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The CMO’s Guide to Setting and Defending Your Marketing Budget and ROI

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February 14, 2023

9 mins read

Setting and defending marketing budget and roi

The CMO’s Guide to Setting and Defending Your Marketing Budget and ROI

Two topics guaranteed to get CMOs talking are:

  1. Pipeline attribution (e.g. how to assign “credit” for opportunities between marketing, SDR, sales, partners, etc.)
  2. Methods to set and defend marketing budgets

It turns out, these are related because many CFOs connect “marketing-sourced pipeline” goals to their marketing budgets.

In this post, I’m going to explain why I think this is the wrong approach for many companies, and then share some key benchmarks that represent the right strategy. This is critical information for any B2B CMO, and I’d love to hear your thoughts (agree or disagree) in the comments.

Why marketing-sourced pipeline is flawed

In my Marketo days, I preached that the quickest path to CMO credibility and respect was to “take a seat at the revenue table”, which meant directly connecting marketing investments to pipeline and revenue. (Note: I always talk about marketing investment, never spending, since we want people to think of marketing as an investment and not a cost center.) 

In those days, the model of sales and marketing alignment was a relay race, in which marketing would generate, nurture, and score a lead, then pass it like a baton to an SDR, who in turn would pass it to sales as a marketing-sourced opportunity. It was fairly easy to show how more marketing investment would generate more leads, and therefore more marketing-sourced pipeline and revenue. That’s how I would set and defend my marketing budget in the early days of Marketo.

The baton handoff model made sense back then, when deals were relatively low value and high velocity, and were often sold to a single decision maker. But it increasingly doesn’t make sense today, especially for more complex, higher value deals. Buying groups are larger and more complex (the most recent data from Gartner says 14 members on average, roughly half “active” and half “occasional”). And effective account-based motions demand marketing and sales orchestration at every step of the journey, pre- and post-opportunity. This includes SDRs and AEs prospecting into target accounts that are also getting marketing touches, AEs inviting key prospects to field events, and SDRs helping to set meetings and staff the booth at a tradeshow. 

A better model for sales and marketing alignment today is a soccer (or football) team, in which players in different positions pass the ball back and forth as it moves up and down the field. In this model, you don’t give credit to any one touch, any more than you give the credit for a goal to any one kick from any specific player. Trying to assign credit breaks down the very teamwork that is required for success. Can you imagine a soccer team putting different scores on the board depending on who scored the goal? Or worse, what if they paid players only for the scores they made? They’d never pass the ball to each other and would ultimately perform much worse as a team.

The team ultimately cares about the total number of goals, and that’s how you should think about pipeline. Rather than getting into squabbles about whether any given opportunity is marketing-sourced, or sales-sourced, or SDR-sourced, etc., focus on what really matters: is there enough TOTAL pipeline to meet your company’s revenue goals, i.e. “Everyone-Sourced Pipeline.”

This also solves the problem that so many touches happen outside of your ability to track. This includes things like word of mouth and conversations in so-called “dark social” communities. It also includes all the great marketing you do that influences deals indirectly, such as PR and awards; ungated content; analyst reports; public speaking; peer review sites; web traffic from unknown visitors; brand advertising; and those intangible feelings about your company that make up your brand – all of which can increase the likelihood a prospect responds to a sales outreach, but from which marketing wouldn’t get any “direct” credit.

If your deals have any level of complexity beyond a single buyer, then switching to Everyone-Sourced Pipeline — and measuring and paying marketing and SDRs on that goal — is, in my opinion, one of the most critical things you can do to drive sales and marketing alignment, focus your marketing on all the things that impact revenue, and optimize your account-based motions.

Setting and defending your marketing budget: benchmarks

OK, perhaps you’re convinced, but your CFO and board are still used to you sharing traditional metrics like MQLs and marketing-sourced (or influenced) pipeline. What can you do? First, share this article with them, and if you need, reach out to me directly (a DM on LinkedIn works great) and I’ll speak to them!

Second, as you move to Everyone-Sourced Pipeline, you’ll need a new way to set and defend the marketing budget. Fortunately, it’s still possible. How? Using benchmarks. 

