Posts Tagged ‘marketing budgets’

Summary: Marketing VPs and CEOs at data storage and data management firms can use these 5 techniques to generate more sales for the same budget by thinking strategically about how they allocate money.

I think it fair to say that most executives take a tactical, rather than a strategic, approach to the marketing budget. For the most part they take last year’s budget and adjust it up or down or they base it on a percentage of revenue. Then they apply the relatively small changes to their existing expenditures. Accordingly, firms set in motion a marketing program that may not provide them with any competitive advantage. And for most, that’s OK. It is good enough not to be at a competitive disadvantage.

However, it’s possible to gain a competitive advantage at budget time. By that, I mean a small sales-centric firm can “punch above its weight” and generate more sales for the same budget by thinking strategically about how it allocates money.

Strategic budgeting also makes it possible to overcome many of the B2B marketing challenges:

MarketingSherpa Marketing Research Chart:

A worthy goal is to maximize the funds that are applied to lead generation and lead management. What’s a lead? It’s not a web page visit, a click, or a rented list. A lead, according to Marketingsage’s definition is “a sales opportunity-related request with actionable contact information recorded by [you].” These actionable requests are reliably generated by paid promotions such as online advertising, trade shows and email campaigns, especially when supported by product-centric PR and highly selective participation in social media.

Another goal, for business with a resale or distribution channel, might be to increase the funds available for sales incentives directly tied to revenue. For example, paying market development funds to resellers only when they meet a set revenue objective.

Regardless of the promotion or incentive, strategic budgeting usually comes down to applying money to programs and campaigns that have a direct, or highly influential, impact on sales. So if your budget is not increasing, you are really making a decision to take funding from something or someone so you can apply the money to something or someone else that may have a greater impact on sales.

That’s why strategic budgeting is tough. Almost all marketing program and campaign will have their merits and supporters. However, the fact that it tough to do is also the reason why it’s possible for some to out perform peers with the same budget.

With that said, I’ll highlight my top 5 techniques for strategic budgeting.

Calculate What your Promotional Budget Should Be

When you have a revenue target, a lead-to-sale close rate, an average cost per lead and an average customer value you can estimate how many leads you’ll need and the required budget.

For example, if you pay the industry average of $60 for an information request type lead (e.g. white papers download), and your lead-to-sale close rate is 0.5%. You can calculate that you need 200 leads per sale and those leads will cost $12,000. If this year’s revenue target is $10-million and the average customer generates $100,000, you need 100 customers. The 20,000 leads you need for 100 customers will cost $1.2-million in promotions.

Of course, a happy customer can be expected to purchase more and the cost of incremental sales to existing customers will be far lower.

When you do this for the first time you may fund the numbers quite sobering. That’s not a bad thing because the strategic marketer will use this calculation to push back on unrealistic expectations and goals or to justify the appropriate budget for the targets set.

Adopt an Opportunity Cost Perspective

The average cost for an information request type lead (e.g. a white paper download) in the data storage industry is ~$60. As such, you’ll find it helpful to think of each $10,000 that is not spent on lead generation as 166 lost leads.  You can translate that into foregone revenue when you calculate your own close rate and expected average value of a customer – $83,000 using the above example (more if customers have a recurring value).

Thinking in terms of lost leads is very helpful when making judgment calls. For example, should you spend $60,000 to upgrade the trade show booth? Yes, if you think it will deliver a return greater than ~1000 leads – $500,000 in new revenue using the above example.

The same question can be applied to the purchase of marketing analytics tools, paid analyst relationships, promotional giveaways, internal sales meetings, custom creative, etc. If you are the CEO, you can apply this opportunity cost perspective when allocating budget to other departments, rather than to marketing.

Invest Early

If it takes an average of 3 months to convert a sales lead to a customer your fourth quarter promotions are driving next year’s revenue, not this year’s. Therefore a strategic marketer will invest almost everything early in the year to drive sales. Early sales success can be used to justify, and fund, the additional budget required to sustain the momentum later in the year.

