leaders align on a plan and are incentivized by revenue and new logo acquisition targets, everyone pulls in the same direction. If you’re still incentivizing your marketing team on lead generation metrics, STOP!

Reduces territorialism

Resistance to new ideas, suggestions, and collaboration will fade away. Phony symbols of influence such as “how many people I manage” or “how large my budget is” or “this was my idea” don’t matter anymore. 

Less blame shifting between sales/marketing leaders

This tension will never completely evaporate, but revenue leaders who are unified on a main goal of allocating spend to maximize returns will make decisions together and own the results together (good or bad). 

Better aligns top of funnel and bottom of funnel

Arguments about leads counts, revenue contribution, and MQL/SQL definitions should become a thing of the past. What matters is that your top of funnel lead generation investments produce enough quality volume to maximize bottom of funnel sales capacity.

Reduces Customer Acquisition Costs (CAC)

With precise measurement of every volume, conversion, and duration metric, it’s easier and faster to spot leaky funnels or underperforming strategies so you can either fix the problem or redeploy spend into other strategies. This “factory-floor” approach reduces the wasted motions and money that skyrockets CAC for SaaS companies as they scale.

CAC Impact on Growth Calculator

 

Not All Sales and Marketing Spend is Directly Measurable

While this article has been promoting end-to-end measurement of all your customer acquisition strategies, it’s worth noting that not all sales and marketing is directly measurable. 

On average, growth stage SaaS companies implement approximately 3-7 direct customer acquisition strategies. 

Common Lead Sources for Growth Stage SaaS Companies

With a properly instrumented tech stack, it’s easy to measure leads and customers sourced from direct channels such as SDR prospecting or Facebook advertising.

But, how do you measure business indirectly generated from pure branding activities, from word-of-mouth referrals, from your sales leader who has a significant LinkedIn following, from your CMO’s byline quote on TechCrunch, or from your CEO’s speaking engagements?

Unfortunately, you can’t. Not all of your sales and marketing spend can be tied to results.

You can’t be 100 percent definitive about any of the indirect activities impacting new business—but there is no doubt that like a rising tide lifts all boats, strong branding can make all your demand generation strategies more successful.

How will I know if branding is impacting demand gen?

  • You’ll see more organic traffic from branded searches
  • You’ll see more direct traffic from people typing your URL into a browser
  • You’ll see more referral traffic as people link to your website content
  • You’ll see more traffic to your LinkedIn company and more traffic from social media
  • You’ll see more traffic on your G2 listing (and hopefully more leads)
  • Your prospecting calls will become friendlier
  • More people will stop to introduce themselves at your tradeshow booth (if trade show booths become a thing ever again)

⇒ The lesson: Instrument your tech stack and put BI in place to measure everything you can. But, don’t waste time trying to measure the impossible.

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Topics: Fight Waste
Scott Stouffer

Written by Scott Stouffer

CEO & Founder of scaleMatters.

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