The cmosurvey.org publishes lots of data on marketing as a percentage of total company budget and total company revenue, by industry, company size, etc. In Sept 2022, the marketing budget accounted for an average of 7.8 percent of revenue at B2B product companies, and 5.9 percent for B2B services companies. Here’s the data for marketing as a percentage of revenues:

Personally, I find the data by employee easier to work with since they show a more linear pattern of companies spending a declining percentage of revenue on marketing as they grow larger:

Marketing Percent Revenue By Employees

And here’s the data by industry:

Marketing Percent Revenue by industry

The cmosurvey.org data, while useful, does require you to interpolate from multiple data points to land on the right number for you. For SaaS companies in particular, we can do better: Insight Partners publishes some great benchmark data for total marketing budget — includes people, program, and other (mostly tech spend) — as a fraction of the new logo bookings goal, based on the average deal size (in ARR) for new logo contracts:

  •  <$15K new logo deal size: 55% Total Marketing Spend vs. New Logo Bookings 
  •  $15K-$75K new logo deal size: 57% Total Marketing Spend vs. New Logo Bookings 
  •  >$75K new logo deal size: 20% Total Marketing Spend vs. New Logo Bookings

It’s interesting to me that the marketing spend for companies with large deal sizes is much lower. Also, I note that these numbers aren’t as useful if your deal sizes are around that $75K break point, since the difference between the two lines is so significant.  

So here’s another (even more detailed) way to get to the same outcome: take the % of total sales & marketing investment that goes to marketing, and divide it by your Magic Number (new logo bookings as measured in ARR growth, divided by total sales and marketing investment) and you’ll get the total marketing spend as a fraction of new ARR logo bookings: 

Total marketing spend as a fraction of new ARR logo bookings

Here’s an example. Let’s assume you are targeting a Magic Number of 0.75. This means you book $0.75 in won ARR (annual recurring revenue) for $1 in total Sales & Marketing (S&M) investment. Some companies do even better, but anything above 0.75 is generally considered good. 

Now let’s assume marketing makes up 25 percent of the total S&M number. This is a reasonable estimate based on the Insight Partners benchmarks:

  •  <$15K new logo deal size: 42% Marketing % of S&M investment 
  •  $15K-$75K new logo deal size: 29% Marketing % of S&M investment 
  •  >$75K new logo deal size: 22% Marketing % of S&M investment

Again, we note that companies with larger deal sizes tend to spend proportionally less on marketing as a percent of the total. (The Keybanc Capital Markets Technology Group Private Company SaaS Survey also has benchmarks on marketing as a % of total S&M investment.)

So, we divide the marketing percentage by the Magic Number, we get 25% / .75 = 0.333, meaning you need to spend $0.33 in marketing to get $1 in new logo ARR, and that your marketing budget would be a third of your new logo bookings target. Voila! You have a budget benchmark your CFO can buy into. (You can obviously adjust this based on your own Magic Number and marketing investment percentage).

Additional marketing budget and ROI benchmarks

We can also use the benchmark data to allocate our budgets and even set targets for marketing ROI and efficiency. First, Insight Partners also publishes data on how much of your total Marketing investment should be on programs (versus people and other): 

  •  <$15K new logo deal size: 52% programs % of total marketing investment (38% people, 10% other)
  •  $15K-$75K new logo deal size: 57% programs % of total marketing investment  (33% people, 10% other)
  •  >$75K new logo deal size: 40% programs % of total marketing investment  (43% people, 17% other)

(I note that the companies with the largest deal sizes tend to invest more in people and technology, which reflects the nature of an account-based go-to-market.)

IDC also publishes what they call the People to Program ratio (which combines programs and other), which often lands around 60-65 percent programs (though this data is skewed by large companies with large budgets) and 35-40 percent people. 

Personally, I think 60 percent programs (including other) and 40 percent people is a good target. 

So, let’s take the $0.33 in marketing to get $1 in new logo ARR we calculated in the prior section, and multiply that by 60%. This gets us 60% x $0.33 = $0.20 in marketing programs for $1.0 of new logo ARR (and $0.133 in people). 

Finally, let’s use the Pipeline Win rate to get a required marketing efficiency. If your win rate is 30 percent, then you’re looking at a target ROI of $0.06 (30% x 0.2) program investment for $1 in new logo Pipeline (all sources). The inverse is what I call the marketing “Golden Ratio” (pipeline $ per investment $), in this case 16.67x. This is a good ROI target to aim for as you work to achieve an efficient marketing investment (though again, you can adjust the math for your own business).

What do you think? What are your targets for marketing efficiency? What benchmarks do you use to set and defend your marketing budget? Please let me know in the comments!

PS: The Insight Partners benchmarks also give data on how the program budget gets allocated across digital, events, content, and other channels (PR, analysts, etc.); where marketing departments focus their resources on new business vs expansion, renewal, sales enablement, and brand; and how many FTEs you should have based on the new logos bookings target. If you’re a SaaS company, check them out!

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Jon Miller

Chief Marketing Officer (CMO), Demandbase

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