What half of the marketing budget is wasted?
With Q&A from CMO turned founder Anthony Kennada
Every CFO is trying to cut costs and become more efficient right now. Companies are looking for efficient and durable growth. The marketing department receives a disproportionate amount of scrutiny when spending cuts are needed, which makes sense given it usually has the largest amount of discretionary spending.
There is no question that companies have become less efficient at acquiring customers over the past few years (covered in my previous post). See the customer acquisition cost (“CAC”) trend below.
It would be easy to cut costs by shutting marketing down. New business sales might not even really be impacted for one or two quarters, but eventually, sales will suffer.
The problem with budgeting for marketing is the difficulty in quantifying the ROI of many of the marketing department’s initiatives. The different marketing functions can be bucketed as follows:
Demand Generation - responsible for driving leads and pipeline
Product Marketing - positioning and messaging of the product
Corporate Marketing - public relations, brand awareness, etc
A natural instinct to economic headwinds and pressure to be more efficient is to dramatically reduce investments with lesser quantifiable and longer-term ROI such as corporate marketing. Or shut down things that can easily be turned off - such as paid advertising channels.
While companies know money is wasted in marketing, it’s extremely difficult to know “which half is wasted”. Many software companies probably waste even more than half of their marketing budgets…
How do companies make marketing more efficient?
More marketing teams should perform zero-based budgeting (the majority don’t). This is an approach that involves developing a new budget from scratch every year, versus starting with the previous period’s budget and incrementally adding to it. While zero-based budgeting can be useful for all departments to improve efficiency, I think it is particularly beneficial for marketing.
A CFO friend once told me that their CMO left mid-way through budgeting season, but had $6M budgeted to meet their marketing objectives and pipeline goals. The new CMO started soon after and the CFO told them there was no established budget but they had a max $5M budget.
About a month later the CMO built a new bottoms-up budget of $4.5M ($1.5M in savings from the prior version). They exceeded all of their objectives that year...
If you give someone more money, they will find a way to spend it.
Good data and a reasonable attribution methodology
Yes, I know attribution is never perfect, but get 80%(ish) there and marketing teams can make much better decisions.
Have the right metrics and targets
There is variability in what the “correct” metrics and targets should be based on company-specific factors, but a few callouts:
You can’t improve what you don’t measure. I know it can be hard (similar to the above point), but better data and tracking enables companies to find more successful and efficient strategies quicker. Ray Rike gave a scary statistic - <18% of SaaS companies track marketing CAC ratio!
Leads don’t put food on the dinner table. The goal of the company isn’t to create leads, it’s to generate efficient revenue. Usually the further down the funnel you can hold marketing accountable the better.
Marketing, sales, and finance need to work closely together. Leaders from these groups should be meeting regularly to discuss problems, data trends, and create alignment on how to more successfully win deals.
Clear definitions of funnel stages. If a sales qualified lead (SQL) is just defined as a meeting set and people’s incentives align to SQLs, then they will deliver a lot of meetings with prospects that have no chance of closing.
Continue to iterate on the goals and metrics. Regularly review metrics/goals and make sure they are driving the right outcomes. Changes in the business may also mean they need to be updated.
Use the company’s target CAC ratio to help triangulate what marketing can spend and be efficient. Forecasted sales expense is more easily quantified based on AE comp plans and sales capacity planning.
If a company knows its 1) forecasted sales expense, 2) its new ARR goal, and 3) its targeted CAC ratio then it can back into what can be spent on marketing. Benchmarks can be used to help inform CAC targets (see next point).
Benchmarking is great, but understand the potential pitfalls
Balance short-term and long-term initiatives
It’s easy for a CMO who is worried about her job in the next 6 months to over-rotate on quick short-term wins. Or the CFO to push cuts on items that have less clear, longer-term ROI. The problem though is that the longer-term marketing initiatives are often the ones that can really drive efficient, durable growth in the future.
Q&A with Anthony Kennada
I asked Anthony to do a Q&A with me because I think building a trusted brand/community is not an area that companies should drastically cut from their budget to get quick savings.
While I am not a marketer, I have found that the companies (brands, communities, audiences, etc) that I trust are much more important than small feature differences. It is 100x easier to start/scale a company than it was a decade ago. Competitors also have a lot easier time catching up or copying features today.
But my trust in a company means I know they are the ones that will make the right changes/innovations in the future to support me.
Paid marketing channels or other short-term marketing initiatives to quickly get new business doesn’t build long-term, durable growth. Both are important strategies, but balance is needed.
Who is Anthony?
His 10,000 hours came at the helm of high-growth marketing orgs, namely building Gainsight from effectively pre-revenue days to over $100M in ARR. Anthony was key in establishing a new software category in Customer Success and creating a movement behind the community. He wrote the playbook for category creation!
Anthony also held CMO roles at Front and Hopin. He is now taking his experience of building multi-billion dollar SaaS companies and building his own startup called AudiencePlus, which helps companies more efficiently acquire customers.
What does AudiencePlus do?
- you are hearing it first here folks! AudiencePlus raised some money and is looking to make marketing more efficient.
AudiencePlus is a rebellion against inefficient paid media and hard-to-quantify organic marketing. We are building a SaaS platform that leverages machine learning to help every company grow efficiently by embracing owned media – owning the direct relationship with their audience, owning distribution of content into that audience, and owning the first-party engagement data that informs business outcomes.
