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Insider Secrets for Digitial Marketing Success
Voiceover: This is Performance Delivered, Insider Secrets for Digital Marketing Success with Steffen Horst and Dave Antil.
Steffen Horst: Welcome to the Performance Delivered Insider Secrets for Digital Marketing Success podcast, where we talk with marketing and agency executives and learn how they build successful businesses and their personal brand. I'm your host, Steffen Horst.
In today's episode, we're going to talk about how much you should invest in growth and how to prove it is a good investment. Here to speak with me is Peter Mahoney, the CMO at Goto. Goto is a SaaS company based in Boston that offers communication and remote it tools for your company's customers and teams anywhere on any device. He co-authors the next CMO and a guide to Operational Marketing excellence. Peter, welcome to the show.
Peter Mahoney: Steffen, it's great to be here. Thank you very much for inviting me.
Steffen: And I have to say, obviously, I'm especially happy that you were able to join. As you just told me, you're currently somewhere in beautiful Scotland taking a break from hiking low in the highlands. So I appreciate you taking these 25 to 30 minutes to talk to me. Now, before we get started, tell our listeners a little bit about yourself. How did you get started in your career? What led you to becoming a CMO at Goto?
Peter: Well, gosh, I'm old, so I have to give you the abbreviated version of this. Stefan, I've been doing this for a long time, so I've been a marketing and product executive and CEO for somewhere north of 35 years. But it didn't start out that way and I certainly didn't expect to be doing this. I actually went to school for physics and computer science and sort of accidentally landed in a job, actually in sales. To get started in my career, I started working for a little company called IBM, and I really enjoyed working with customers and the sales process, and that sort of got me hooked on working with customers and technology. And from there I went through a whole stream of different, mostly growth-oriented, but also a number of public tech companies and did a whole bunch of different things. Was a CMO a bunch of times, spent a couple of years, more than a couple of years, about five years, as the CMO of about a $2 billion public company called Nuance, a leading voice in AI company, which is now part of Microsoft. After an acquisition left and started my own company called Plana, focused on marketing planning and budget management and ROI measurement.
And then after sort of sitting on the sideline and doing some consulting and advisory work, someone convinced me to do this one more time and I took a job at Goto, which is about a billion-dollar private equity-backed company, formerly a public company, went private back about four years ago, and they asked me to come on to be the CMO and it's been fun. I'm nine months in and having a great time so far. So that's the abbreviated story.
Steffen: Wonderful. Well, obviously today I want to talk about how you should invest in growth. And in the multimillion-dollar question, how do you determine if the investment was a good investment? Now to get started, how do you determine how much to spend for growth in overall marketing? Where did you start the journey there? Steven?
Peter: Yeah, a lot of people, Stefan, it's interesting. A lot of people ask for the magic number. They just want to know how much I should spend. And it's not that simple. You often hear about benchmarks and you might have read published benchmarks for what companies spend on marketing. But the reality is there are many, many factors that go into determining how much you should spend on marketing. So as an example, what kind of marketing do you do? Do you market to consumers? Do you market to businesses? Obviously, the responsibility of the marketing function is quite different when you look at those kinds of companies, but you also need to consider how fast you're growing. You need to consider your profitability.
So what does the p and l look like for your business? You need to understand what the lifetime value of your customer is. So the point is, there isn't really a single clear answer. I can't tell you a number. What is important to understand is that you need to consider all of those factors together to determine what should you be spending to profitably drive growth in your company, which fundamentally is what you're there to do.
Steffen: Yeah, no, I understand that saying, hey, you should spend a million dollars. Disregarding completely what a company's situation is makes literally no sense. But lets talk about an approach, and you already mentioned a few things there, lifetime value and other things. Where do you start? When you join a company, for example, it matters whether the company is established or a startup.