Although the data storage and data management industry is not as seasonal as bathing suits and snow blowers, it does have some peaks and troughs that should be taken account. For example, summer months tend to be slower and government and educational customers purchase in cycles. Strategically it may make sense to execute the bulk of your lead generating promotions in the first 5 months of the year.

The word “execute” is important here because it takes 4 to 8 weeks to prepare most promotions – longer for trade shows. Add months and quarters if you need to hire staff, plan and/or build consensus.

Think Talent

Executing lead generating promotions on time with sufficient budget is paramount to success. Your ability to do this will depend on having the right skills at the right time. Therefore, strategic marketers think about talent before they decide whether to hire employees, agencies and/or contractors.

Your choices here are critical simply because talent is likely to be your largest single expense. Typically talent expenses, including payroll, annual analyst contracts, and agencies can consume 60% to 90% of a marketing budget so productivity gains can make a huge difference if savings can be directed into sales programs and lead generating campaigns.

Whether you can redirect savings from increased productivity depends on whether your talent expenses are fixed or discretionary. Payroll is essentially a fixed costs so sales-centric productivity is key. If an employee costing $150,000 per year is spending just 20% of their time on irrelevant tasks, you are effectively forfeiting $30,000 worth of leads. Using the above example, that’s 500 leads that could drive $250,000 in revenue.

On the other hand, outsourced talent is typically discretionary so you can use the services for what you want, when you want, for as long as you want. There usually very little, if any, “busy work.”

Therefore, the strategic marketer minimizes fixed expenses by keeping the number of employees to an absolute minimum and ensuring that the vast majority of everyone’s time is spent on activities that can impact sales. Many deliberately under-staff for 3 reasons:

  • Employees, and everyone who demands their time, are forced to prioritize.
  • To get everything done, tasks will need to be outsourced. Therefore the value and cost of the task will more visible and it will get more consideration (see note on the Opportunity Cost Perspective).
  • Discretionary budget can be more easily reallocated to sales programs.

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Of course every situation is different, but based on decades of experience I’ll offer this rule of thumb:

≤60% of the talent portion of the budget should be allocated to employee payroll, bonuses and benefits and tools (including the VP of Marketing). The most productive teams have experienced product marketers with deep knowledge of the products and industry.

Their job is to manage the day-to-day tasks that cannot or should not be managed by outside agencies. These include liaising with customers, vendors, technology partners, resale partners, salespeople and engineers. This interaction allows them to:

  • Define the strategy, budgets, and timing.
  • Define the product and company positioning.
  • Tee-up press announcements and the outsourced development of sales tools (case studies, brochures, video, etc.)
  • Make decisions about product pricing, sales programs and promotional investments (lead quality, the acceptable cost per lead, tactical placements, events, etc.)

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≥40% of the talent portion of the budget should be allocated to outsourced services such as PR, creative services, media buying, event management and strategic counsel – tasks that are performed better by people with broad media relationships, independent perspectives, and specialist skills. For most firms these tasks do not fill a 40 hour week and specialist skills, contacts and tools make it difficult to hire an effective do-it-all employee. Additionally, many of these tasks need to be executed simultaneously during certain periods of the year requiring bandwidth that just not available from a highly productive internal team.

A highly productive small tech firm marketing a B2B product like storage or data management software can compete using an experienced product-centric VP of marketing, a senior marketing manager, and one full service agency (like my PR and lead generation firm, Marketingsage 🙂

Such an organization would typically:

  • Run 20-25 simultaneous adverting campaigns, including creative, landing pages and lead capture.
  • Generate 10-12 press announcements per year and brief press/analysts each time.
  • Run quarterly reseller inventive programs.
  • Attend 6 or so domestic trade shows.
  • Run 8 to 12 prospect lead nurturing email campaigns.
  • Manage the process for 4 or so interoperability certifications.
  • Author and layout 4 or so white papers.
  • Author and layout 6 or so case studies.
  • Produce 20 minutes worth of videos.
  • Maintain the web site.
  • Maintain a corporate blog.
  • Selectively participate in sales-centric social media discussions.

