Download the document 67 KB

By: J. David Green, Best Practices Leader at InTouch

Most business-to-business (B2B) marketing executives would like sales to close the loop on leads. While closed-loop information is clearly useful, what does it really tell the Chief Executive Officer (CEO)? Reasonable people can ask a very simple question that closed-loop information does not answer: how much of the revenue would we have gotten anyway? Marketing can claim the leads generate "incremental revenue", but the evidence is often inconclusive and not particularly compelling.

While great lead programs surely make a revenue contribution of some sort, other factors also play a large role: product strategy, product quality, service and support, and sales strategy. So revenue growth is at most a shared benefit, not something that one group can claim exclusive rights to.

The expense-to-revenue ratio marketing might attribute to lead programs has other holes. Take the obvious case of Microsoft. Microsoft no doubt generates enormous profits from its flagship desktop franchises of Office and Windows. Clearly the return on sales and marketing resources is much better for such products and they are for Microsoft’s CRM software. Most large B2B companies have such flagship cash cows in their portfolios, engines that help make possible investments in more strategic growth areas. This reality means that marketing teams should ideally parse the expense-to-revenue ratios for lead programs further to distinguish revenue from such commoditized areas versus strategic growth areas.

Before further cost-justifying demand generation investments with incremental revenue contribution arguments, maybe marketing executives should take a new approach. That is, where lead generation is concerned, this focus on the revenue and growth side of the equation may be misplaced. Perhaps a more useful frame of reference for investments in demand generation and lead management is on the cost side of the equation and not on the revenue side at all. That is, lead generation is really a matter of cost avoidance and therefore cost savings. In this light, B2B companies must compare these marketing expenses to the costs associated with related sales activity and ask which use of resources yields a better return? The sales activity that most closely approximates demand generation and lead management is sales prospecting. Sales people prospect to motivate customers and prospects to start the buying process. Demand generation campaigns really do the same thing.

In fact, these intertwined sales and marketing costs are arguably directly tied to one another. That is, the more pipeline sales receives from qualified marketing leads, the less time (and therefore expense) the sales force must allocate to this activity. Conversely, the smaller the sales pipeline delivered from marketing leads, the more the sales force must use its time and budget dollars to build the pipeline. Moreover, if marketing sends sales a high volume of unqualified leads, then sales has to spend time and money on this qualification process. Clearly, the cost of sales qualification, which is almost never part of the ROI calculation, diminishes the financial of that lead program.

One can even make the argument that some of the educational work and nurturing that sales does also overlaps with the education and nurturing that marketing might do on behalf of sales.

From this perspective, the closing rate on leads is interesting and even helpful but does not address the real financial questions every CEO should ask:

• Can marketing develop for sales some of the pipeline more cost effectively than sales can develop for itself?
• If so, what percentage of the pipeline should marketing deliver to optimize sales productivity?

In this context, the real financial yardstick is increased sales productivity, not lead conversion ratios or the expense-to-revenue ratio on these marketing investments. In other words, management cannot look at these marketing expenses in a vacuum. Instead, a more holistic approach is necessary, one that contemplates the effect of these investments on overall sales production. Put more simply: do investments in lead generation increase sales productivity profitably and materially? If the answer is "no", then the CEO might as well reallocate the marketing resources used to generate demand and qualify and nurture the resulting leads to the sales organization for additional headcount so that sales can generate its own demand.

Of course, the conversion rate of inquiries into sales matters. Clearly, higher conversion rates are beneficial. But conversion rates are not the final word on measurement. Instead, sales and marketing can align around a common goal: improving sales production profitably.

Better goal alignment doesn’t necessarily resolve the measurement problems either. The executive staff might ask important and vexing questions:

• How much time (and therefore money) does sales invest in prospecting?
• What kind of return is sales getting for that time?
• What is the return on the parallel marketing investments in lead generation and lead management?
• What impact do marketing investments have on sales effectiveness in prospecting?
• What impact do marketing investments in lead generation and lead management have on sales costs?

These are all fine and worthy questions. The problem is the answers are difficult to obtain and often lead to additional valid questions. For example, some types of sales prospecting can be highly effective. Asking customers for referrals as a by-product of the sales process takes little time and generally yields a high payback. Cold calling is another matter. In theory, the cost and return on sales prospecting would need to be parsed. Even cold calling would need to be parsed. If a sales person’s pipeline is empty, cold calling is a better use of that sales resource than doing nothing.

For these reasons, getting the most accurate answers would require transforming customers, prospects, and sales people into data entry clerks, an approach that is not scalable and counter to the purpose of increasing sales production. So what is a more pragmatic method to this conundrum?

What about reducing the problem to the ultimate baseline? In other words, for a given sales team, what is the combined sales and marketing expense to revenue ratio? With this approach, the problem becomes setting up a worthy experiment that contemplates the key variables (selling talent, the product and service portfolio, competitive threats, post-sales satisfaction levels, and so on) and then configuring a pilot to create a true comparison.

The job of leadership would be to identify the most salient variables and define the level of proof necessary. The more proof required, the longer the experiment would run. Once a pilot proves successful, scaling and fine tuning the model can involve a series of experiments using the same approach, a control team and a pilot team of sales people.

Of course, that fine tuning requires all the important granular measurements of pipeline progress marketers struggle with today. Service level agreements between sales and marketing leadership will be necessary for the pilot. Such agreements must spell out the definitions of phone-ready leads and sales-ready opportunities. That agreement must spell out the precise follow up and reporting obligations of both the tele-qualification team and the sale team involved in the pilot. Most importantly, for those involved in the pilot, the pipeline from the leads must make a material difference to sales production. With these and other best practices in place, those illusive closed-loop measurements will take on new urgency for sales leadership and for the sales people themselves.  Best of all, sales and marketing will have a single, unifying goal: using lead programs to increase sales productivity profitably and materially.