How to Calculate Cost Per Opportunity

Posted on March 1, 2025 | Leave a comment

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.

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Posted in Demandgen, Marketing, Metrics, SaaS, Scaling, Startups

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My Fourth Appearance on AI and The Future of Work

Posted on February 24, 2025 | 1 comment

This is a quick post to announce my latest appearance on Dan Turchin’s AI and The Future of Work podcast.

Dan, the founder/CEO of PeopleReign, has been doing AI since long before it was cool and, to give you an idea of how long he’s been podcasting about AI and the future of work, my appearance marks episode 324 of his podcast. He’s no Johnny-come-lately to the fascinating intersection of people and technology and his material is always worth a good listen.

In what’s become a tradition, I’m back on the show to talk about my 2025 predictions blog post. In the 43-minute episode we bounce around a lot, but cover these topics:

  • The evolution of search: answers, not links
  • LLM optimization, how to show up in LLM-generated answers
  • Why it’s dangerous to think you’re lost in a “sea of sameness” when it comes to product differentiation
  • Why branding isn’t the last bastion of differentiation
  • Why to track Rand Fishkin when it comes to the evolution of SEO to LLMO
  • Why general-purpose databases are generally good at absorbing special-purpose databases — but not always
  • Does Europe’s tendency to greater regulate have any hidden benefits?
  • The Robin Williams quote about Canada: “it’s like living in the apartment above a meth lab.”
  • How America-first VCs will likely shoot their feet off with European companies and entrepreneurs
  • Why I predicted that LinkedIn will likely follow the path to enshittification by following engagement as their north star

I’ll conclude by saying that the Future of Work has become one of my favorite topics. It started with my Clubhouse room (remember Clubhouse?) with Thomas Otter. That led to some ongoing collaboration with Thomas when he moved to become a partner at Acadian Ventures (which, by the way, is an investor in PeopleReign). That also eventually led, through introductions to the founders, to my joining the board of TechWolf, where I’m now learning about redesigning work, people-centric data platforms, and the skills-based organization. It’s a fascinating area, particularly here at the dawn of mainstream AI, and one that affects all of us.

Thanks again Dan for having me on the show and for a great conversation about the predictions and a whole lot more.

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Posted in AI, Future of Work, Predictions

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Think of Demandgen Like Any Other Sales Support Resource

Posted on February 21, 2025 | Leave a comment

Why is it that when we want to add an account executive (AE) to the plan, we always think about some ratios but not others? For example, most people think: Boom! Then we’re going to need:

  • 2/3rds of an sales consultant (SC)
  • 1/3rd of a sales development rep (SDR)
  • 1/6th of a sales manager

With the chosen ratios varying as a function of your sales model. If we’re good, we might even include:

  • 1/8th of an alliances manager
  • 1/10th of a salesops person
  • 1/12th of a sales enablement person

If we’re really good, and we have a large organization, we’ll also get the next layers of sales, SC, and SDR management.

But what’s the one thing that almost never comes up in these support ratio discussions? Demand generation (aka demandgen). Money for marketing to build pipeline for the incremental AE.

When we don’t treat demandgen as a ratio-driven, support resource, we get what I call the baby robin problem.

Sellers waiting for pipeline from marketing

We throw our model out of whack by hiring more sellers than planned and thus everyone ends up with insufficient pipeline. The sellers turn into baby robins, mouths extended upwards, waiting for someone — e.g., SDRs, marketing, alliances — to drop opportunities in.

How can we avoid the baby robin problem? By treating demandgen budget as you would any other sales support resource. We instinctively think about SDRs and SCs (even if we don’t always go hire them). But we don’t do the same for demandgen. So part of this is self-discipline. The other part is math.

Let’s assume steady state, so we can ignore timing and ramping:

  • If our AE has a quota of $300K/quarter
  • And we want 3x pipeline coverage
  • Then we need to generate $900K of pipeline each quarter
  • If our pipe/spend ratio is a healthy 15:1
  • Then we need $60K/quarter in demandgen spend per AE

That’s $240K/year. A lot more than 1/3rd of an SDR and 1/6th of a manager. Yet, we routinely model these lesser costs and forget the demandgen.

Why? Silos.

It’s a different budget. Oh, that’s marketing. But it’s sales that’s asking for incremental money to hire the seller. The marketing budget is someone else’s problem. Until you repeat this 5-10 times and now every seller is starving for pipeline. Then it’s everyone’s problem.

