I had a chat with a CMO a while back.
DK: How’s the relationship with your CRO going?
CMO: Solid. We collaborate really well.
DK: I’ve heard you’ve had some trouble hitting sales targets.
CMO: Yes, well you know the targets are pretty aggressive and we just had some major turnover in the sales force. But that’s all settled now. The new CRO joined 6 months ago and things are pretty stable now.
DK: So when you say you’re collaborating does that just mean you’re working together without incident or are you deeply collaborating — e.g., joined at the hip?
CMO: Deeply collaborating. We’re not just going through the motions. We talk about the hard problems. We answer each other’s calls on the first ring. The CRO always tells me that we have each other’s backs.
DK: So what are those problems? By the way, the CEO told me they think it’s a top-of-funnel issue.
CMO: Well, yes, it’s certainly part top-of-funnel, but our close rates are pretty grim as well.
DK: How grim?
CMO: We close about 5% of our opportunities.
DK: You close 5% of your sales-accepted opportunities?
CMO: Well, we’re actually closing 5% of our post-demo opportunities. That’s stage 4. The CRO thinks it makes more sense to calculate the close rate from the demo stage [1].
DK: I see. What else?
CMO: The slip rate is bad, more than half of deals slip out of the quarter. No-decision is our top loss reason code in the CRM.
DK: Sounds to me like a pretty standard emerging space problem. Everyone’s trying to figure out the market. Nobody has budget in the category. People aren’t sure what it is. But a lot of people are interested.
CMO: Yes, a lot of tire kickers.
DK: Are any of your direct competitors crushing it or are you all dealing with the same issues?
CMO: As far as I can tell, we’re all largely in the same boat.
DK: So is this a top-of-funnel problem or is it broader?
CMO: It’s broader. Both the CRO and I agree that we have two problems: we are not closing enough of the pipeline we have and we need more pipeline. Because of the second problem, we’ve raised our pipeline coverage goals to 4x. Originally the CRO wanted 5x but I negotiated it down.
DK: What’s the budget situation?
CMO: Well, in order to improve efficiency in CAC ratio, we’re holding the marketing budget basically flat over last year. The sales budget is going up 50%, though, in order to pay for those hires needed for growth.
DK: I see.
DK: Last question, who spends more time with the CEO, you or the CRO?
CMO: Oh the CRO does. They spend a lot of time together, working on board slides, financing decks, and operating models and such. The CEO leaves me pretty empowered to run marketing.
There’s Something Happening Here. What It Is, Is Actually Clear.
Paraphrasing Buffalo Springfield, there’s a ton in this all-too-common scenario to chew on [2]. Before addressing the key point of this post — about the CMO/CRO relationship — let’s take a quick minute to discuss the business situation, because I’m guessing that Kellblog readers can’t wait to tackle that first.
My Take on the Situation
Given that conversation, here’s what I think about the business.
- It’s in a new space and they haven’t figured out the model yet.
- Everyone in the space seems to have the same challenges — lots of interest, but few deals, nobody has budget, lots of slipped deals, and few purchase decisions.
- Strategically the space appears to be more vitamin than pain-killer. They need to get better at giving people a compelling reason to buy and helping them find budget to do so.
- They likely need to segment the space better, to try and find a subsegment where the pain is high enough to do something now and where the company can build out a whole product (aka, cross the chasm).
- They need to be very aware of premature scaling. While the financing model may say to hire 12 reps this year, the empirical indicators do not. See my SaaStr Europa talk on this topic.
That’s it, in my opinion. No more, no less. Like any Silicon Valley startup with top investors, the company [3] likely has a founder who knows the space, a qualified management team [4], and has built a product that delivers against the initial vision.
The reality is that once in a while you land in the exact right place at the exact right time and everything takes off. Pretty often, however, you don’t. It doesn’t mean your vision is wrong or your product doesn’t work or your team sucks. You just need to debug your model, refine your focus, and give yourself some time.
If the CEO has hired a strong CRO and a strong CMO, the worst thing they can do at this point is start a blame game. What you want is a Three Musketeers team with an all for one and one for all spirit. The CEO, CRO, and CMO all working together to solve the company’s fairly obvious if also fairly challenging problems.
What you don’t want is a simplistic explanation and a circular firing squad that results in one, two, or even all three of those musketeers getting shot while the company struggles. That’s what is likely happening in our scenario, and because it’s somewhat subtle, let me spell it out.
The Blame Game
The first rule of being a CMO: if you look up and see this, you’re under the bus.
The view from under the bus
The CMO is squarely under the bus here. How do I know?
- “It’s a top-of-funnel problem.” If the CEO thinks it’s a top-of-funnel problem, that is definitionally a marketing problem because marketing typically has the most top-of-funnel responsibility. There are fifty things going on, but when we net it all out: it’s a top-of-funnel problem. Hum. I bet the board thinks it’s a top-of-funnel problem, too.
- The CRO has likely shaped that perception. Remember when I asked who spent more time with the CEO? That’s because it’s usually a great proxy for who more shapes their opinions and worldview [5].
- The deal conversion rate is quite low and somehow that’s not included in the reduced problem statement. A typical close rate in enterprise software is 15% to 25%. This sales team is closing 5%. The company may be light on top-of-funnel, but it can’t close deals either. Yet somehow, the second problem gets eliminated from the reduced form [6].
- The conversion rate is off the wrong stage. This is a real tell-tale. Sales doesn’t even want to calculate the close rate off stage 2 opportunities, where stage 2 is usually defined as sales-accepted opportunity. There must be a handoff point from marketing to sales where an opportunity is accepted or not and, after acceptance, sales takes responsibility for a close rate. By the way, closing 15% to 25% of them means you can not close 75% to 85%, so it’s not exactly a high bar. I increasingly see companies push the close rate calculation further into the sales cycle (e.g., demo to close) which has the effect of pushing more responsibility onto marketing [7].
