Wednesday, March 29, 2006

Marketing Best Practices

Capital efficiency and return on invested capital are the hallmarks of successful companies. Venture capital is a milestone driven investment model and companies benefit, with respect to dilution, by being able to achieve milestones and value creation on as little capital as practical.

A major area of potential inefficiency and burn is marketing. This post passes on a few marketing performance indicators that are worth tracking to ensure return on the marketing dollar. At scale, software companies spend 20-30% of revenues on sales and marketing, while start-ups, typically spend 50-60%+. Marketing, when done well, can be a critical driver of sales leads and growth. The goal must be to avoid being in a company where you feel like paraphrasing John Wannamaker, who famously observed, "I know I am wasting 50% of my marketing budget -- my trouble is that I don't know which 50%."

The goal of a start-up's marketing plan should be to drive leads into the sales process. Ultimately, management needs to track the cost per lead and the cost per close. My suggestions are to track the following
  • Programs
    • advertising (home page ads, newsletter sponsorships, banner sponsorships, search engine key words)
    • direct email
    • outbound telemarketing
    • events
  • Costs per program
    • ex $2,000 to sponsor a newsletter geared to the target demographic
  • Reach
    • ex newsletter reaches 12,000 readers
  • Expected response rates
    • ex .5%
  • Actual response rates
    • ex .75%
  • Costs/lead = cost per program/leads from program
    • expected cost per lead = $2,000/60 = $33.33
    • actual cost per lead = $2,000/90 = $22.22
  • Leads/quarter from all programs
  • Average cost per lead/quarter
    • Total programmatic spend/total leads generated
Metric-driven management helps a young company quickly triangulate on what is working and what is not. Tracking costs, response rates, and the contribution of marketing to the success of the business helps make marketing more scientific and its contributions more tangible to the overall goal of reaching the next milestone as efficiently as possible.
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2 comments:

  1. Andrew Fife6:34 PM

    Will:
    great post. I would go a step further and also track the whether or not the leads turn into sales because all leads are not equal. For example leads generated from search engines may not be as valuable as those generated from focused industry tradeshows. Nonetheless, I wholeheartly agree with your point that startups need to be capital efficient and that means know which marketing programs are generating sales.

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  2. rachna11:24 PM

    Will: A very well articulated post!

    I have often observed that in smart established organizations, 'marketing' is treated as a 'science' and marketing-spend is measured in terms of ROI -- and it should be.. every dollar a company spends should be accounted for, in terms of what value/returns it is getting for the company.

    Surprisingly, a large number of startups tend to overlook this aspect - when it would be of "all the more" value to them to know what dollar-spend is giving what returns, considering their limited resources/funds. It would help them channelize these limited resources/funds to achieve maximum bang for the buck.

    I totally second your thought that - "Capital efficiency and return on invested capital are the hallmarks of successful companies."

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