So how can you avoid this? I’ll say it a few different ways, so you can take your pick:

  • Work together. Hiring incremental sellers is a go-to-market (GTM) problem, not a sales problem.
  • Plan holistically.
  • Treat demandgen like any other sales support resource.

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Posted in Demandgen, Marketing, Pipeline, Sales, Sales Model, Scaling, Startups

You Can’t Eat Pipegen

Posted on February 16, 2025 | 2 comments

Years ago, I was in a board meeting and a VC dropped the expression: “you can’t eat IRR.”

I’d never heard it before. It sounded catchy. But, honestly, I didn’t know what it meant. At first, I thought it was VC-ism. But then I learned the phrase was coined by the venerable Howard Marks of Oaktree in one of his famous investor memos. So it’s really a finance-ism, not a VC-ism.

What does it mean? While Marks’ fourteen-page memo provides numerous clear, in-depth examples, I’ll try to capture the spirit of the question with one of my own. Consider two investments, A and B:

And let’s pretend they’re both made by a VC firm on your behalf. Firm A puts your $100 into a startup and one year later they sell the company and distribute $120 back to you. The internal rate of return (IRR) is 20%. That’s pretty good (e.g., compared to average stock market returns), but you were hoping for a long-term investment and now you need to find somewhere else to put your money. Firm B invests in a startup and sells it in year eight, getting you $350 back. The IRR is also 20%. But the total value to paid in (TVPI) is 3.5 compared to 1.2 with Firm A.

In essence, because IRR is based on time, if you can produce a nice return very quickly, you can get an amazing IRR. In my example, both investments produced a solid IRR of 20%, but in one case I had only $20 of profit to eat with, whereas with the other I had $250. (And this is why most investors prefer TVPI over IRR as their top metric. Why? Because you can’t eat IRR.)

I feel the same way about pipegen (aka, pipeline generation). Why? Let’s look at a simple example:

This company’s pipegen targets, presumably created using some funnel model, are in the first row. That model is typically some kind of waterfall where you take starting pipeline, add pipegen plans from the various pipegen sources (e.g., marketing, AEs, SDR, alliances), subtract closed/won opportunities, subtract lost and slipped opportunities, and make some adjustments for opportunity sizes varying around over time.

Actual pipegen, expressed as a percent of plan, is in second row. This is usually broken out by source, but I’ve aggregated them here to keep things simple. Note that if you stopped reading after row two, you’d pop the champagne. Go us! 105 to 109% of pipegen targets all year!! We’re the best!

And you’d be surprised how many companies do this. Sometimes they do it unknowingly. Once you break out pipegen by source, look at plan performance, and compare to prior quarters and years, you have a lot of numbers on a slide. So you tend to then look at the bottom and see total pipgen as a percent of target. If those figures are 100%+, then awesome. Pipegen’s not the problem. Next slide.

But that’s not good enough. What if, for whatever reason, that despite our strong pipegen performance relative to plan, that we’re not starting each quarter with sufficient pipeline coverage. Remember, there are only two high-level questions about sales:

  • Did we give them the chance to make the number?
  • Did they make the number?

Look at row 3. Starting coverage is short for starting pipeline coverage. That’s total current-quarter pipeline at the start of the quarter divided by the new ARR target for the quarter. Most CROs want this ratio to be 3.0x. Here, you can see we started every quarter with between 2.5x to 2.8x coverage. That’s not good enough. In short, it means that we’re not giving sales a fair shot at making the number each quarter. That might partially be sales’ fault. Normally sales is responsible for generating 20-40% of the pipeline (including SDR outbound). But it’s also the fault of marketing and alliances. Nobody should be drinking champagne.

Sure, we may have beaten the pipegen targets in our model, but something’s clearly wrong with our model if we can consistently miss starting coverage while exceeding pipegen targets. What might that be? Perhaps:

  • We’re losing more deals so less pipeline is slipping
  • Deals are shrinking, e.g., in response to price pressure from a competitor
  • Sales cycles are stalled by a megavendor entering the space
  • Deals are slipping more frequently and/or by more quarters than in the past
  • Sales cycles are lengthening, so we’re generating enough pipeline but it’s all too far in the future
  • There’s a math mistake in our model

There are a lot of different reasons this could happen. But the main point is don’t forget to look at row three in the example. That’s where the pipegen team can celebrate. They should need two triggers to open the champagne: first that we beat pipegen targets and second that we start with sufficient pipeline coverage.

And we only break out the caviar on the third trigger: when sales beats the new ARR number.

