PLEASE NOTE: This transcript has been created using fireflies.ai – a transcription service. It has not been edited by a human and therefore may contain mistakes.

00:03
Dom Hawes
Welcome to Unicorny, the antidote to post rationalized business books. This podcast series reveals how senior executives in the world's best businesses are building value. Each episode gives you an insider's perspective, so join us to find out how and why other business leaders make the decisions they make, how they create and measure value, and importantly, what they see coming down the road today. We're back with Peter Russell-Smith to find out what marketing can learn from the private equity playbook. And if you haven't listened to part one, you might want to flip back and listen to that one first. But it is your call. I'm Dom Hawes and in my day job, I'm the CEO of Selby Anderson. We're a group of highly specialized marketing and communications agencies supporting tomorrow's leaders in finance, technology, industrial technology, and health. We like the tough stuff. We help businesses operating in complex markets win the future.

00:59
Dom Hawes
Last week in part One, we covered private equity houses, how they're segmented, and what their cycle stages are. Private equity playbooks and marketing's role in value creation, how you can apply private equity principles in your business, the importance of systems and processes, and the need for a sales and marketing playbook. And we touched on marketing's role in acquisitions. This week, we're going to talk about the evolving role of marketers, particularly in sustaining growth. We're going to talk about the relationship between the CFO and the CMO. We're going to get stuck into a bit of theory with Ansoff matrix when we discuss market share. But first we're going to continue talking about marketing's role in due diligence. And we're going to look at a way of using a due diligence approach, or DD, to identify your competitors' weakness. Okay, to set the scene at the tail end of part one, I asked Peter where marketing should be focusing effort, and he said focus on existing customer relationships first and the way they were made in the first place.

02:00
Dom Hawes
He commented that the quality of existing customers and the quality of the journey they went through to become customers in the first place can tell you loads. The question you want to answer is how does this company we're acquiring end up with such good quality contracts and such good quality customers? This is a due diligence question, but what if you're not making an acquisition? What lessons can you learn? I'd say take the same approach and look at your competition. Look at how they're dealing with their customer acquisition and onboarding, look at how they're dealing with integration and automation. Take lessons from them that you can implement yourself. Let's get back to the interview. Peter, what do you think? Do you think people can learn from competitors like this?

02:42
Peter Russell-Smith
Yeah, the other thing is just try and steal their customers. One of the ways that you can get an understanding of your competition, particularly if your go to market strategies penetrate in other words, sell your existing offers into existing customers or existing markets. Go and try and steal your customers and put a marketing program in place to get them away from their existing supplier. Now, if that's something that's easily done, clearly there are some issues there that you can capitalize on and it devalues your competitor. So that's a very easy way to get a sense check of where they're at, not just by watching them, but attack them and see what the market's response is.

03:20
Dom Hawes
So we've gone through the pricing and packaging at the start of the stage. We've gone through process and some automation. We've got a playbook in place, which means that we are deskilling some of the roles that we have in the organization to increase our margin. We've built ourselves as a platform so we can go acquire business, whether that's physical M A or whether we're targeting competition to onboard new customers. So we've built a bigger ship. We're coming towards the end of the cycle. Where do marketers now add value?

03:48
Peter-Russell-Smith
Two main areas. The first one is to keep the ship going. So what happens is once you get to a particular level of growth or a particular revenue, you encounter different problems. So a company at 5 million has different problems than a company at ten different problems of a company at 25. So if you think about the usual private equity entry, quite often it's around 2020 5 million. And that's because the founders and the entrepreneurs who started the business are bumping up against issues that they don't know how to solve. They can't do it themselves. And so the disciplines around business process, the disciplines around investment in the playbook, the communication of the playbook, they're things that private equity does really well. So if you're getting to that next level, there's another ceiling that you hit at 100 million. Do you centralize, do you decentralize?

