What’s the bottom line on any financial statement? Equity. Equity is what’s left after you subtract liabilities from assets. Accumulation of equity is why we are in business—unless you just enjoy working for the sake of working! Even non-profits are interested in equity, because they need to be able to show their organization is doing some good—i.e. channeling money where it’s needed most. Most executives think of sales and marketing as costs, i.e., necessary evils that you need in order to move your business forward. This is old thinking. Done right, sales and marketing are investments that can take your company to the next level. Let’s explore some ways to make that happen in light of our previous examples of digital marketing assets and liabilities.
First, let’s review the cases we set up for Year 1 of operations:
Annual Cost Summary – Year 1
|Base Case – No Growth||$181,188||$91,200||$89,988|
|Case 2 – Grow Traffic||$181,188||$135,600||$45,588|
|Case 3 – Increase Visit/Lead||$209,274||$195,600||$13,674|
|Case 4 – Aggressive Growth||$396,991||$309,600||$87,391|
Cash Flow, Years 1-5
Next, let’s run these scenarios out over 5 years, keeping all assumptions constant within each scenario, except for cost factors. In the Aggressive Growth Case, I have added 2 new employees per year after Year 1 at $7,000 per month (each) to keep up with the demands for new content and sales. In reality, such explosive growth will probably require more manpower and expertise. The other scenarios could probably also use some additional resources in years 2-5, but I have tried to keep this model relatively simple. I have also capped visit-to-lead conversion rates at 3 percent and lead-to-customer rates at 3 percent based on our experience with practical limits in these KPIs. In theory, both of these could be improved by a skilled, highly aligned Sales and Marketing Team.
|Scenario||Year 1||Year 2||Year 3||Year 4||Year 5||Total|
|Base Case – No Growth||$89,988||$188,397||$268,831||$334,577||$388,318||$1,270,110|
|Case 2 – Grow Traffic||$45,588||$153,836||$339,905||$519,051||$754,854||$1,813,234|
|Case 3 – Increase Visit/Lead||$13,674||$343,938||$876,484||$1,503,763||$2,532,229||$5,270,088|
|Case 4 – Aggressive Growth||$87,391||$1,748,082||$5,094,452||$10,749,375||$18,909,498||$36,588,798|
Cost Per Lead (CPL)
|Scenario||Year 1||Year 2||Year 3||Year 4||Year 5|
|Base Case – No Growth||$76||$76||$76||$76||$76|
|Case 2 – Grow Traffic||$100||$79||$62||$49||$38|
|Case 3 – Increase Visit/Lead||$95||$44||$30||$23||$18|
|Case 4 – Aggressive Growth||$99||$56||$52||$44||$38|
Cost to Acquire a Customer (CAC)
|Scenario||Year 1||Year 2||Year 3||Year 4||Year 5|
|Base Case – No Growth||$7,600||$7,600||$7,600||$7,600||$7,600|
|Case 2 – Grow Traffic||$10,044||$7,876||$6,189||$4,862||$3,821|
|Case 3 – Increase Visit/Lead||$9,520||$4,363||$2,976||$2,338||$1,837|
|Case 4 – Aggressive Growth||$4,268||$1,876||$1,299||$1,092||$945|
Sizing Up the Options
Now let’s look at the different digital sales and marketing scenarios and evaluate their potential impact on the financial health of the company.
Base Case Scenario – No Growth in KPIs
5 Year Assets: $1,726,110 (~$345,000 per year)
5 Year Liabilities: $456,000 (~$91,000 per year)
5 Year Equity: $1,270,110 (~$254,000 per year)
Don’t forget this is the entire output of the Sales and Marketing Team over five years! There are other hungry mouths to feed, for example, Products and Services, Customer Support, Management, Clerical, Human Resources, and the list goes on… That kind of overhead will eat up profit fast. In fact, the No-Growth Scenario is a recipe for disaster. There are other ways to generate revenues, for example, through outbound marketing, direct sales and referrals, but how effective are they, and more to the point, how cost-effective are they?
The real problem with the Base Case Scenario is there is no improvement over time. Cost Per Lead (CPL) and Cost to Acquire a Customer (CAC) remain constant (and high) over the five-year spread, which kills both profitability and growth. Now weigh in the likelihood that competitors aren’t standing still, and you can see that this model is unsustainable in both the near and long terms.
