Measure marketing on total cost per deal closed

New Belgian Funnel Coach Benny van Calster from Minds&More sent me a link to a Marketing Profs article today. In Sales and Marketing Best-Practices: Seven Heavenly Virtues Dan McDade paints a bleak picture of how poorly Marketing and Sales handle leads, and recommends 7 actionable steps to get on the same page.

His final recommendation supports something I’ve been arguing for eons, and it prompted me to give a quick example in support of this simple but scary insight. Dan argues that in our enthusiasm to embrace Marketing ROI we have focused on the wrong ratios. See the work of my friend Jim Lenskold on this – he’s the author of Marketing ROI and is undoubtedly the MROI guru. Jim explains that to calculate MROI you need to compare the return (revenue – COGS – cost of campaign) to the cost fo the campaign.

But Dan makes a simple, irrefutable suggestion about simpler ratios.

“Cost-per-lead metric may work for high-volume prospect acquisition, cost-per-opportunity and cost-per-deal indexes are better for measuring prospect-development initiatives”. I couldn’t agree more. Here’s a simple example to support this.

If you had no other information, you’d conclude that Campaign A was better than the other two, and should be accelerated at their expense.

If the costs for each campaign are considered, then you might prefer Campaign B because the cost per lead is by far the lowest at $8 ($1200 / 150).

Let’s now factor in the number of sales, per Dan’s suggestion.

Campaign B now firms as a favourite with a cost per sale of $150 ($1200 / 8) – half the cost per sale for Campaign A ($300). And with a cost per sale of $187.50 – 25% higher, Campaign C is looking out of the money too.

But here’s where I’ll challenge the data. Marketers focus on their own costs, and ignore the costs incurred by Sales to win the deal. If we truly want Marketing and Sales to be on the same page, then we need to respect Return on Effort. Take a look at the work of another friend Jim Cousineau and you’ll get my point.

Ask your counterpart from Sales whether they’d prefer to win 8 sales from 150 leads, or from 100 leads. Of course they would prefer the better close rate of Campaign C. In most businesses, Sales incurs far more cost per sale than Marketing does, yet Marketers think they have ‘cracked the code’ by learning how to do a few basic calcs using only their own costs.

At one level, MROI is not as simple as conversion ratios; at another level we’re short-changing the analysis if we think only of Marketing’s costs when we work out what to do more of and what to stop.

Marketers should prioritise those campaigns that create opportunities which are most likely to close, not those that generate the greatest number or cheapest leads.