04:38
Peter-Russell-Smith
How do you geographically address different markets? So each size of company has got very different problems. And part of marketing's role is to understand when you're arriving at that tripwire and communicating that back to the business and the business owners, to say we're getting a high level of resistance or we've got sufficient market share that we've got diminishing returns here, so we need to do something else. So because marketing is always out there and it's always in the customer's face, it's always in the market, that feedback is incredibly important at any stage of development. But when you get to those thresholds, when you're stagnated and when you can't work out what to do next, that feedback's really critical.

05:21
Dom Hawes
So one of the things I've noticed while we've been recording the Uniqlo podcast, particularly, is this. So I think there's something going on in marketing. The role of the marketer, the person with marketing in their job title is being degraded. Marketing is getting much more complicated. There's loads of good marketing going on in business, but a lot of it's not being done by somebody with marketing in their job title, it's being done by other people. A revenue, a sales, a customer success, someone else. That's all part of marketing. So if you were going to give some advice to someone with marketing in their job title, what would that be?

05:54
Peter Russell-Smith
Change your job title. No, just kidding. I think one of the issues around marketing is that marketeers have traditionally not been very good at communicating their value. So the conversations they have, if you think about traditionally, there was lots of people who had sales director titles and rev ops director titles and those sorts of things. They would be the people who would be engaged in the discussion first, and then it would be, oh yeah, we need to include marketing later. Marketing should be in those discussions up front, and it's understanding the return on investment and understanding business speak to be at that table, to have those discussions and to be up front and center in the whole process. And I think having marketing in your title doesn't really mean much. It's the function of marketing. How that's become more complex because of digitization. It's a much more complex proposition than it was even three years ago before the Pandemic.

06:48
Peter Russell-Smith
So get amongst it, get into those conversations, be a part of that. Don't sit back and just do the marketing bit because it doesn't really exist.

06:58
Dom Hawes
It doesn't. So what we're talking about today is value creation. Let's just have a quick recap. In your opinion, what are the main value drivers through a PE process?

07:07
Peter Russell-Smith
Three key drivers focus on EBITDA. And that may mean that you've got to spend less on product development and more on sales and marketing, which tends to be the case. So focus, good focus on EBITDA, a good focus on recurring revenue and making sure that you've got customer contracts that can be uplifted each year at will. You have the right to do that and you've got a high proportion of your revenue is recurring. The third thing is have a solid playbook for how you engage in the market right the way through the pipeline to a customer and then onto customer success. So strong, well rehearsed and well communicated playbooks are essential to making sure that you're well on the way to being attractive to PE and increase your enterprise value.

07:53
Dom Hawes
So I've been out doing some of my own field work because we're targeting PE backed businesses and I've been speaking to some CFOs because the value creation piece, as far as I'm seeing, doesn't sit in. The marketing department should do, but it doesn't the marketing people are the ones that generally get instructions that they then go and communicate. But it's the CFO who is entrusted with that value delivery. And what I'm seeing is that they may have pricing and packaging reasonably well sorted early on. They're bringing someone like the big business agency in, or Pearson Ham, a pricing specialist. They know what their target looks like to exit at the five year point. And they've made their acquisition, they've integrated it about the three year point. They've got a two year window to go from where they are today. Let's call it Revenue x to Revenue x plus.

08:39
Dom Hawes
They don't know how they're going to get there. And that's the time that they then bring a marketer in and go help. And by then it's kind of too late. Talk to me about how an organization should be filling that gap in the last two to three years of their cycle.

08:52
Peter Russell-Smith
Great question. Marketing should be in the discussion with the CFO because you can't do it in isolation. So you can prepare a spreadsheet as long as you want, but if there's nothing attached to it's not going to happen. So what you find is you'll end up with these revenue gaps that marketing, as you say, get called in to say, help, we need to fill this gap. Right? Often marketing can fill that gap because if you think about B two B companies, particularly the D to C conversation in a B two B context is becoming much more important. And so marketing can help fill that gap. There's a number of different ways you fill revenue holes. You either go and do something new, you go to a new market, you develop your product in a different way, you expand out your services or offerings to your existing customers.