This post is similar in spirit to one I did last fall entitled, Why Great Marketers Look at Pipeline Coverage, Not Just Pipeline Generation. If you want more on this topic, then take a look at that post as well.

Finally, you now know why I say, “you can’t eat pipegen.” But you can eat starting coverage.

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Posted in Marketing, Pipeline, Startups

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Six Tips on Presenting to the Board of Directors

Posted on February 8, 2025 | 7 comments

So, you’re on the executive staff of a startup and you’ve been asked to present at an upcoming board meeting.  That’s great news. Board exposure is a key benefit of working on the e-staff. You’re getting the chance to build relationships with the venture capitalists and independent directors who sit on your board. These people can help you in many ways, e.g., providing tactical advice, acting more generally as mentors, helping you extend your network, approving your future promotion to a more important position, presenting you with outside board or advisory opportunities, and — when the time comes for it — helping you find your next company.

The board can be a tailwind accelerating your career or a headwind slowing it down. Let’s talk today about how to make a good impression in board meetings and how to start building good relationships with the members of your board.

Here are six tips:

  1. Lose the baggage. If you have authority issues or PTSD from prior board experiences, you need to lose the baggage. That may not be easy — and you may need a therapist to do it — but boards can easily sense passive aggression and inauthentic interactions. I worked with one CRO who viewed board meetings as a necessary evil, something to survive so we can all get back to work. If you feel this way, the odds are the board can tell. (Our board certainly could, and it limited his tenure as a result.)
  2. Make your presentation from scratch. Bad board sessions start with bad slides. Usually, they’re too long and detailed. This typically positions the exec as either “in the weeds” (ergo too junior and in need of an upgrade) or “stonewalling” (i.e., deliberately making an overwhelming deck to stifle conversation). The path to hell begins in the slide sorter, so do not start there. Start with a blank outline to avoid the number one mistake — starting with what you have instead of what the audience needs. Doing so is a false economy and, for chrissake, it’s your board: if anyone deserves a custom presentation, it’s them. So make a custom slides, from scratch.
  3. Cut to the chase. Boards are notoriously impatient. Individual sessions are usually pretty short. There’s no time to warm up with “How ’bout those Yankees?” or several introductory slides, including the tired highlights / lowlights slide. (That slide is appropriate once in a board deck, in the CEO’s update, and if there’s something particularly good or bad in a functional area, it should have already been raised there.) If we’ve had insufficient pipeline for the past two quarters, go immediately to the reasons why and the remediation plan. If you’re not sure what the hot issues are — itself a yellow flag — ask the CEO. Nothing will infuriate a board more than endless warm-up slides that don’t cover the important issues. Beware saying: “Great question, but we’ll get to that on slide 27.” With some boards, you may not still be employed by slide 27.
  4. Make slides that facilitate discussion. Board members like to talk, so let them. Build slides that facilitate a discussion. That usually means first baselining the board with key facts and metrics. (Remember, they might sit on 5 to 10 other boards, so they’re not going to remember everything you talked about last meeting.) Then tee-up a discussion using techniques such as: (i) making a proposal and asking for feedback, (ii) outlining three options (if you really can’t decide) and requesting input on them, or (iii) asking three questions that will help you make the decision. Be authentic. Don’t propose three options if two are patently absurd. This wastes the board’s time and they’ll see through it.
  5. ATFQ (answer the effing question). If, at any time during the meeting, the board asks you a question: answer it. Read this — among the top five Kellblog posts of all time — for advice on how to do so. If asked for your opinion, offer it. Don’t stare at the CEO and then toe the company line. The board is fully aware of the disagree-and-commit principle. They assume you’re committed. They’re asking if you agree.
  6. Ask for relevant follow-up meetings. If you’re the CRO and one of your directors is a former-CRO, ask them for an offline meeting to discuss a hot sales-related topic. While you should spend most of that meeting discussing the advertised topic, you should take a bit of time to get to know each other and start building a relationship. Invite them to a coffee if you can, as opposed to a Zoom. Drive to their office if they invite you.

If you follow this advice, you’ll make a better impression on your board than most and you’ll start to leverage board meetings to set up offline conversations that will hopefully lead to a few career-long and career-changing relationships.

As CJ Gustafson replied when we discussed the idea of building relationships, “oh, you could find a relationship like Scorsese and DiCaprio.” Yes, exactly. That worked out pretty well for both of them.

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Posted in Boards, Career, Leadership, Silicon Valley, Startups, VC