I remember the datapoint that made me take notice of (at the time) this new thing called “inbound marketing.” Inbound Marketing generates 54% more lead volume at 61% lower cost than outbound marketing. When presented that data, who could argue that shifting your resources from outbound to inbound was the right thing to do?
While I am a (HUGE) proponent of inbound, there are two key fallacies lies with this data.
- The first and less damaging lie is based on how a lead is defined.(and it's contained in the very context of the claim that got my attention). An inbound lead is anyone who registers or fills out a form on a website, with no attention paid to the quality or propensity to buy associated with a lead. The definition of an outbound lead (though it varies depends on who you talk to) has a much higher threshold.
This type of apples to tables comparison is akin to someone making the claim that they can generate a higher volume of leads at a lower cost than someone else can generate sales qualified leads. It's a meaningless claim.
- The bigger and more damaging lie (that is still commonly perpetrated by technology and service providers) is caused by treating the lead-to-revenue cycle as a linear equation (generate more leads and you’ll generate more sales in equal proportion) rather than as the more complicated equation that it is.
The rationale further infers that if you generate more leads from inbound methodologies, you’ll lower your cost of customer acquisition even as your growth rate increases and you hit scale. Anyone who has successfully executed high-growth inbound marketing at scale has the financial statements that will illustrate just how big a lie this is.
Let me explain, using one of the most common tools that inbound marketing agencies and advisors use to demonstrate the ROI of working with them.
Last week, I got an email from an inbound marketing agency offering me a free download of their lead generation calculator. I hadn’t received one of these offers in a while, so I was curious to see much had changed. I was disappointed to see that it hadn’t.
The calculator makes a pretty simple and compelling argument. The argument is that if you can increase the conversion rate associated with your website, you’ll increase sales and lower costs.
The calculator works something like this (note: for the example, I literally just picked numbers from the air, so please do not read anything into them. The illustration applies regardless of the numbers.):
- It starts by asking you how many visits you get to your website on a monthly basis. For this example, let’s assume you get 13,000 visits/month.
- Next, it asks on average, how many new leads are generated from your website in a typical month. Let’s use 100 leads for this. This would mean that we have a .76% conversion rate.
- From there it asks what percentage of those leads are qualified. We’ll use 40%, which means we generate 40 qualified leads per month.
- Next, you enter your closing rate. Let’s go with 33%, so from the 40 qualified leads, we close 13 sales.
- It finishes by asking for the gross profit per sale to determine the total gross profit generated. For our mythical example here, we enjoy a $35,000 gross profit per sale, so our website generates $462,000 of gross profit per month.
This is where the calculator gets fun, and the lie gets damaging. What would happen if:
- We increased the conversion rate by 20% (bringing the conversion rate to . 92%)? Well, the lie tells us, we’d generate $92,400 per month in gross profit.
- We also increased traffic by 15%? We’d increase monthly gross profit by $175,660.
These are relatively modest improvements with BIG impacts. After all, if I were to tell you that our services could create the second scenario and our services cost, say, $20,000/month; well, you’d be foolish not to hire us. You’d break-even on your investment with us on the 11th day of our 2nd month working together. (I better raise my pricing.)
Of course, we know, it’s not that simple (or lucrative). Let’s look at the three components of this lie:
As your lead volume and lead velocity increase, your downstream conversion rates will decrease.
All leads are not created equal and as your lead velocity increases, the quality of that lead pool (as measured by predisposition and timing to a buy decision) will increase. The reason for this is that intent is the critical element for this type of lead quality and, at any given time, the number of potential leads with intent is finite and limited.
High-intent leads are also the most likely (and easiest) to convert, so as you increase site traffic and conversion efforts, your lead pool will increase with lower- and low-intent leads at a faster rate than the growth of your overall lead base.
This is not inherently bad but it does mean that you can’t simply calculate higher sales as a result of higher conversion.
As the lead volume and velocity increase, the lead to revenue time will increase.
I will admit that I have always hated one of the most sacrosanct reports used in sales. The waterfall report presumes to create predictability by highlighting the “conversion waterfall” of your revenue acquisition process.
The problem with these reports is that they rarely bring time into the equation. Just like the lead generation calculator I highlighted above, it illustrates a flow and ROI that is instantaneous.
A typical waterfall report highlights the myth that fast growth solves everything. Yet anyone who’s been involved in a high-growth business (and especially one that accelerates growth) knows that growth eats cash. Customer acquisition cost is an important metric, but it’s only a small piece of understanding your real economic model.
You must also calculate and account for the timing of those costs (often heavily front-loaded and fixed) and time to revenue. The ash heap of business history is filled with companies that got killed because of their growth, not despite it.
As you generate more leads, your time to revenue will increase and if you don’t account for it, it can kill you.
The basic premise of the calculation puts your focus on the wrong metric; you shouldn’t be solving for gross profit, you should be solving for lifetime value.
Your focus should not be on revenue or even gross profit. The number one business health metric is the ratio of lifetime value to the cost of customer acquisition & retention. When you solve for this, your decision-making, judgment, and analysis can change dramatically.
The Right Model For High Growth
Growth is a complex beast that is easily misunderstood. The reason for this is that so much of the impact of growth are intangible and virtually invisible. To make sense of it you must identify the three key processes that drive lifetime value:
- Demand Generation
- Customer Acquisition
- Revenue Acquisition
These three processes operate at different rates and each have variabilities and constraints. Intelligent growth is focused around optimizing these three distinct, dynamic process to maximize throughput while controlling the costs associated with them. You must solve for the whole, not their individual parts.
If you don’t effectively manage the constraints/bottlenecks that exist within and between them, you can easily find yourself doing all of the right things only to run out of money before your profit engine kicks into high gear.
If you take this Lifetime Value Manufacturing approach, you’ll gain much greater clarity, you’ll pick up tremendous efficiency and velocity and you’ll achieve sustained growth with much, much less effort and cost.