Peter: Yeah, you need to start with a plan and obviously it's going to add to your specific question. It matters a lot if you're a startup or you're established company. So let's start with an established company and we can come back to the startup question because I've done a lot of work with very early-stage companies trying to help them answer these questions too. But if you're an established company, what you need to start with is first of all, you need to understand your goals. What are you trying to achieve? What is the responsibility that you're signing up for, for marketing, it may be to drive revenue, it may be about pipeline, it may be about awareness, it may be some combination of those factors. But you need to understand what you’re accountable for and what you should be delivering. The second thing you need to understand, if you're established, and this is something that I did when I came to go to, is what historically has the company done when it comes to delivering results. And I like to cast that information in the form of what
So how much have I historically spent to generate a qualified opportunity? How much have I spent to generate a dollar of pipeline? How much have I spent to generate a dollar of revenue? So all those factors are actually really important to understand as a baseline. And with that little bit of information, I at least know that if I want to do the exact thing that I did before, and my primary thing is about driving revenue or growth, this an example, I might say that, well, we spend on the order of generate a dollar of revenue, I need to generate $10 million. That means that if I do the same thing at the same level of performance I've done in the past, to generate $10 million, I need to spend $7.5 million. Now, your goal as an executive is to figure out how to drive improvements in performance over time. So maybe that's just the starting point. You need to figure out how to do it better. But that might be a reasonable place to start when it comes to looking at how much you should be spending overall. The other really critical thing you need to factor in there, Stefan, is that even though the company may have historically performed at a certain level, you need to understand the financial characteristics of the company and what that spending is doing.
So understanding, for instance, if I was spending $1.50 to generate every dollar of revenue, I need to understand, is it recurring revenue, how long do customers stay with me? And is it ultimately a profitable thing to do? Or do I need to come up with a fundamentally different equation for driving growth in my company?
Steffen: So what you just said, spending, for example, seventy-five cents to generate a dollar, is that looking more kind of one-time deals, or how does lifetime value factor into your thinking about that?
Peter: Yeah, so a couple of ways. So, first of all, let's just, in case there's some people who are unfamiliar with the concept, let's just define what lifetime value really means. And it's easiest to think about if you have a subscription product or recurring revenue product. So if you have a product where your customer is spending $1,000 a year and your average customer lasts for five years, that means that you have an 80% retention rate. So if you have an 80% retention rate for your customers, that means 80% of your customers renew every year, 20% go away. That means on average, your customer is going to last for five years. And it's just, it's an average, but it's a useful understanding of what a lifetime value would be. Now, that's part of the equation.
You might think it's, well, it's easy to understand if it's a, if it's five years and $1,000, then a lifetime value is $5,000. What you really need to then factor in is what is the margin you generate? So what's the profit you're generating for each dollar that your customer is spending on you? So if you have a high-cost product, so you're doing some fancy generative AI product and you're using an API into one of these expensive tools, you may have something like 60% gross margins. So that means that for every dollar you have to pay forty cents to someone else. That would mean that with my 60% gross margin, my $5,000 of revenue is worth $3,000 of margin. So that's what the lifetime value is. And that's an important baseline to understand. Does that make sense?
Steffen: Totally. Yeah, yeah, totally. Now talk a little bit about how that potentially changes the equation compared to if you have a kind of a one-time deal situation. Because if you have people renewing or if, you know, they stay for, in your case, five years, you're working off a much greater revenue opportunity than if you have a 110 deal, for example.
Peter: Absolutely. So if I know that my lifetime value is, in that case, multiples of the three times the annual revenue in profit, then that means that I can afford to spend a little bit more to acquire that customer. There are a couple of metrics that people tend to think about. One is in a ratio of the lifetime value to your customer acquisition cost, or LTV over CAC. You want that to be obviously, a positive number. You want the value of the customer to be more than what you spend on the customer. The other way to think about that is what is my CAC payback period. So what is the amount of time I have to hold on to a customer where I pay back the amount that it costs me to require the customer? So if I generate $100 a month from a customer, and it costs me $600 to acquire that customer, then it takes me six months to pay that back.
So that's important to understand. Now, if you have a single purchase product, so maybe you're selling a piece of luggage and that luggage costs dollar 500, then you have to consider the fact that you certainly don't have any guarantee that the customer is ever going to buy another piece of luggage. So that means that you need to justify the customer acquisition cost on a single unit basis. Now you might go back to trying to sell them another product over time, but understanding what the relative cost to acquire that customer is for that single product purchase is really important. That case for a single purchase example that you mentioned.
Steffen: Yeah. Now where I see a lot of startups, and moving to the startup part that just outlined briefly early on, where I see a lot of companies struggle, is kind of doing the right approach from a marketing or growth perspective for startups because they don't have past campaign information. For example, they might not know if it's a product that's kind of subscription-based or where people would usually use it for a longer period of time, not just one-time sale. It's hard for them to say, hey, you know what, we believe we at least have a two-year for some annual subscription lifetime. How do you suggest for companies, for startups to approach what we just talked about?
