Today on Stacking Growth, Matt Chanella and Dale Harrison cover the calculations that will create the most accurate version of your marketing ROI. Dale breaks down what you need to calculate the R, the I, how to put all those numbers together, and why this version works better than traditional ROI calculations. Hope you enjoy. So we talked about the R side of ROI, but we also need to look at a more complicated part, which is the I side, the investment.
So I is the marketing cost. So one of the things that we have some advantages with in looking at revenue and contribution margin is that revenue tends to be fixed to specific points in time. So, you know, when the sales team closes a deal, you know, we know exactly when that revenue even occurred. And we know exactly how much it is at that point.
So revenue is easy to measure and contribution margin is easy to estimate. But marketing costs tend to be spread out over time, and that makes it a lot harder to connect specific marketing costs to specific revenue. And again, the thing that has been done with sort of the incorrect approach to calculate marketing ROI is to look at current period revenue divided by current period marketing cost. But the fact is, is that little or none of that marketing cost in that given month or quarter actually had anything to do with the revenue that came in that month or quarter.
And a specific example here is that if marketing is delivering a stream of leads to sales, but sales has a say a 90 day closed cycle. So, so 90 day average sales cycle. Then, you know, even if that lead, that next lead ends up closing and becoming a customer, there'll be no revenue recognition event for another quarter because there's a time lag there between when marketing has done his job and when sales finishes his job and actually produces revenue. And so the revenue doesn't kind of instantaneously.
And, you know, so if you're in a business that's running say a one quarter average sales cycle, which is not a typical at all within business B2B SAS, if you're running the one quarter sales cycle, that means that no marketing expenses this quarter had any influence on this quarter's revenue. That it will have have major influence on next quarter's revenue, but not this quarter's. And the reality is that once that prospect enters the sales process, marketing has very, very little influence over either the rate at which, you know, how quickly the deal will close or how likely the deal is close. Most of those things are either already locked in or they are outside the control of anything that marketing can do.
So marketing has little or no contribution once a prospect is in the sales process. Their contribution is what happens during the period of time up to when that prospect enters the sales process, which I realize counters goes counter against a lot of kind of folklore within B2B marketing. But there are really good studies that show that whether you're doing no marketing or a lot of marketing in terms of kind of sales support marketing deals close at exactly the same rate. Doesn't matter.
And the reason why is that almost all of that, if it takes 90 days for sales to close a deal, it doesn't mean that they need 90 days worth of constant convincing to talk them into it. Oftentimes they're talked into it by the second or third day. And the rest of that time is how long does it take for procurement to process the paperwork? How long does it take for accounting, I mean for legal to review the contract?
How long does it take accounting to set up a vendor record so that they can accept an invoice or a PO? And there's no email campaign you're going to run that will make legal, review that contract one day sooner. There's no email campaign you're going to run that's going to make procurement get off the rear ends and process that paperwork one day sooner. And that's the bulk of why things take a long time to sell to close is there is a lot of internal machinery that has to go on within the customer that neither sells nor marketing have any control over.
And then likewise, the highest predictor of whether or not you're going to win a deal is whether or not you were in the day one consideration set, which is driven entirely by whether or not the buyer was aware of the brand well ahead of when they came in market to buy. And so about 75% of what determines whether or not a particular product gets selected for final purchase is entirely determined by whether or not there had been good brand marketing done. And the buyers, the key buyers were aware of the product and the brand before they had a need. So again, marketing has very, very little to offer to influence things once the sales process has started.
Therefore, if we're trying to cap out an ROI, what we really have to look at isn't anything that marketing any marketing expenses during the time that the sales cycle is underway. You have to look at what marketing did before the sales process begins and we'll look at that in a second. So I want to talk about kind of categories of expenses. So we have performance marketing and then how to think about these in terms of figuring out how to allocate these historical marketing expenses to current period revenue.
So performance marketing is basically focused on generating leads that sells over the next average cell cycle. It acts on the 5% of currently in market and it generally does a very, very poor, to non-existent job of producing any kind of durable brand association for the 95% who are not in market. So any of the sort of lead gen performance marketing kind of activities are inherently very, very short term. And they will either produce a result or not produce a result within one cell cycle and they'll have no less in effect after that.