09:37
Peter Russell-Smith
That conversation needs to occur at the same time as the formation of the business plan and the spreadsheet. So the CFO is extremely good with numbers, and most of them are really good with all the stuff that's financial, but they're not marketers, they're not salespeople, they're just financial people as important as they are. So it's the complete mix of skills that go into what we want to achieve and how do we want to achieve it. If those two conversations occur at the same time, then the transition and the growth becomes sustainable.

10:17
Dom Hawes
Okay, let's just take a breath because Peter's moving at speed and I feel like we might need a recap. So Peter pointed out that companies experience growing pains or what may seem like impenetrable walls at different stages of their evolution. And this really chimed with me because we see that in agencies too. A business reaches a certain size, then seems to plateau, and at that stage you either overcome the obstacles and continue on the growth path, or you start to plateau and stagnate and decline. Now, these issues are often about business process, not product or market. Yet many companies seek a solution to stagnation by diversifying either into new products or new markets. So as a marketer, one of the most important things you can do is to keep your business on the growth path by being very clear about a few things. What's the size of your total addressable?

11:08
Dom Hawes
Market also known as Tam. And what's your market share here's why unless you've got a meaningful market share, you will create most value by seeking more. So go penetrate the market. You're the voice of the customer. So assuming the product market fit is still good and you're the best placed person to know that you've got to make the case to the board that they need better process, not diversification. I just wanted to highlight that because as marketers we always seem to chase new when actually quite often we should be chasing more of the same, not something different. Let's get back to the conversation and now introduce the concept of objective orientation.

11:49
Dom Hawes
So there's also, I think, a connection here. If you're a spreadsheet jockey and you've got a gap and you know what your average customer billing is and you know what your lifetime value of your customer is, you can put an algorithm that'll say we only need to win 50 more customers at an average rate, but of course no one's average. And what I think what the marketer's role is also to do some number crunching to look at how realistic that is. I call it like objective orientation, right? So if you know that you need to win another 3 million in revenue between now and exit and you know that your average customer is 50,000 pounds a year, you know that you're going to need 50 X, whatever to get there. Then you need to look at your total addressable market and be realistic about who's in market.

12:35
Dom Hawes
And the statistics we have are only 5% of your target market is in market any one time. Is it physically possible for you to achieve it? And often the answer is no. Which is why I think sometimes firms undershoot against their objective. Talk to me a little bit about pipeline validation and verification.

12:52
Peter Russell-Smith
It's a really contentious area. So remembering here we're talking about value creation and what creates value better than anything is EBITDA. It's the cash that's left when everyone's gone home, right? So basically you can improve EBITDA by getting more out of your existing customers and you can improve EBITDA by getting more customers. And so you've got a relative cost per customer acquisition that you need to take into account. So growth for growth's sake doesn't really do it anymore. You need profitable growth. So part of the balance in making the transition from revenue X to revenue Y is keeping in mind the profit that you're going to generate as you make that transition. You don't have to always keep it positive, right? You have to invest in the business. And so you'll take a hit on your profitability because you're convinced of this and you've done your market research and it all looks really good.

13:43
Peter Russell-Smith
That's the natural course of business. But as you do that, one of the things you got to make sure you're doing is you make sure that your EBITDA and the planning that you're doing around how you grow is consistent, it's well communicated, and it's part of a strategic plan, not just a CFO spreadsheet.

14:02
Dom Hawes
If you believe Drucker, the purpose of a business is to win a customer and then satisfy their need. Let's push that a bit further. When you're trying to scale, if you're trying to create value, is it good enough for the purpose of a customer to be the reference for the next customer after that?

14:18
Peter Russell-Smith
Customer acquisition is really difficult, right? That's why marketing exists. Basically everyone in a business thinks they can do marketing because they just look at it and think, well, that's easy, I can do this, I can do that. The real trick is, as you acquire new customers, is to get them to be happy and all that sort of stuff. When you look at your EBITDA position, and entrepreneurs typically overinvest in their products because they're really wedded to the technology and all that sort of stuff. So one of the first things private equity often does is back off all the product development. And then you get the whole concept of MVP minimum Viable Platform, which basically means that it'll do some stuff and hey, we'll wait till the customers complain or suggest, and then we'll go and put another feature in. And so you build it exactly to the customer specification over the long term.

