If we’re going to analyze the future profitability of our marketing efforts, let’s do it like any business would—by building a Pro Forma Balance Sheet. We can break down digital-marketing-driven revenues, costs and investments into Assets, Liabilities and Owners’ Equity, just like we do for our business as a whole. First, we’ll look at Assets, the value of what we have sold and what we will sell in the future in terms of digital marketing. Let’s take a look at a hypothetical digital marketing department (or agency) and make some reasonable definitions and assumptions.
Definitions
Current Revenue – Sales revenues received this month (let’s start in January) directly attributable to digital marketing. Identify all customers who have closed this month and first became leads via one of your digital marketing initiatives: SEO, PPC, email, social media, blog, website referral, download, video, webinar, etc. You should be able to easily identify customers from digital marketing if your marketing automation system is integrated with your CRM system.
New Account Revenue – Now we need to project ahead how many new customers we can reasonably expect based on current digital marketing KPIs and reasonable growth rates, for example as a base case:
- Current Website Traffic – 10,000 unique visits per month
- New Leads (form conversions) – 100 per month
- Visit-to-Lead Conversion Rate – 1%
- Lead-to-Customer Conversion Rate – 1%
- Average Monthly Revenue Per Customer – $1000
In this case, and with no growth in primary KPIs, we can expect (on average) to add one new customer per month, or $1,000 in new revenue per month.
Initial Financial Assumptions
- Sales and Marketing are aligned and operate as a single entity (BIG ASSUMPTION), so that we can break out costs (liabilities) for the entire sales cycle
- 10 Current Customers (under contract at the start of the cycle)
- Annual Churn Rate – 20%
- All data is rounded to the nearest integer or dollar
Base Case—No Growth in Primary KPIs
Assumptions: No Growth in KPIs over 12 months, 1% Visit/Lead Rate, 1% Lead/Customer Rate, 20% Churn (over 12 months).
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
| Website Traffic | 10000 | 10000 | 10000 | 10000 | 10000 | 10000 | 10000 | 10000 | 10000 | 10000 | 10000 | 10000 |
| Visit/Lead % | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% |
| New Leads | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 | 100 |
| Lead/Cust. % | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% |
| New Customers | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 |
| Current Revenue | 10000 | 10833 | 11653 | 12459 | 13251 | 14030 | 14796 | 15500 | 16290 | 17019 | 17735 | 18440 |
| New Account Rev. | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 |
| Churn | 167 | 181 | 194 | 208 | 221 | 234 | 247 | 259 | 272 | 284 | 296 | 307 |
| Total Monthly | 10833 | 11653 | 12459 | 13251 | 14030 | 14796 | 15500 | 16290 | 17019 | 17735 | 18440 | 19132 |
Annual Revenues: $181,188 – Base Case
Case 2—Moderate Website Traffic Growth
Assumptions: 25% Growth in Traffic, 1% Visit/Lead Rate, 1% Lead/Customer Rate, 20% Churn (over 12 months).
To achieve this model, we need to ramp up our inbound marketing efforts across the board—blogging (and blogger outreach), social media promotion and engagement, SEO, PPC, press releases and email marketing. (In my next post on Liabilities, I’ll describe the resources needed to get to this and other levels.)
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
| Website Traffic | 10000 | 10227 | 10455 | 10682 | 10909 | 11136 | 11364 | 11591 | 11818 | 12045 | 12273 | 12500 |
| Visit/Lead % | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% |
| New Leads | 100 | 102 | 105 | 107 | 109 | 111 | 114 | 116 | 118 | 120 | 123 | 125 |
| Lead/Cust. % | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% |
| New Customers | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 | 1 |
| Current Revenue | 10000 | 10833 | 11653 | 12459 | 13251 | 14030 | 14796 | 15550 | 16290 | 17019 | 17735 | 18440 |
| New Account Rev. | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 | 1000 |
| Churn | 167 | 181 | 194 | 208 | 221 | 234 | 247 | 259 | 272 | 284 | 296 | 307 |
| Total Monthly | 10833 | 11653 | 12459 | 13251 | 14030 | 14796 | 15550 | 16290 | 17019 | 17735 | 18440 | 19132 |
Annual Revenues: $181,188 – No Increase Over Base Case
Case 3—Moderate Growth in Traffic and Visit/Lead Conversion Rate
Assumptions: 25% Growth in Traffic, Increasing Lead/Visit Rate (1%-2%), 1% Lead/Customer Rate, 20% Churn (over 12 months).
In this model, we not only need to increase traffic through inbound marketing, but we also need to improve lead conversion rates through demand generation campaigns, calls to action, email marketing and conversion rate optimization (A/B testing) on landing pages, CTAs and emails.