Brand marketing will also produce immediate results. So this is one of the great misunderstandings in B2B marketing. Brand does not take a long time to produce a result. Brand marketing will produce a result instantaneously, but it will only work on people who are already in that 5% who are in market.
And to give you a specific example, I have run billboard campaigns for extremely niche B2B products. Specifically, these were research products sold to scientists doing biomedical research. We would put billboards up at the traffic choke points leading into a major medical or academic research center. Literally, the hour the billboard goes up, we could immediately start to see impact in terms of brand awareness search and in terms of the performance of our page search campaigns and the performance of our placements in category generic search.
And we could immediately start to see traffic on the website coming directly result of that billboard. And that billboard is you do not get more classic brand marketing than a billboard. The other thing that we would see though, and this is the thing with brand marketing, is that there's also a long term effect. Because it's designed to form a durable brand memory association, these memories can influence the 95% as they come in market over future time periods.
So we would run these billboards for like a month. At the end of that month, we would still see this heightened effect. We would see a greater than normal rate of things like brand awareness search for up to 90 days after the billboard went down. Now, again, it was gradually declined because people would forget about us.
But over that next two, three months, even after the billboard is down, there's still enough people that saw the billboard, saw it enough times that they remembered it. They've not yet forgotten it. And they will continue to be influenced by that piece of marketing long after the marketing goes away. So this is the real power of brand marketing is that it gives you this, you know, the performance marketing works very short term.
Brand marketing also works short term, but brand marketing keeps working off into the future, but at a diminishing rate as these memories are progressively forgotten. And then the last thing is the site of latency to revenue. So revenue is not instant. There is some average cell cycle.
So once a product, you know, once a prospect in a cell cycle, marketing has got little or no ongoing influence. So, you know, if you've got a 90 day cell cycle, this implies that no marketing expenses this quarter influenced any current quarter close one deals and the associated. Revenue. So we have to be able to do these time shifts if we want to figure out how to line up the marketing expenses from the past with the current period revenue.
A final note here. So average cell cycle is really critical to doing these sorts of R. Y. Calculations.
So best practice is to generally aggregate marketing expenses and time blocks that match average cell cycle. So, you know, if the average cell cycle is 90 days, then aggregate the marketing expenses by quarter and and and recalculate the R. Y on a quarterly basis. If you've got a fast cell cycle, say a 30 day cell cycle, then do everything on a month by month basis.
And generally, if you've got a very long cell cycle, nothing much is changing fast in the business. So you don't really need to recalculate an R. Y. Number every day or every week or every month.
And so, you know, the idea here is to look to the to the cell cycle as kind of the way to chunk up time, you know, chunk up your expenses on the marketing side, you know, in blocks that match the cell cycling. So applying the model. So we're getting closer to an actual number here. So what I want to talk about is a concept kind of visualized what I had just talked about about the fact that these brain campaigns work immediately, but then they continue to have an influence off in the future.
So, so this is a this is looking from the standpoint of we did some marketing this quarter. So or this month, you know, whatever time period. So we did some brand marketing. We did some performance marketing.
So the performance marketing will entirely have an effect, yet, you know, good or bad positive or negative. It's effect is going to is going to be completely will completely occur within one cell cycle, because it's focus is identifying people who are in market and activating them into the sales process. And at some point, they're going to reach a close close one or close offs and then they're they're not going to be in the market for typically a long time to come. The brain campaign will do exactly the same same thing, but only for people who are in that 5%.
But because there are future buyers that see that campaign that will come in market next quarter and the quarter after that this this quarter's brand campaign will continue to have. Positive influence on future cell cycles, but at a lower and lower level, because what's happening is people are rapidly progressively forgetting that they saw the brand campaign. Now, again, if we're running the same brand campaign every single quarter, then we're refreshing these memories and you get a somewhat different effect. What I'm looking at is kind of what's the diminishing influence on future cell cycles for what we do during this this cell cycle.
So performance campaign, so a sales day today won't become revenue for one cell cycle in the future. And just to make the conversation easier, let's just assume for now we're talking about a 90 day cell cycle, but you have to adjust this for, you know, if your business is cell cycle is different. So the revenue that closed this quarter was a result of marketing leads delivered last quarter. That means that we need to match this quarter's revenue against last quarter's performance marketing expense.
