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Why Digital Marketing is the Next Big Growth Lever for Private Equity Firms and CEOs

 

 

How many times have you been approached by CMOs asking for more budget?

And how often can the CMO give a solid, data-backed business case for why they should get that extra budget? 

This is a common problem. Marketing teams often can’t get the increased investment they need because they have trouble relating their activities to business results. They’re usually focusing on hard-to-track benefits like brand awareness instead of ROI, and many aren’t ready with the kinds of metrics CEOs and PE investors need to justify giving them more budget. A recent Gartner study showed that marketing budgets have been stagnant for the last few years.

Meanwhile, sales teams are facing challenges too. Nearly 60% of sales reps expect to miss quota, which can impact your board meetings, projections, budget, and whether or not you can acquire more companies. At the same time, the average tenure for a VP of Sales dropped by 26% between 2010 and 2017. On average, a VP of Sales will now spend only 19 months with an organization. 

These challenges for marketing and sales teams are actually two sides of the same problem. Many organizations aren’t making the connection between marketing activities and their ability to hit bookings targets. As a result, marketing is often critically underfunded, and this is having a knock-on effect on the ability of sales teams to deliver. 

With sufficient budget, the right digital expertise, and a data-focused approach, digital marketing can be a huge growth lever for SaaS companies. In this post, we’ll look at why digital marketing is so important for company growth, and show how you can scale your marketing efforts to deliver better ROI. 

 

Why marketing is often underfunded

For most companies, sales forecasting is a math exercise carried out by the CFO. The forecasting usually focuses on the number of bookings Sales needs to deliver, with the CFO collaborating with the VP of Sales. However, this type of planning isn’t based on a full picture of the sales process. 

For Sales to close the right number of deals, they need enough MQLs to work with. And to produce enough MQLs, the marketing team needs enough budget for their activities. Many companies aren’t having conversations about the number of MQLs and marketing investment as part of the forecasting process, and this makes hitting sales targets almost impossible. 

For example, if the sales target is to close 100 deals between April - June:

  • If your MQL to close rate = 4:1
  • Target number of MQLs needed = 400
  • If your average time from MQL to close = 90 days
  • Target date for 400 MQLs = January - March 
  • If your average cost per MQL = $100
  • Budget needed for 400 MQLs = $40,000

In this example, to deliver the 100 deals projected we would need to budget $40,000 to generate 400 MQLs between January - March. If your forecast doesn’t factor in your MQL to close rate, average time from MQL to close, and average cost per MQL, your marketing team might be stuck trying to generate leads with only $10,000 and just a few weeks before June. These conditions just don’t add up to the target number of deals. 

 This disconnect between sales targets and marketing investment is often because the  software company started out as a sales organization. In the early days, CEOs and founders play a lot of roles and act as the first salespeople. As the company grows, founders start replacing themselves in sales roles and eventually removing themselves from the sales process, before fully building out marketing. Some companies grow to millions of dollars in sales without having a fully functional marketing team that is contributing to revenue.

When sales companies eventually add a marketing team, it’s often in the form of ‘traditional’ marketing, focusing on building the brand, attending events, sales enablement, and PR. These types of marketing are costly and make it difficult to track ROI, so for many SaaS companies, marketing has not historically been a primary revenue driver.

Leaders see they’re missing value here

A Gartner study shows that SaaS and Technology CEOs now see marketing and demand generation as one of their most urgent challenges. They rank this area as highly critical to solve. However, they only have a low level of confidence that they will solve this challenge within the next year.  

Source: Gartner

PE investors see huge potential value in digital marketing in particular. Digital transformation is one of the most popular strategies PE investors employ to boost company value, second only to integrating add-on companies. Digital transformation can include implementing new technologies into all stages of the company’s operations to make them more efficient, including how they go to market.

Source: BDO

Almost 60% of PE investors say the long-term digital potential of a company is very important to their investment decision, so this can be a key factor in companies being acquired.