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
| Website Traffic | 10000 | 10227 | 10455 | 10682 | 10909 | 11136 | 11364 | 11591 | 11818 | 12045 | 12273 | 12500 |
| Visit/Lead % | 1% | 1.09% | 1.18% | 1.27% | 1.36% | 1.45% | 1.55% | 1.64% | 1.73% | 1.82% | 1.91% | 2% |
| New Leads | 100 | 112 | 124 | 136 | 149 | 162 | 176 | 190 | 204 | 219 | 234 | 250 |
| Lead/Cust. % | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% | 1% |
| New Customers | 1 | 1 | 1 | 1 | 1 | 2 | 2 | 2 | 2 | 2 | 2 | 3 |
| Current Revenue | 10000 | 10833 | 11653 | 12459 | 13251 | 14030 | 15796 | 17533 | 19241 | 20920 | 22571 | 24195 |
| New Account Rev. | 1000 | 1000 | 1000 | 1000 | 1000 | 2000 | 2000 | 2000 | 2000 | 2000 | 2000 | 3000 |
| Churn | 167 | 181 | 194 | 208 | 221 | 234 | 263 | 292 | 321 | 349 | 376 | 403 |
| Monthly Total | 10833 | 11653 | 12459 | 13251 | 14030 | 15796 | 17533 | 19241 | 20920 | 22571 | 24195 | 26792 |
Annual Revenues: $209,274 – 16% Increase Over Base Case
Case 4—Aggressive Growth in Traffic, Visit/Lead Conversion Rate and Lead/Customer Conversion Rate, Reduction in Churn
Assumptions: 50% Growth in Traffic, Increasing Visit/Lead Rate (1%-3%), Increase Lead-to-Customer Rate (1%-3%), Decrease Churn (20%-10% over 12 months).
In this model, we need to turn on the jets across the board—aggressive content marketing schedule, demand generation and conversion rate optimization, effectively doubling our output and engagement in all channels.
| Jan | Feb | Mar | Apr | May | Jun | Jul | Aug | Sep | Oct | Nov | Dec | |
| Website Traffic | 10000 | 10455 | 10909 | 11364 | 11818 | 12273 | 12727 | 13182 | 13636 | 14091 | 14545 | 15000 |
| Visit/Lead % | 1% | 1.18% | 1.36% | 1.55% | 1.73% | 1.91% | 2.09% | 2.27% | 2.45% | 2.64% | 2.82% | 3% |
| New Leads | 100 | 124 | 149 | 176 | 204 | 234 | 266 | 300 | 335 | 371 | 410 | 450 |
| Lead/Cust. % | 1% | 1% | 1% | 1% | 2% | 2% | 2% | 2% | 3% | 3% | 3% | 3% |
| New Customers | 1 | 1 | 1 | 2 | 4 | 5 | 5 | 6 | 10 | 11 | 12 | 14 |
| Current Revenue | 10000 | 10917 | 11826 | 12727 | 14621 | 18499 | 23345 | 28151 | 33916 | 43633 | 54270 | 65817 |
| New Account Rev. | 1000 | 1000 | 1000 | 2000 | 4000 | 5000 | 5000 | 6000 | 10000 | 11000 | 12000 | 14000 |
| Churn | 83 | 91 | 99 | 106 | 122 | 154 | 195 | 235 | 283 | 364 | 452 | 548 |
| Monthly Total | 10917 | 11826 | 12727 | 14621 | 18499 | 23345 | 28151 | 33916 | 43633 | 54270 | 65817 | 79269 |
Annual Revenues: $396,991 – 219% Increase Over Base Case
Summary
We have looked at several possible scenarios for growth in primary KPIs. Here’s a summary for Year 1:
Scenario Traffic Visit/Lead Lead/Cust. Churn Revenue Growth Base Case 10000/mo 1% 1% 20% $181,188 0% Case 2 +25% 1% 1% 20% $181,188 0% Case 3 +25% 2% 1% 20% $209,274 16% Case 4 +50% 3% 3% 10% $396,991 219%
Discussion
Under these scenarios and their underlying assumptions, several conclusions can be reached about the impact of marketing priorities, activities and levels on revenue growth.
- Revenue growth is relatively insensitive to growth in website traffic as long as visit-to-lead and lead-to-customer conversion rates remain low.
- Even a doubling of visit-to-lead conversion rate, with a 25% increase in website traffic has a modest impact on revenue growth (16%). Why? Because traffic increase and lead generation alone are not sufficient to generate new customers as long as lead-to-customer conversion rates remain low. We must focus on the entire sales funnel.
- To achieve a substantial increase in earnings (200%), you need an aggressive program to increase traffic and visit-to-lead and lead-to-customer conversion rates. As you can see, explosive growth is possible within a few months of launching these digital marketing initiatives, but only if they focus on mid-funnel and bottom-funnel conversion rates.
An aggressive program to achieve rapid growth in KPIs and revenues would require a full spectrum of enterprise inbound marketing and commitment of resources involving:
- Increasing qualified (targeted) website traffic via content marketing aimed at attracting buyer personas on an aggressive publication schedule
- Increasing visit-to-lead conversion rates via landing page, CTA and email conversion rate optimization (A/B testing) and personalization, channel-based metrics (which channel converts best), campaign-based metrics (which type of campaign converts best)
- Increasing lead-to-customer conversion rates via lead nurturing, personalization and sales and marketing alignment
- Reducing churn via content marketing and lead nurturing aimed at customers, customer-centric social channels and support forums, sales and marketing alignment
- Sales augmentation (upsells, cross-sells) via sales and marketing alignment, newsletters, customer channels (social + web), customer-centric email and direct mail campaigns
Next: Liabilities. We’ll look at the actual costs to achieve revenue goals and examine some best practices for enhancing profitability.
// photo credit: SalFalko 