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Fast, Good, Cheap

You’ve heard the saying: You can have it fast, good or cheap. Pick any 2. For a marketer at a small firm in the storage and data management sector the priority is clear:  Fast and good (enough). Cheap is not the strategic option, even for a cost conscious marketer. Here’s why:

Time is your enemy. The market is highly competitive so a better or less expensive product will emerge soon – maybe before you see an ROI on your current development efforts. This could leave you at a competitive disadvantage with unsold inventory, depressed margins and higher promotional costs.  Additionally, if your firm does not yet have a positive cash flow, time is burning up your available capital. Ask the CFO what’s preferable: spending an extra 20% on an agency that can execute now; or burning 3 months of expenses for the whole company while you go through a hiring or orientation process.

Obviously fast and bad will not win you customers. However, don’t let perfect become the enemy of good enough. Good enough is faster and less expensive than perfect. You’re in the B2B IT market, not the fashion market, so let your competitors waste time and money on custom art, billboards, golf sponsorships, and chotskies while you deliver what prospects want – timely information that helps them choose your product over the alternatives!

About the Author

David X. Lamont is an accomplished marketer of IT products and a partner at Marketingsage, a PR and lead generation firm that specializes in marketing data storage, data management, and enterprise software products. He can be reached by email at blog [at] marketingsage.net. Fellow marketers and IT professionals are invited to join his network on LinkedIn and to subscribe to this blog (see sidebar).

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Summary: A look at the love, launch and lapse phenomenon encountered by many start-ups, what underlies the lapse, and how to mitigate it happening to your firm.

Over the past 20 years I’ve followed the successes and failures of firms in the data storage and data management arena. I’ve noticed a phenomenon that impacts those who sell enterprise software and systems based on new, or potentially disruptive, technology. In today’s market such technology would include systems based on solid state disks (SSD) as well as some cloud enablers, virtualization/VDI solutions and Big Data solutions

The phenomenon is the love, launch, and lapse phases many start-ups experience. In other words, most tech firms experience a honeymoon period that eventually ends. Here’s what happens:

Love at First Sight: The executives and board members are working their Rolodex to sign up beta customers and these initial customers love you. Additionally, analysts and journalists are calling you and you haven’t even come out of stealth mode. If you are out of stealth you may even have been recognized with a “most promising” or “company to watch” award.

Launch Like a Rocket: You hire a PR agency and announce your venture funding and your new product. You get lots of press coverage, especially in the storage media that you read every day. Additionally, your sales team has a bunch of prospective customers. You may even have some noteworthy customers.

Under these circumstances the typical CEO adds salespeople and minimizes the budget for paid promotions like advertising. After all, the prospects in the pipeline were relatively easy to get and PR is driving the funnel. Given everyone’s enthusiasm the plan presented to the board will likely be high on the revenue forecast and low on marketing expenses.

Lamentable Lapse: However, as the quarters pass the vast majority of “hot” prospects turn cold and the press coverage is no longer generating many leads. Other firms now dominate the editorials. The resellers are signed-up, but not selling. There’s little discretionary budget available for promotional campaigns and the few that are tried don’t produce enough results. The marketers are sent on the fruitless quest to find the “magic well” — a single source for high volume, low-cost, purchase-ready leads. The blame game is heating up so office politics between sales and marketing are becoming a drain on productivity. The PR agency is fired. The VP of sales is replaced. The VP of marketing is replaced. Eventually, the CEO is replaced.

What happened?

The analysts and press are always interested in new technology, new products, and new firms. It’s their job to know what is going on in the market. They trade in that knowledge as well as sell their own services to storage vendors. Almost every technology start-up can get their “15 minutes of fame.”

PR agencies know that, so a few storage specialist PR-only firms have built their entire business on the “launch and leverage” model. I prefer to call it the “launch and lapse” model. It’s a great model for PR agencies. News about new technology, products and VC funded companies is in demand so the agency can usually show great initial results to the client (and to the client’s competitors — the PR agency’s new prospects). However, when the launch is done the “heavy lifting” starts. At that point, the PR agency executive that sold the service turns the start-up over to a less influential account manager and moves on to new business (often the client’s competitors.)