Peter: Yeah, so there are a couple of things that are really important to do, Stefan. So first of all, you need a thesis, so you need to make some assumptions, and then you need to measure against those assumptions over time to see if it's really panning out as you expected. And if not, you make some adjustments. So what you might do is if you're a new company and you don't know how long you're going to retain customers, as an example, then first of all, you don't assume you're going to retain them infinitely. So maybe thinking about lifetime value of a customer isn't the best thing to do. Instead, think about how long you need to retain that customer to pay back the cost of acquisition for that particular customer. Just so you know, a good benchmark is if you're selling to either consumers or small businesses, you want to pay that back under a year. So something like nine to twelve months.
If you're selling to businesses, especially larger businesses, it may be okay to spend 15 to 18 months as a target to pay back the customer acquisition cost. So as a new company, you need to make a set of assumptions, and that's really just going to be based on your pricing. In that case, if I'm selling a subscription service and it's $100. I know that my total customer acquisition cost, and by the way, keep in mind that that doesn't just mean your marketing program cost, it means all of the costs related to acquiring a customer. If it's an e-commerce business, it's really just maybe the media cost and any campaign related cost. And if there are e-commerce people who are getting paid commissions, it's the commission cost. So any variable cost you have to acquire the customer, you need to factor those in. And in this case, if it's a monthly service, I know I can spend about $900 in aggregate to acquire that customer.
That's a reasonable target to take. Then again, you define that based on a set of assumptions and then you measure as closely as you can, as often as you can. And if the numbers start to vary, then you can make some adjustments based on that. If you're holding on to customers longer, if they're creating more value, maybe you can spend more to drive more growth. And if it turns out they're not lasting that long and are unprofitable, you need to scale back and spend less money because you're just going to ignite big piles of cash, which is not a positive thing to do, obviously.
Steffen: Now every activity that marketing or sales does is in the end geared towards, I would say driving sales. Because when you spend marketing dollars, even awareness, you introducing your product, your service, whatever that you offer to your target audience with the sole goal, I would say to at some point get them to a point of action which could be subscribing to a service, buying the product, etcetera, how do you plan your budget versus awareness consideration and actually lower funnel activities, how do you split that up when you are a startup and then again versus a more established company?
Peter: Yeah, it's a great question, Stefan. And so if you break that down and say, let's take awareness as an example, so you need to think about from an awareness perspective, and you were hitting on exactly the right point. It's all ultimately to drive more revenue for the company. But you need to think about, I'm doing this awareness campaign. To what end? What am I trying to achieve with this campaign? Awareness is actually an interesting thing because the objective of awareness is usually one or the other kind of thing. On one hand, it may be I need to create a broad awareness of my brand within a category. So when someone thinks about that category, they think about my brand and I want to make sure that I'm part of the consideration set of solutions for them as they're thinking about a problem to solve. No, I'm thirsty.
I want a Coke or a Pepsi. Right, that's why they think about that. You want to be part of consideration. The other part of awareness is reputation. And from a reputation perspective, your objective may be about improving your win rate. So it may be that hey, there aren't many companies that participate in my particular domain and people are going to come up with some relatively short list of companies. But ultimately I want to make sure I'm boosting my reputation. And why do you do that? Because from a reputation perspective, if you're known as a reliable company with high-quality products, then maybe that's going to increase your win rate.
And ultimately either you're going to be considered when someone has a need for your thing, so that makes your play rate higher. So you're going to be considered when people are thinking about it or your win rate is going to be higher because you want to think about as people are thinking about your brand among others, you want them to decide yours over the other at a higher rate. But fundamentally, if you think about investing in awareness, you need to think about, well, what is the potential benefit that I'm going to be able to get by making that investment. A lot of early stage companies will say, I want to do some awareness advertising and a thought experiment I like to ask people is, well, what do you think that awareness is going to do? So as an example, if you think that, hey, I want to double my organic search performance as an example, by creating more awareness for my brand. Okay, so if you do that, then you need to think about, well, what's the value of doubling that awareness? And that's pretty easy thing to do because I know what my current baseline is, I know what it converts at and maybe it generates $5,000 a month. Great, doubling my awareness will turn that $5000 to $10,000 a month. So I have some sense of what doubling the awareness is. And therefore I know what, at least from a boundary perspective, what's reasonable for me to start to think about what I might spend when it comes to awareness.
