My marketing professor once said, The answer to every marketing question is, “It depends.” Thus, the important part is knowing on what.
So, how do you calculate the cost/opportunity? Well, it depends! On what? On the specific question you’re trying to answer. When people ask about cost/opportunity, they usually have one of two things in mind:
- An efficiency question — e.g., how efficiently does marketing spend convert into sales opportunities (oppties)?
- A cost question — e.g., how much it would cost to get 50 more oppties if we needed them
Knowing which question you’re being asked has a big impact on how to calculate the answer. Let’s illustrate this by looking at this typical marketing budget, which is allocated roughly 45/45/10 across people, programs, and technology:
If this marketing team generated 1,000 oppties, then the average total marketing cost/oppty is $9,000 = $9M/1K oppties. You might argue that’s a good overall marketing efficiency metric and try to benchmark it. But those benchmarks will be hard to find.
Why?
Because there’s a better overall marketing efficiency metric: the marketing customer acquisition cost (CAC) ratio = (last-quarter marketing expense)/(this-quarter new ARR). Why is the marketing CAC a better marketing efficiency metric than average total marketing cost/oppty?
- It’s more standard. While relatively few startups break their CAC ratio in two parts, virtually every startup already calculates CAC ratio or CAC payback period (CPP). People are familiar with the concept and the math mostly already done — just back out the sales expense.
- There is less room for calculation debates. While neither total cost/oppty or marketing CAC is hard to calculate, because marketing CAC is a derivative of CAC, some nagging questions are already answered for you – e.g., Is it all marketing or just a part? Is it GAAP expense or cash expense? Answers: look at how you calculate your CAC ratio for guidance.
- The phase shift. The CAC ratio compares last quarter’s expense to this quarter’s new ARR in an attempt to better match expenses and results.
- There are more benchmark data sets. I can think of about ten sources for CAC ratio data (not all of which make the sales/marketing split). I can think of approximately zero for average total marketing cost/oppty. You can’t benchmark a metric without good data sets to compare against.
So if someone’s asking you about marketing efficiency by looking at average total marketing cost/oppty, I’d politely redirect them to the marketing CAC ratio.
But say they’re looking at cost. Specifically, that the company is forecasting a pipeline generation shortfall of about 50 oppties and the CEO asks marketing: How much money will it take for you to generate 50 more?
Is $9,000 * 50 = $450,000 even correct?
The answer is no. To get 50 more oppties, you don’t need to hire 5% more marketers, boost the CMO’s salary by 5%, up the PR agency retainer by 5%, increase the userconf budget by 5%, spend 5% more on billboards, or increase tech infra spending by 5%. Thus, you should not multiply the average total marketing cost of an oppty by the number of oppties. You should multiply the incremental cost of an oppty by 50.
And the best answer we have here, at our fingertips, for the incremental cost of an oppty is the average demandgen programs cost/oppty. In our example, that’s $3,250. So, to generate 50 more oppties would cost $162,500. That’s good news because it’s a whole lot less than $450,000 and because it’s correct.
In short, cost/oppty = total demandgen cost / number of oppties.
This begs a potential rathole question which I call the low-hanging fruit problem. Most demandgen marketers argue that picking oppties out of the market is like picking apples out of a tree. First, you pick the easy ones, which doesn’t cost much. But the more apples you need, the higher up the tree you have to go. That is, the cost of picking the 1,000th apple is a lot higher than the cost of picking the first one. That is, the average cost of picking 1,000 apples is less than the incremental cost of getting one more.
While I think there’s some truth to this argument — and a lot of truth when it comes to paid search — you can’t let yourself slide into an analytical rathole. As CMO, a key part of your job is to always know the incremental cost of generating 50 more opportunities. Because — as veteran CMOs know well — either or both of these things happen with some frequency:
- There is an oppty shortfall and someone asks how much money you need to fill it. You should answer instantly.
- There is a money surplus and on day 62 of the quarter the CFO approaches you, asking if you can productively spend $100K this quarter. The answer should always be, “yes” and you should start deploying the money the next day.
That’s what you might call “agile marketing.” And you get agile by doing the math in advance and having the incremental spending plan in your pocket, waiting for the day when someone asks.
To make things easy, unless and until you have a spending plan that answers the cost of getting 50 more oppties, just use your average demandgen cost/oppty and uplift it by 25% to adjust for the low-hanging fruit problem. That way you can answer the boss quickly and you’ve left yourself some room.
Let’s close this out by raising a common objection to using demandgen costs only. It sounds something like this:
If I use demandgen cost only, someone might say that I’m understating the true cost of a marketing-generated opportunity and I’m going to get in trouble.
Well, that certainly can happen. People can accuse you of anything. There are two ways to avoid this.
- Speak precisely. If asked, say “the average demandgen cost of an oppty is $3,250.” And, “the incremental cost of getting 50 more will be around $4,050.” (An approximately 25% uplift.)
- Use footnotes. If making slides, always put definitions in the footer. So, if a row is labeled “cost/oppty” then make a footnote that explains that it’s demandgen cost only. Better yet, label the row “demandgen cost/oppty” and use the footnote to explain why that’s a better proxy for an incremental cost — which is the thing most people are worried about.
And finally, remind them if they want to discuss overall marketing efficiency, they should change slides and look at the marketing CAC ratio, which does proudly include every penny of marketing expense. And if you’re really, really good, ask them to skip to the slide that shows the sales/marketing expense ratio and discuss that.