Source: BDO

Some of the opportunities from digital marketing are low-hanging fruit, and most companies should already be putting these into practise to some extent. For example, one simple digital tactic that all companies should be doing is to advertise for late funnel keywords. In the example below for fundraising and donation software, you could be spending $10k-$20k on these keywords to generate leads that are ready to talk to a salesperson and ready to buy.

However, even though many CEOs and PE investors have identified the huge value digital marketing offers, many companies still aren’t maximizing these growth opportunities.

 

So why is this a challenge?

A major challenge that is holding organizations back is a lack of digital literacy within marketing teams. A survey from Altimeter showed that having a low level of digital expertise was the main challenge for digital transformation initiatives.

Source: Altimeter

Because many SaaS companies have previously focused on traditional marketing, they often don’t have enough digital marketing experts on their team. 

This issue is enhanced by the fact digital marketing is still relatively new. It’s become big in the last 20 years, and it’s only in the last 10 years we’ve seen strategies that work reliably duplicated across organizations. We’re only now coming to a point when you can find CMOs that have 10 years of digital marketing experience. As a result, just 8% of companies feel that they’re strong across all areas of digital marketing. 

This problem isn’t as easy to solve as it might seem: it’s difficult to hire digital marketing talent. Digital marketing experts are harder to find than cyber security experts, network architecture experts, or even 3D printing experts. This is because there’s an imbalance in the supply and demand. The vast majority of companies need digital marketing expertise on their team, whereas only a small minority need 3D printing expertise. 

Source: Grovo

 

The new buyer journey

The high demand for digital marketing talent is because the way potential customers interact with organizations has changed. Marketing is now critical at every step of the buyer journey. 

Each year, potential customers are engaging with Sales later in the funnel. Nearly 50% of people are consuming 3-5 pieces of content before their first conversation with a salesperson. If you aren’t providing quality content that buyers can engage with at the top of your funnel, you’re likely missing out on opportunities to connect with potential customers. This might take the form of thought leadership blog posts, webinars, or videos on social media. 

Source: Demand Gen Report Survey 

Your website also needs to be nurturing buyers towards conversion. Across the stages of the buyer journey, around 80% of people now use a website to get information and complete jobs like exploring solutions and selecting suppliers. 

If your website isn’t ranking well on search engines, potential customers likely won’t find it, and if it’s giving an outdated or frustrating user experience, the customers that do find it won’t stick around. In these scenarios, potential customers aren’t getting the information they want from your website, and rather than contacting your sales team they’ll likely go to someone else’s website instead, so the lead will be lost.  

In a traditional marketing structure, Marketing builds the MQL, nurtures the MQL, and then hands the lead off to Sales to close. The new alternative is more collaborative: Sales and Marketing work together at all stages of the buyer journey, including the closing stages. This structure suits the behaviour of modern buyers, but it also means that you need to have digital marketing power at every stage in the buyer journey to support Sales.

How to get there

This collaborative approach demands a strong digital marketing team with the budget and bandwidth to support Sales. For this extra investment to get the green light, we need to bridge the disconnect between marketing activities and sales performance. There should be data clearly linking the investment to the number of closed won deals, revenue, and LTV. 

A Gartner study on CMO spend showed that 12% of CMOs cited brand awareness as their most important metric, while 7% prioritized ROI and just 1% prioritized lifetime value. Shifting the focus onto metrics that clearly track performance and focus on revenue is a key step to maximizing marketing as a growth lever. 

To scale your marketing in a way that has a measurable impact on your bottom line, these seven steps outline an approach that is focused on data and builds the business case for increased investment. Many of these metrics are among the most popular due diligence requests, but very few companies have them to hand. As well as helping increase your digital marketing ROI, knowing these figures is a general best practice.