So you need to do that kind of napkin math to figure out what is the potential value of this awareness that you're trying to create. And that will help you determine whether it makes sense for you even to invest anything in awareness in a broad awareness campaign. Or should you try to think of other different approaches to generate awareness or have more of a direct marketing approach? But working through that thesis and sort of working out the numbers is a really critical part of determining what that mix is. And if you're in an early stage, you may want to focus on a much more direct marketing type of approach and really about. So rather than focusing on broad awareness, you may focus more on paid search for your category as an example, because that may be an approach that will enable you to more directly acquire customers without having to focus first on generating broad awareness.
Steffen: Yeah, I think that's a great point you just mentioned. I mean, I would probably caveat it in just one area, that if you have a product that no one knows that a product like that exists, you will need probably a level of awareness. Unless you are able to identify the pain points that your product solves within your target audience and you can advertise against those you know, because then you come.
Peter: Well, you're right on about that stuff. And it's a really important consideration as you're thinking about if you're starting a company or in an early stage company, do you need to create awareness for your overall category? And that can be a very expensive thing to do, obviously, too. And it really depends on your target audience. What you'll find is that the cost of awareness is proportional to the size of the audience. So if you have a very, very broad target audience, then it's very expensive to reach out to be. You're buying Super Bowl ads, right? It's getting huge reach to try to communicate to an audience and generate awareness. If you have a very focused, targeted audience, then it's possible to improve your awareness within a small target much more cost effectively.
Steffen: Now, the next question I have written down here, and you started talking about numbers already, what's the best way to prove return on your investment? Because obviously, the main topic is how much should you invest in growth and how do you prove it's a good investment? So in order to prove it, you need to be able to say, for every dollar I put in, I got x out. So how do you go about that?
Peter: Yeah, it's a complex question, and I'll try and answer it in a simple form because I think you need to approach it simply to start measuring ROI. So when people think about ROI, they almost immediately go to thinking through attribution. So think about, well, which one of my tactics, as an example that I spent money on should get credit for a particular sale. And as you know, Stefan, it's really complex and sometimes impossible to try to measure which particular tactic, which particular impression you made on a customer or prospect that convinced them to buy something, when in some cases you may have dozens, hundreds, even thousands of different impressions with a customer. What I like to do is I like to start by thinking in aggregate at a very, very high level. And the easiest way to do it is to say, well, let's take 100% of the sales and let's take 100% of my cost of marketing and sales and understand that ratio. That's super important. So, for instance, if I generated $10 million in sales and my sales and marketing costs overall were $1 million, then I know I have a nine x return on investment, right? I spent a million and I generated $10 million for that.
So that's a fantastic ROI. And once you start understanding at a very high level, you can start to break it down into individual, measurable segments. And the best way to do that is to start trying to segment the segment the spending and segment the benefit in a way that can be matched up. You might be able to do that with a sales channel, a particular product you're focusing on, et cetera, but really start to break that down into a measurable segment over time. The other approach that can be really useful is to run control tests. The tricky thing with ROI is determining whether your marketing actually made a difference or not. So, for instance, if I spend a million dollars in marketing and the company generated $5 million in sales, I have no idea whether it was for my marketing or not. But if I can segment my marketing and say, hey, I'm going to run a campaign in a particular market, in that market can be geographical, it can be a vertical segment or something like that.
Then I run a controlled test and I have some sense of when I sell the product without marketing or with a baseline of marketing, I get x. When I introduce this new capability, this new marketing message, marketing campaign, I get why. Then I can understand what the difference is. So those are some of the techniques that I like to use to try to break down, to come out with as accurate and as unbiased as possible measurement of what the return is on the marketing investment that I'm making.
Steffen: Perfect, Peter, unfortunately, we've come to the end of today's podcast episode. Thank you so much for joining informants about podcast and sharing your knowledge on how much you should invest in growth and how to prove it's a good investment. Now, Peter, if people want to find out more about you or Goto, how can they get in touch?
Peter: Well, they can definitely go to our website@goto.com or they can. They can follow me on LinkedIn, which is usually the best place to find me.
Steffen: Okay, perfect. As always, we'll leave that information in the show notes. Thanks everyone for listening. If you like the performance of our podcast, please subscribe and leave us a review on iTunes or your favorite podcast application. If you want to find out more about Symphonic Digital, you can visit us at symphonicdigital.com or follow us on X at Symphonic HQ. Thanks again and see you next time.
Voiceover: Performance Delivered is sponsored by Symphonic Digital. Discover audience-focused and data-driven digital marketing solutions for small and medium businesses at symphonicdigital.com.