Most new publicity (PR or advertising) will release a pent-up demand for information about what’s being promoted. It’s that pent-up demand for certain information that results in an initial surge of leads, followed by diminishing returns. These diminishing returns are easiest to see with some online adverts. The early placements generate more results than later placements (I know, it’s the opposite of print and what the advertising sales rep tells you.) The initial demand is satisfied so when the publication’s audience is not growing at a sufficient rate, the volume of sales leads falls for the same advert. It’s normal!

Of the leads that come in, it’s not uncommon for a technology firm to see a high number of “false positives.” These look like good leads, but don’t close quickly (or at all) so the close rate is very low. False positives result when the hype surrounding a new technology piques peoples’ curiosity. They want to learn about it so they end up downloading the white papers and otherwise flagging themselves as a lead. However, if the new technology has multiple applications (e.g. SSD in consumer and enterprise applications), is complex (e.g. integrates into larger systems and requires buy-in from many people) or is expensive (e.g. beyond the budget authority of the purchase champion) you should expect a long and difficult sales process that can take months, or even years, of nurturing and selling.

What about the happy customers? Beta customers are not the same as real customers, even if they are big names. Many large enterprises are willing to try new technology. The real test is whether they deploy it widely as a result. Additionally, the start-up probably sold the beta product at a big discount (or gave it away) and the tech support people are the best engineers who’ll drop everything to deal with an issue. Lastly, as good as the executives and board may be at at leveraging their executive-level contacts, that sales model is not scalable or repeatable by ordinary salespeople.

STEC stock value after announcing that OEM customers may choose other SSDsUnfortunately, big OEM deals can also result in an eventual lapse. The big OEMs – HP, Dell, IBM, etc. – have annual design cycles for their server and storage products so the components suppliers chosen this year may not be the same as those chosen next year. Big suppliers like Seagate and Western Digital can keep up with the design cycles, but a start-up is typically so overwhelmed with the initial design-in business that they fail to secure the second and subsequent supply contracts. An established vendor that loses a design-in contract will turn to other customers (often through an established distribution channel), but a start-up often goes out of business (or gets acquired at a low valuation). Others, like STEC, may just lose half their stock value.

In fact, it’s often the lucky start-ups that are overwhelmed with fulfilling the demand of a large customer. They are generating revenue and have proven the end-user demand for their innovation. Others sign promising deals with big OEMs (with all kinds of hooks and exclusivity requirements), but the OEM does not sell nearly as many as forecast.

All of these factors assume that a market exists and therefore the sales issues can be overcome. That’s not a given, but I can accept that it is for most data storage products. There is a growing need for capacity, speed, protection and management of data. However, a market is made up of different types of buyers who require different things.

Enterprise SSD is in the Early Adoper Phase

SSD Market 2011

A new market segment is made up of “Innovators.” These buyers are technology enthusiasts willing to try new ideas at some risk. They like to test new things and don’t need complete solutions. They just need access to new technology. These Innovators may buy the product based on its technological capabilities. However, the larger number of “Early Adopters” have different needs.

Early Adopters are looking for a breakthrough advantage in their business and require complete solutions. A solution is not a just box full of Flash or some other technology. Solutions include expertise in the customer’s environment. Therefore, successful firms sell an augmented product that includes more than their raw technology. For example, Texas Memory Systems, a 30+ year old solid state disk supplier, speaks fluent Oracle. They employ an “Oracle Guru” who works with the DBAs that initially identifies the performance problem that’s ultimately solved by the product being sold.

The challenge for the start-up in new market segments is to solve both a technical problem and a business problem. Solving the technical problem can generate a few sales to the Innovators. However, a business problem must be solved to sell to the Early Adopters and many technology start-ups don’t invest enough to market and sell in this environment.

What Really Happened?

The lapse is a result of the executives doing something reasonable. They believed their own eyes and planned accordingly. Unfortunately, they did not recognize that they could be in a honeymoon period so the number of prospects in the pipeline was significantly smaller than it needed to be and the infrastructure to generate leads was lagging.