7 steps to scale marketing as a growth lever

  1. Build MQL to close reporting
  2. Build channel and campaign reporting
  3. Identify average days to close
  4. Identify opportunities to scale
  5. Identify gaps in content
  6. Identify team members needed
  7. Forecast MQLs and budget needed

 

1. Build MQL to closed reporting

Knowing the progression from MCL to closed won is vital to setting marketing targets that support your sales targets.

To calculate your conversion rates, review the number of MQLs, new customer opportunities, and closed won deals for each month. From here, you can calculate the conversion rates between stages for each month and the year on average.

To start forecasting your marketing activity, work backward from the target number of closed won deals. You can calculate how many SQLs you need to get one closed won deal, how many MQLs you need to get each SQL, and how many MQLs marketing needs to deliver to generate one closed won deal.


2. Build channel and campaign reporting 

For each channel, note the number of MQLs and opportunities they have generated, and the average cost for each. By looking at channel performance and ROI, we can see if the budget being spent on each channel maps to the return. 

Where it’s possible, drill down into each channel to show the return for each campaign. For example, if you attend 50 trade shows, note how much you spend in total to attend each event, and how many leads you got from each. 

Calculate your acceptable cost per MQL, and assess how each channel is performing against this. If the cost per MQL is significantly above, stop investing in this channel. The same applies to individual campaigns. In the trade show example above, if a specific trade show is showing far fewer results, it likely isn’t worth you continuing to attend that event.

On the other hand, if a channel is slightly below acceptable cost per MQL levels, this is an opportunity to test and optimize the way you’re using it. If it’s significantly below, this suggests it could be a big opportunity to get value if you can increase the budget. 

 

3. Identify average days to close

To forecast marketing activity, map out how many MQLs need to be delivered each month to generate the target number of closed won deals on schedule. Use the average number of days from MQL to close to work backwards from when the closed won deals need to be delivered.

 

4. Identify opportunities to scale

From the analysis of channel performance and spend, identify opportunities to adjust the marketing investment to generate more MQLs at a lower cost. 

How much more could you be spending on each opportunity? Based on the current conversion rates, forecast how many leads you could be getting if you ramped up the investment. For example, with the conversion rates in the table above you could get 10 more closed won deals each month if you increase the paid media spend by $10k. 

 

5. Identify gaps in content

To engage potential customers and nurture them to convert, there should be content at each stage in the buyer journey. However, a lot of organizations don’t have all this content built out yet.

Create an inventory of the content you have and map it to the buyer journey. Do you have nurture sequences, or landing pages for the paid campaigns you want to run? Do you have enough content to support customers staying with you post close, or to support customer advocacy?

 

6. Identify team members needed

Now that you’ve identified the opportunities to scale and the content you need to build out the funnel, you need the bandwidth and expertise on your team to execute these projects. 

Do you have enough manpower to generate the target number of MQLs? 

What are the skillsets you need to take advantage of the marketing opportunities, and what roles can fulfil these?

For example, if we identify opportunities in the area of SEO, but the company doesn’t have an SEO manager, we want to add that expertise to the team as soon as possible. 

The cost of filling out your team depends on factors like location and industry, so forecast how much it will take to hire for these roles in your market. You may be able to reallocate some of the resources from ineffective campaigns to building up your team in more effective channels.

 

7. Forecast MQLs and Budget needed 

Based on your MQL to closed won rates, how many MQLs do you need to hit your bookings target? Including the opportunities you’ve identified, how much budget do you need to generate those MQLs?

If, based on conversion rates, you need a budget of $1 million but your current budget is stuck at $800,000, you now have the metrics and the business case to prove why that budget needs to be increased so you can hit targets.

 

The end goal

At the end of these steps you’ll have a clear picture of how marketing connects to sales, and the potential revenue you can generate by optimizing your marketing ROI. These steps will help you be specific about marketing, rather than relying on gut feeling. Together, this builds a data-backed business case for why increasing investment in marketing helps hit booking targets and drive growth.

 

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