On the brand campaigns, the question here is how fast are people forgetting? And this is a very hard number to measure, but there are reasonably good estimates out there. And because we've been some very good studies going back decades now, looking at how fast people forget, you know, half as these brand memories are forgotten across a population. So for high consideration goods, which most sort of expensive B2B products fall into this, you know, a reasonable estimate is that about 50% of the people exposed to a B2B brand ad will have forgotten it within 90 days.
There's there'll be no active recall. And, you know, but what that means also is that 50% forget it in the next 90 days of that 50% of those will forget it in the next 90 day period. It's like a radio active decay, except its memories. And so, you know, this gives us an estimate of decay rate.
It's a reasonable estimate to use. And again, part of what we're trying to get at here is a reasonable, defensible marketing ROI estimate, not necessarily an exact number. And so, you know, if you don't like the 50% in 90 days, you know, you can replace it with another number if you have better data. Most people don't have better data.
This usually requires pretty extensive market research to be able to precisely measure that for your product. But, you know, again, for high consideration B2B goods, it might be 12 weeks, it might be 10 weeks, it might be eight weeks. But none of that's going to make that much of a difference in the final calculation. So, what we need to do, though, is we need to allocate this period's brand campaign expenditures across future sales cycles.
And let's just do a really quick look at this idea of decay. So, if we're losing 50% of memory, you know, with, you know, every quarter, then the idea is that this quarter's brand expense could be allocated in terms of half of the cost going to the current quarter, 25% going to the next quarter, 15% to the next quarter, 10%. But these are rough estimates of what a 50% per quarter decay rate would look like. It's technically 50, 25, 12.5, 6.25.
But again, this list is just sort of rounded up to easy numbers. And this is what this looks like. So, if we look at, you know, if we implanted, you know, recallable, durable brand memories in 10,000 people's heads, you know, within one month, 22% will have forgotten within two months, another 17 and a half, you know, three months, another 14%. So you get this kind of decay curve over time.
And this is what we're trying to take into account in terms of how prior expenditures for brand marketing are still having a lingering influence on people that are currently in an active sales process this period. So, let's put the pieces together here. So to do a marketing RIS summit, we need a few pieces here. So we need this, some estimate of incremental contribution margin instead of revenue.
We need to factor in the latency effects, the fact that sales takes time. We need to factor in the lag effects of brand marketing's influence, how it will continue to have influence off into the future, you know, or inversely, how historical investments in brand marketing are continuing to have lagging influence into the current business cycle. You know, and then we need to align the average sales cycle is the baseline period and to focus on calculating an overall market ROI. And one of the things I want to talk about as well, just briefly, is this idea of you could do, there's a lot of different marketing ROIs.
There is, what is the total marketing ROI for everything marketing is doing. But then there's also what's the ROI on this campaign or what's the ROI for, you know, we're doing connected TV. So what's the ROI on CTV? And then the other thing that people attempt to do is just a bad idea is what was the ROI on this one deal.
You know, and the problem is that it is impossible to know all of the influences that are associated with, you know, a particular customer or even a particular channel or a particular campaign. You know, and one of the things that is, you know, has been, you know, a massive influence from Refine Labs is to popularize this idea of dark social, the idea that there are a lot of influences that are going, you know, that are pushing customers toward your brand or toward a competitor's brand that are completely invisible. They're outside your ability to either to even know that exists much less to be able to measure it. And so it becomes, you know, it becomes essentially a complete impossibility to try to figure out the ROI of a deal or even the ROI of a channel or campaign.
You're much better off just trying to come up with with a broad ROI that represents all of marketing investments in the company and, you know, and then being able to defend that number at a fairly detailed level. So, so we need two pieces here. We need to calculate an I and we need to calculate an R to get the ROI. So, so we need to start with some assumptions about average cell cycle, brand memory decay rates.
Again, it's, you know, it's not hard to look at the CRM to get to, you know, to see why the particular company's average cell cycle is the memory decay rates typically are not going to have any information on that. In the absence of any information, 50% per quarter is, you know, is a reasonable defensible estimate. It will never be, you know, the decay rate might be faster than that. It will never be slower than that.