We are a seed-stage company (still unannounced) and are working directly with some of the best CMOs in B2B SaaS to bring the product to market in early Q2.
How has selling a marketing tool changed in this new environment?
- Good data (even if it's not perfect) is so important for improving efficiency in the marketing department. Otherwise, teams won't know when to change strategy, double down on a channel, etc. This is when >50% of the budget gets wasted.
Marketers across industries are being challenged to do more with less. There’s no appetite for making big, expensive marketing bets with unclear ROI. With all of that being said, marketers still have a number to hit.
Maintaining the (often inefficient) status quo is a non-option – so marketers will have to do something new in FY24 just to survive.
With efficiency in focus, a lot of CFOs have the marketing budget in their cross-hairs. How can companies be more efficient in marketing while maintaining velocity?
Having done this a few times, I’m now convinced that owned media is the most sustainable way for marketing to impact growth for SaaS businesses. Paid media is often the biggest line item in the marketing programs budget, and yet, produces the cohort of pipeline that has the lowest conversion to revenue. Building your demand strategy on rented channels like social media, SEO, or content networks like YouTube isn’t a perfect approach either – as your impact is governed by an algorithm that you can’t control.
By moving owned media into the center of your strategy, your marketing team can produce quality content without breaking the bank, run lean on the hiring front, distribute content directly to your owned audience (without paying or renting access), build a first-party dataset around audience engagement, and leverage those insights to drive business outcomes.
As a CMO turned founder/CEO, what have you changed your mind about on marketing?
- this story reminds me of the below quote from Paul Graham. This not only applies to headcount but also budgets. Folks assume as you get bigger you need to spend a lot more on stuff and have it more "professional".
I had to do an about-face from my CMO role at an extremely well-funded startup, to the founder of a seed-stage company with the budget to boot. The idea of doing more with less was more than just a buzz phrase, it became existential to our survival as a young company.
As you can probably imagine, I had to ‘unlearn’ things pretty quickly.
One of the things that I changed my mind about was needing to contract an expensive agency to produce our content – especially video production. I was given a $200k quote to produce a six episode series because I thought we needed “Netflix-quality” for B2B marketers. It turns out that not only could we produce content in-house at a fraction of that expense, but most consumers (especially late-Millennials & Gen Z) actually prefer authentic content creation over high-quality production.
So instead of paying $200k for six episodes, we spent less than $20k on equipment and can now create an infinite amount of content in-house without added expense.
Startups need to get scrappy again! No more relying on the endless VC ATM.
What metrics do you think are most important for managing efficiency in marketing (and why)?
- Not enough companies actually track customer acquisition costs at the channel level. Without that granularity, it becomes difficult to know what is working and what's not.
I push my marketing team to talk about profitability at the channel level rather than in aggregate. How much did we spend on Google PPC (as an example) last quarter, how many leads were generated, and how many of those leads converted into net new bookings? Now do SEO or your channel of choice next.
Given the economic realities we are experiencing as a collective industry, marketers can’t afford to wait for a program to develop when scarce resources can be reallocated to channels that are already productive today.
What was the biggest financial lesson from your time at Hopin after experiencing hypergrowth and then subsequent growth struggles?
- While maybe not to the same scale/speed as Hopin, there are lots of companies experiencing a similar thing right now. Companies need to make sure they have the data/metrics to support the growth plan and they aren't just building a pretty sales capacity model to show they can make the math work.
Very few SaaS companies have ever experienced what Hopin did in 2020/2021. When you grow from $0-$65M ARR in one year, there aren’t industry benchmarks that you can learn from – especially when the circumstances surrounding a once-in-a-generation pandemic are providing such a unique tailwind behind your growth.
The worst mistake was in our annual planning where we forecasted healthy growth over 2021 with murky data to support the plan. We then executed a hiring initiative to achieve that plan, which did not end well only a few months later. While everyone had the best intentions, ultimately we were not able to live up to our potential as a business.
Going back to the Paul Graham quote from above, companies should slow down spending and hiring until more pain of growth is felt. Don’t hire too far ahead just because growth is expected.
How do you position AudiencePlus as critical and not as not a "nice-to-have" during a time of significant cuts?
The idea of doing more with less applies broadly to owned media – reduce your paid media spend, produce a steady cadence of content in-house, keep headcount rather light, and benefit from access to first-party engagement data that can be directly attributed to pipeline creation, acceleration, and revenue attainment across new business and existing.
Said another way, investing in building, engaging, and monetizing an audience – rather than attempting to “create demand” within your market – is not only more efficient to execute, but it in fact yields more profitable results.
How should people think about spending on brand/community when the ROI seems unclear and it can take a longer time to see benefits?
The benefit of owned media as a function of "brand/community" is that you have access to the first-party engagement data -- so attribution is pretty clear. On the issue of time, I think that's more a function of "organic" marketing programs like SEO that do indeed take time to mature. However, I'd characterize SEO as a "rented" channel since our impact is governed by an algorithm outside of our control.
I'd encourage companies to think about brand and community efforts as a function of owned media in order to take the guesswork out of the equation, run more efficiently, and build an authentic relationship with an audience at scale that can sustainably fuel growth.
First off - thank you Anthony for doing the Q&A! Follow him on Twitter @akennada and check out AudiencePlus. Excited to see what they do.
Marketing is always going to be a bit more difficult to ensure efficient spending. But with proper data, metrics, and prioritization, marketing teams can make better-informed decisions that will bring down the cost to acquire a customer.