Scenario 2 – Increase Website Traffic
5 Year Assets: $2,491,234 (~$500,000 per year)
5 Year Liabilities: $678,000 (~$135,000 per year)
5 Year Equity: $1,813,234 (~$365,000 per year)
We’re doing better, but nowhere near where we probably need to be to break even for most businesses—so what’s the problem?
The problem is that getting “eyeballs” on your brand is just one step in the process of garnering qualified sales leads online. You can have the best content, the most viral videos in the world, but if you aren’t set up to capture leads, and they aren’t the kind of leads that become customers, you can’t expect to increase sales much through digital marketing. In this scenario, we have a fixed visit-lead conversion rate of 1 percent, which is about right for a company with a decent online presence and a few conversion opportunities. The problem is that lead conversion rate doesn’t increase over time, so we are missing opportunities and losing ground to more aggressive competitors.
Scenario 3 – Increase Website Traffic and Visit-Lead Conversion Rate
5 Year Assets: $6,248,088 (~$1,250,000 per year)
5 Year Liabilities: $978,000 (~$195,000 per year)
5 Year Equity: $5,270,088 (~$1,055,000 per year)
Now we’re starting to see some daylight. Small businesses can start to make things work with these numbers. Companies that invest in content marketing and demand generation can generate some real momentum in terms of new leads that grow month over month. Smart marketers work to optimize lead conversion rates by A/B testing landing pages and by leveraging all of the available digital channels to promote their content. In some cases, the growth in leads may outstrip the capacity of the Sales Team to respond, requiring additional resources. Also notice the substantial declines in both CPL and CAC, although cost-per-lead drops faster than customer acquisition cost. So what’s wrong with this picture?
There are two possible problems:
- Despite the accelerated lead generation process, a majority of leads may be unqualified, and statistics show that 80 percent aren’t ready to buy upon first touch with your digital assets.
- What happens to leads once they enter the sales funnel? If you don’t have a well-thought-out plan to nurture them and alert the sales team when they are ready to buy, many of your hard-fought leads will leak out of the funnel and move on to competitors.
Scenario 4 – Aggressive Growth in Digital Marketing KPIs
5 Year Assets: $39,480,798 (~$7,900,000 per year)
5 Year Liabilities: $2,892,000 (~$580,000 per year)
5 Year Equity: $36,588,798 (~$7,320,000 per year)
As you might expect, with aggressive growth in KPIs comes impressive return on investment. While the Sales and Marketing annual budgets might seem alarmingly high, there’s no comparison with the other scenarios in terms of overall performance and growth. Small- to mid-size companies can use a formula like this to achieve financial goals and scale up to capture their markets. Scaling down would have the opposite effect. I would expect an enterprise-level company to be at least twice this budget and effort level in their sales marketing programs. Once the Sales and Marketing Team reaches critical mass (about the size and scope I have outlined here in Years 1-5 or higher), it can start to scale its efforts as well to further accelerate capturing qualified sales leads and improving sales efficiency through lead nurturing and marketing automation without much additional technology or manpower. This efficiency is best reflected in the lowest CAC for all scenarios in Year 5. So what’s wrong with the Aggressive Growth Scenario?
Well, nothing really. The problem is that C-Suite Executives may not buy into these kinds of models and forecasts and remain unwilling to invest the requisite amounts in digital marketing. Why? Because marketing has always been looked upon as a contingency expense, not an investment in the future. In fact, many startups fail to include much marketing at all in their initial fundraising, only to find out too late that they couldn’t achieve the needed rapid growth in sales to penetrate markets and survive. From an investment perspective, here’s what they are missing:
- Digital marketing strategies and commitments are 100 percent measurable and accountable.
- Aggressive growth strategies can improve every aspect of the sales and marketing process, from brand awareness to lead capture to conversion to customers and beyond.
- Digital marketing pays dividends through sustainable growth in primary KPIs and brand advocacy.
- Cost per lead and cost to acquire customers can be reduced over time while sales and marketing efficiency increases, yielding increasing ROI with time.
Now that we’ve looked at the Balance Sheet, our next step will be to put a plan in place for implementing one of these strategies. Please stay tuned for my next post.
Photo credit: kanjiroushi
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