This is this is basically the slowest that people will forget. But again, it's a reasonable, it's a reasonable number in the absence of a more specific measurement. And then you want to look at period by period, marketing expenditures broken out by, by in the three categories, performance campaigns, brand campaigns, and then admin over head because a big chunk of marketing, it has nothing to do with campaigns. You know, it's, it's all the martech cost, all of the data analytics, you know, all of the management overhead.
You know, so there's lots of other costs other than what did it cost us to produce, you know, this brand campaign or this performance campaign. So, this is what real numbers would look like. So what we're looking at here is the current cell cycle. So, and I just marked this as Q and then we're going to pick up expenses off into the past between performance and brand.
So this is Q minus one. So one quarter in the past, two quarters in the past, three quarters in the past, four quarters in the past. So the idea is 100% of the performance campaigns, we're going to allocate against, you know, from the from Q minus one, we're going to allocate to the current quarters revenue. We'll allocate all of marketing's admin overhead to the current quarter.
And the brand will allocate half of what we spent on brand this quarter to our last quarter to the current quarters revenue. But then we'll pick up 25% of what we spent one quarter previously at that end, 15% of what we spent two quarters or three quarters previously, 10% from four quarters previously. And we basically add up the pieces. You know, so here, what we assume is, you know, $100,000 a quarter total marketing cost, 50,000 are spent on performance campaigns, 40,000 on brand and another 10,000 overhead.
And then we've got these base assumptions of a 90 day cell cycle and a memory decay rate of 50% quarter. So there's really no hard math here. And most of these numbers, either marketing already has it or marketing can go to finance and finance can help get it for them. So, you know, what we're doing is we're picking up, you know, bits and pieces over different time periods, adding them up to allocate them against the revenue that's generated from within the current cell cycle.
So a couple of notes on this. So this example assumes a 90 day average cell cycle, which also assumes that you're calculating the R on a quarterly basis. The, you know, and all of the categories and marketing expenses are basically aggregated on a quarter by quarter basis. So the final allocation of marketing costs is simply equal to the total, in this particular example, this final allocation is simply equal to the total quarterly marketing cost.
So here we're assuming $100,000 per quarter in total marketing cost and we're adding all these pieces up that gives us back 100. So the question is, why don't we just do it the old fashioned way and say current period marketing cost, 100 divided by current period revenue or contribution margin. And the reason why is that this example, just for simplicity assumes that you're spending exactly the same amount quarter by quarter forever. So in other words, you know, the last five years you've been spending 40,000 on brand every single quarter and 50,000 exactly every quarter on performance.
The reality is campaigns come and go and expenditures vary over time periods. And that's why you have to look at what the actual expenses were. So if you have a business that never changes, where you're always spending exactly the same amount for brand and performance every single quarter forever. One, that's not a very interesting business.
It's not going to be growing. But in those cases, you know, it's going to be, you're going to have a lot simpler final allocation amount for marketing, you know, for the marketing investment. But real businesses, these numbers, you know, these baseline numbers, so this 25% allocation from two quarters ago, you know, is going to be 25% of a different base than the 50% of the brand expenditures from last quarter that we're using. So, so you have to understand that you really need to look at at these allocations against the actual numbers quarter by quarter to be able to get an estimate of what those investments were.
So the final part here, we're getting close, is we then need to calculate the R in the ROI. And so here, we basically need to understand what the revenue and the gross margin rates are, the sales costs, because 100% of the sales costs are going to apply to current period revenue. And then whatever allocated marketing cost. There's an alternate and more precise way of doing this, where you you measure the rate of incremental sales contribution versus incremental marketing contribution.
But these generally require some sort of a fairly good MMM study. Most businesses don't have that. So, you know, the good enough mechanism is just look at how much the company spending on sales each period, and then, you know, come up with this allocated set of marketing costs based on this sort of analysis. You know, to figure out, you know, how much of the historical marketing costs have an influence in this particular sales cycle.
So, what does this look like? So, here, if we had gross accrued revenue, and this is one additional term here. So, when that sales team closes a deal, it may still be, especially dealing with a large corporation. It could be 30, 90, 60, 180 days before, you know, Exxon actually does and why transfer to the company's bank account.
And so, so it's not really how much revenue was collected, but how much revenue was accrued. And so what the accounting does is they will say, we know it's coming. It may take six months before we get Exxon to finally pay us, but we know it's coming. So we're going to accrue those closed one deals to the current periods accrued revenue, you know, and then we'll adjust this when the actual dollars come in.