The initial good news made everyone optimistic when they would have been better served by hoping for the best, but planning for the worst.

Hoping for the best, but planning for the worst

Technology start-ups often establish just one of the 4-Ps necessary for sales success. They establish the product, but do not establish a working promotion, pricing, or channel (place-of-sale) model. In a nutshell, they do not build a working sales and marketing system before the clock runs out. A working system allows you to execute a process and get reasonably predictable results.

Sales leads are at the core of the system. Since people can’t buy what they don’t know about, promotions are used to create market awareness, build brand recognition, and generate sales leads. These promotion-driven sales leads not only have the potential to drive revenue, they are also critical to optimizing your overall marketing. They are the equivalent of an early warning system.

For example, if you know what you are doing and what to expect (as my firm, Marketingsage, does) and it turns out to be difficult and excessively expensive to generate sales leads then you’ve learned something. Your message is not working for the audience you promote to. If the audience includes your customer prospects and your message talks about your product, you may have a positioning issue or need to rethink the offering.

On the other hand, if you are generating leads at a reasonable price it’s fair to conclude that your message is resonating. Therefore if there is a sales issue, you save time and considerable money by investigating product, pricing or channel expectations first. Without a reliable flow of leads, you have to ask if you’ve generated enough awareness for your offering. The only way to answer that question quickly is run many simultaneous promotions. That’s expensive and a big risk for resource- and time-constrained start-ups.

There’s another benefit to building a lead generation system. If you do enough lead generation you’ll end up with a fairly reliable cost-per-lead (CPL) number and a close rate percentage. Those numbers allow you to plan and budget effectively.

For example, if you pay the industry average of $60 CPL and close 0.5% of leads, you can calculate that you need 200 leads per sale and those leads will cost $12,000. If this year’s revenue target is $10-million and the average customer generates $100,000, you need 100 customers. The 20,000 leads you need for 100 customers will cost $1.2-million in promotions. If the sales lead time is 6 months you need all your leads by the end of June. That means the promotions had to ramp up last year. Of course, that’s a little simplistic, but hopefully you get the idea.

Your numbers may be different, but the scenario presented is typical enough. The good news is: When you have data, you can start to drive down the CPL and drive up the close rate to optimize your system. Additionally, happy customers can be expected to purchase more. Therefore, their 3- or 5-year value is often substantially higher than the value of the first year’s sales and the cost of incremental sales is far lower.

There are many ways to generate sales leads (see The Most Effective Sales Lead Generation Methods for Storage and Enterprise Software) – too many to discuss here. However, the difference between a mature lead generation system and ad hoc promotion is typically the inclusion of online advertising.

Done properly, online advertising is effective, cost-effective and relatively predictable. Unlike other promotional methods you can control the placement, timing, message and call-to-action. This control allows you to adjust and optimize in a relatively short period of time. Additionally, it’s scalable!

Bogging, tweeting, cold calling, trade shows, seminars, etc. all require human resources. Consequently, they can be considerably more expensive for the results achieved than just spending a few well placed dollars on advertising.

Bottom Line for CEO’s, VPs and VCs

Recognize that your firm is likely to experience a honeymoon period. Set realistic expectations so you have a chance of success and can justify the necessary up-front investment in lead generating promotions, not just product development.

Realize that the sales cycle for enterprise storage products can be very long. Think 6+ months for today’s enterprise SSD systems and other new technologies in emerging markets. Add months to get promotional campaigns producing. Add quarters if you need to staff-up, build infrastructure as well as get the campaigns producing.

From day-one, build a scalable lead generation and lead nurturing system so you know that you can generate more/less leads as required from various sources.

About the Author

David X. Lamont is an accomplished marketer of IT products and a partner at Marketingsage, a PR and lead generation firm that specializes in marketing data storage, data management, and enterprise software products. He can be reached by email at blog [at] marketingsage.net. Fellow marketers and IT professionals are invited to join his network on LinkedIn and to subscribe to this blog (see sidebar).