15:04
Peter Russell-Smith
That's what it's designed for. But that's not actually what happens. What usually happens is someone just says, right, it's like project smoothing. We've got X to spend on development. How much do we achieve in each sprint? How much can we afford to do? Then you can work through the product pipeline and you communicate the pipeline to the customers, right? So there's many different ways and many different techniques that you can use to profitably acquire new business and to profitably keep your EBITDA as high as possible while keeping customers as satisfied as you can.

15:37
Dom Hawes
That's really interesting. So I think there's also analogy here with advertising here. So there's a very good podcast. I listened to Uncentered CMO with John Evans, and he had Les Burnett on there as a Benescent field gurus in our business. And many advertisers marketing people like shiny things, as do entrepreneurs, as do most businesses, and they think that their proposition wears out. And in advertising, actually, it's proven now through System One, they've proved that advertising doesn't wear out. The opposite, actually. Advertising wears in. And I think it's the same with value propositions. Like a lot of businesses, they want to diversify. We have that in our business, right? You've got a company that's doing maybe 3 million in fees saying, oh, we need to diversify because we're now saturated in that market. When, as you said earlier, they've got probably less than 0.1% of the market.

16:26
Dom Hawes
And what they're doing is really good. They just need to do more of it. So that concept of wearing out. People get bored. I think they feel like they need to do something new when actually they probably just want to do more of the same.

16:38
Peter Russell-Smith
That's exactly right. They should just do more of the same. So penetrate and if you use the Ansoff matrix from Igor Ansoff in the Harvard Business, the penetrate strategy is the least risk, highest return. And so you'll often find private equity come in and that's the playbook. Hey guys, we're just going to focus on what we do. That's it. And we're going to add you to this and then we're going to add that, et cetera, et cetera. So it's really important that in the penetrate strategy that you've got significant market share. And people don't talk enough about market share and total addressable market because they're hard discussions to have. It's hard to determine your total addressable market and it's even harder then to look at and in the cold light of day, understand that your market share is nothing.

17:26
Dom Hawes
Part of the playbook, if you're going to take it to a really granular level, is about enforcing behaviours. But bogus KPIs are worse than no KPIs at all. How do you make sure that your KPI, your key performance indicators, really are key?

17:40
Peter Russell-Smith
Really good question. What tends to happen is people mistake activity for success. So if I make 300 calls a day and then I log all these things in the CRM, and if it's not in the CRM, it's not real, it doesn't exist. These are all sorts of mantras that particularly come out of US based companies. Yeah, if it's not in the CRM, it doesn't exist. That's because everyone wants to have visibility of what you're doing. So you've got one person doing something and 19 people watching. Now what the person's actually doing might not be adding any value. So the really important thing is that the playbook and the measures around key performance indicators are against the company's metrics. So you have a sales and a marketing target that reflects the financial targets of the business. So your key performance indicator is, from a process perspective, how many leads are we converting and those sorts of numbers, how many calls are we making?

18:36
Peter Russell-Smith
But interestingly, if you're not monitoring the quality of the calls, the fact that someone can click a button in a CRM and log a call and then ring a number that rings out, and then hang up and ring the same number and it rings out and they get paid their bonus because they made 300 calls in a day. That's pretty dubious, right? And there's a lot of those sorts of behaviours go on. So the key and key performance indicator has to relate to the business's objectives. You could relate it to EBITDA, so everyone has visibility of how profitable the company is. So everyone is then making decisions around how do I improve the company's profitability. Well, I'm going to stop spinning my wheels in this area because I'm just wasting my time. And this is where the playbooks then get tweaked properly tweaked. Right. So they end up adding value to the business rather than creating activity in the business.