So, so if you're having this conversation with with finance, it's important to understand that what you're looking for isn't the cash flow of this quarter, but the accrued revenue of this quarter. So, and let's say the gross margin rate is 85%. So, this is not out of alignment for a SaaS company. So, that means that of this million, we get to keep 850,000 before sales and marketing costs.
But then, you know, let's say sales costs were 250,000 and then our calculated marketing allocation looking at these historical values comes in at 100. So this gives us a contribution margin of 500,000 out of the million. So basically it says, once the company was able to deliver the product and pay for acquiring that customer, that million 500,000 is left. And, you know, and then we apply that against the allocated marketing cost, and this would give us a 5x ROI.
So how is this different than the usual marketing ROI calculations? So one is contribution margin is used instead of revenue. So, you know, the other thing is, you know, you want to do a holistic calculation. So, you know, sales doesn't come for free.
So you need something that is factoring in the real cost of the business of running that sales organization, because, you know, even when marketing delivers, you know, an absolute guarantee to close deal, it still has to go through the sales process. And that sales process is still not cheap, not free. You know, and then the other thing is to recognize that there's a latency between when marketing does its thing, and then later what sales has done its thing and the revenue event occurs, which means that marketing costs from these prior periods have to be systematically allocated to current period revenue and contribution margin. So, you know, you know, you're going to have to go through the sales process, you know, you're going to have to go through the sales process.
So, you know, the net effect of this is generally a much more believable realistic number, but a much smaller number. So if we look at kind of the naive marketing ROI that you get from HubSpot or Salesforce and Meta, this is a slightly different example. So I'm not showing all of the supporting data, but just give you an estimate of kind of some reasonable numbers from a real company. The naive way of doing this, where you're like total revenue, and you're only applying the current period sales costs to it, you come in at a 12x ROI, which is a gross overstatement.
You know, once you switch to simply total contribution margin, not even taking into account those sales costs, you know, this comes out to 9x. Once you come in with incremental contribution margin, it's going to drop by another factor of more than three. And, you know, and then when you start factoring in time lags, the ROI actually goes up slightly. And then there's one last thing we haven't really talked about is this idea of cross effects, meaning that your prior brand marketing will make your performance marketing more efficient and more effective.
So you get more value per dollar spent with your performance marketing if you're marketing against people who are already familiar with the brand. And that can make the ROI go up a bit higher. But even in the end, you end up with an ROI that is between a third and a fourth, you're going to have to make your own product. And then you're going to have to be able to do a third and a fourth what you would get doing kind of the naive calculation.
And again, people in finance know this. They may not know why 12x is wrong, but they know that there's something seriously wrong with 12x ROI because they're looking at how the business is underperforming and they're looking at how much sales is missing their targets. You know, but supposedly marketing is blowing it out of the park. You know, meanwhile, sales is running at, you know, they can't hit 50% of allocation.
You know, these sort of grossly absurdly inflated ROI numbers that get reported out of marketing, everybody knows that this is complete make-believe numbers, even if they can't explain exactly why it's wrong. And so the idea of coming in with this kind of a structured approach, you know, when reporting these kind of numbers is that you can defend every single part of this number. And so the idea is not necessarily to come up with an absolutely precise number because I don't think that's possible. But to come up with a number that is reasonable likely within the ballpark of reality, but a number that you can defend in detail in ways that will be acceptable by the CFO, the CEO, and the board.
So, and then one last thing about marketing ROI versus campaign ROI is that campaign ROI is extremely hard to estimate reliably. You know, these row-ass numbers you get from Google and Facebook are complete bullshit. And again, are intentionally maxed way, way above anything related to reality because again, it's in their interest to convince you to pour all your money into more Facebook ads and, you know, quit sending any of that money to Google. So everybody is going to grossly over report, you know, the ROI and ROI numbers.
And then the other thing is that the problem with campaign versus overall market ROI is that buyers are influenced by multiple exposures, most of which we cannot see or track. So it's generally better to focus on overall marketing ROI. Don't try to come up with individual, you know, campaign level or deal level ROIs. You know, and then be able to present these numbers with much more credibility and in a way that's fully defensible within the language of finance and business.