- They increased the pipeline coverage target to 4.0x. This further transfers the problem to marketing. First, note that the CRO tried to increase the target to 5.0x and only “dropped” it to 4.0x after negotiation. How kind. The effect of this is to further say, it’s a marketing problem; we don’t have enough pipeline. To do a reductio, I once worked with a company that had 100x pipeline coverage. Guess what? They still missed their number. Because there was zero accountability around pipeline.
- The CRO never signed up to increase the close rate. The company seemed quick to increase marketing’s pipeline generation targets, but never got around to setting a goal to increase the 5% close rate. Hum.
- Bookings capacity is not part of the conversation. Sales turnover means ramp resets means ramped-rep-equivalents is potentially a lot lower than total reps. How much of this problem is due to turnover-driven sales booking capacity shortfalls? Nobody seems to be asking.
- The CMO is getting ratioed, but not in the social media sense. By default, the sales and marketing budget should scale together so the ratio between them should stay constant. Unless, of course, there’s some bottom-up reason for why the ratio changing, why we think it’s possible to feed 50% more sales on flat marketing, and why potentially 100% of the CAC efficiencies are being demanded of marketing. Here, the sales/marketing expense ratio is increasing 50%, without much of a reason except that “sales needs it.”
- The CRO does not have the CMO’s back. Real partners in problem-solving don’t let the boss think it’s the other person’s fault, let alone lead them to that conclusion. Especially when they seem to actually know otherwise.
What To Do Instead
While I’ve touched on it above, solving the company’s strategy problem is worth a book if not a full post, so here I’ll focus on the CMO/CRO relationship.
- Real collaboration is hard. You need to drop the us vs. them relationship and truly work together to solve problems.
- For the CEO, it means creating a safe space where the CRO and CMO can do that. Think: “Look, I think you’re both great. We’re just working on some hard problems. Let’s work together to solve them.” Don’t point fingers. Don’t encourage finger pointing. Don’t tolerate it, whether blatant or subtle.
- If the CEO has hired well in the first place, the odds are not great that a replacement will do any better. Make it about success and teamwork, not accountability in the form of termination. (Exception: if you didn’t hire well in the first place, go fix that problem.)
- For the CRO and CMO, it means admitting weakness to each other. Yes, we generated less opportunities than plan. Yes, the 5% close rate is unacceptable.
- It means doing what you can do to help, regardless of who’d be blamed if you fail. Think: CMO — what can I do to help that close rate? Sales training? Tools? ROI calculator? What? Think: CRO — how can my team help us hit the opportunity generation goal?
- It means holding each other accountable. This is really hard. Think: I’ve been listening to discovery calls on Gong and we need to train our AEs to do better discovery. Or, we need to cut AEs 1 and 4. Or think: I attended our webinar demo last week and the presentation started late and failed to demo the admin side of the product.
- It means going to the CEO with a single message. We’ve been working on this together, we think the root cause is we are early days in the market, we are going to focus marketing on generating opportunities in these specific areas, we are going to focus sales on pipeline discipline, we are going to track MQL-to-S2 and S2-to-close as our key conversion rates, and we are working together on sales hiring profiles and onboarding training to ensure we can better close what we get.
This doesn’t always work. Sometimes the company is just in a rough position in the market. However, sometimes it does. And when it does, it skips an entire executive replacement cycle, allowing the company to answer its key questions faster, and gain important time-to-market advantages, not to mention avoiding costs related to momentum and morale.
All for one and one for all. It works. Try it!
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Notes
This post evolved from a Twitter thread I posted. Thanks to everyone who participated.
[1] Sorry, demo is not a sales cycle stage!
[2] Perhaps the better lyric to borrow is: “there’s battle lines being drawn, nobody’s right when everybody’s wrong.”
[3] As with any Kellblog post, all examples are derived from reality but ultimately not any one company, but a hybrid of scores of companies and situations I’ve seen over three decades in enterprise software. Everyone always seems to think it’s about them!
[4] As I have actually said to VCs who took no comfort in the statement: “it’s improbable that our off-plan performance is due to our own incompetence; we are all hiring the same SDRs, reps, and managers, all from the same hiring pool, giving them roughly equivalent marketing support hired from the same marketing pool, and paying them on the same compensation plans.” Standardization of the model and labor pool serve as risk isolators in Silicon Valley. VCs know that, which is why in general they prefer hiring veterans to up-and-comers. They still hated the statement and I wouldn’t recommend saying it, even if you might think it once in a while.
[5] You might argue that I’m a partisan former CMO contriving an example against sales, but remember I was also CEO of two startups for over a decade. More importantly, as a consultant / director / advisor, all I want to do is solve the problem. That perch makes it easier to see what’s actually happening. I don’t care whose to blame. If I met someone I think is incompetent I’ll say so. If I think it’s a bunch of good people in a tough situation, I’ll say that, too.
[6] Some would instantly blame this weak conversion rate on marketing: “see, the 5% conversion rate proves the pipeline is junk.” Marketing could fire back: “but sales accepted these opportunities, that means definitionally they were qualified, and sales couldn’t close them.” In my balanced view, I’m not assigning blame to anyone. I’m simply saying the company has two problems: light pipeline coverage and a weak conversion rate. Saying there’s only one is what’s partisan.
[7] To be clear, this means that marketing is not just responsible for creating sales-accepted opportunities, but for ensuring they reach the demo stage (typically two stages later). Sales then become responsible for closing say 20% of those, instead of 20% of stage 2s, which have been subjected to two additional layers of filtering. The lowers the bar for sales and raises it for marketing. Most important, it renders effectively meaningless the notion of sales-accepted opportunity.