19:29
Dom Hawes
Yeah. Activity for its own sake is cancerous in a business and is soul destroying for the people that have to do tasks that they often are meaningless.

19:37
Peter Russell-Smith
Yeah. And because you've got a group of people who aren't experienced, because don't forget, one of the things you've done is you've given them a playbook and you've got a different level of renumeration there. They can, if they want to just sit there and go through the activity log and just do stuff. Okay. That's an approach. Right. It doesn't really help the business that much. And so working out what and how to tweak the playbook so that the activities are valuable is really critical. And that takes senior experienced people to guide and coach people in the business and around them, what are the effective activities, how do you measure the effectiveness of that? So that playbook tweaking is really important. Especially if you've chosen to look at a different geography or you've chosen to look at a different market, the same playbook invariably won't work.

20:29
Peter Russell-Smith
You have to keep tweaking them.

20:31
Dom Hawes
Okay, so I'm going to come back to the two biggest KPIs EBITDA and quality of revenue. Not just revenue, but quality of revenue.

20:38
Dom Hawes
Right.

20:39
Dom Hawes
So any marketer who's listening to this today, who has said in the past week or month, well, I've delivered my leads, now it's up to sales, but they're probably going to screw it up, resign or get fired. And I had, I promise you, I was an event this week and I was talking to a CMO of a cybersecurity company and he said, I've delivered X million into the pipeline. I don't care what happens to it, I've done. My job. Should be fired immediately.

21:05
Peter Russel- Smith
Yeah, kind of straight away. Look when you're on the sales side so the middle part of my career was in senior sales and marketing roles. And you get an MQL, you get a marketing qualified lead. Most salespeople throw them in the bin. Just because someone walked past the booth or just because someone clicked a button on a website doesn't make them a lead. Right. So there's been this age old tension between sales and marketing, and part of the response to that was to bang them together. And then marketing just became sales whipping boy, right. And did whatever sales wanted, but that's not the way to do it. And so if you look at serious decisions frameworks, and some of those more forrester's decisions, they focus on what marketing actually is around brand, around demand gen, around sales enablement, and the two of those levels of expertise and seniority get reflected into the playbook.

21:56
Peter Russell-Smith
So generating an MQL is not actually a measure it's, how many MQLs get to SQL? And ultimately only thing that matters is how many sales did you make and at what margin was that sale made and what was the cost of customer acquisition. So if everyone's focused on that, then your man there at the cybersecurity company has lost his job.

22:20
Dom Hawes
Wow. What can I say? What amazing insight and what an eloquent and expert speaker Peter is. I hope you agree with me that was a belter of a podcast and we broke it into two to keep the episodes commutable, but also because there's just so much for us all to process there. In part one, we kicked off by talking about why private equity's approach to value creation is so relevant to businesses at this stage of the downturn. We then made it clear that marketing should play a pivotal role in value creation. It's about much more than communication and promotional activity. We observed that CEOs and CFOs are looking for value over much shorter cycles. So marketers really need to understand how they can impact value directly and then report on those contributions. We agreed that EBITDA, quality of contract and quality of playbooks were three important drivers of enterprise value.

23:14
Dom Hawes
We talked about automation and taking a people first approach to process development. And that brought us on to talk about the importance of marketing operations and revenue operations. And that brought us today's show. We open talking about due diligence and the observation that if you take a forensic due diligencelike approach to your competition, you can learn a lot about them and of course, how to win their customers marketing. Of course, we've already said it. It's not just about creating awareness and generating leads. 80% of any deal sealed with the first hello. So in my opinion, the role of marketing extends to taking responsibility for the entire sales process, including the outcome. And marketing, I think particularly in this climate, has to take responsibility for sales outcomes. That means that marketers need to ensure their strategies are not just generating leads, they're generating quality leads that convert into sales.

24:12
Dom Hawes
And we talked about what a quality lead looks like earlier recurring revenue, good terms and conditions of business in a good market where you are trying to build market share. And according to Peter, that shift, the shift that marketing takes responsibility for sales outcomes too. That shift in responsibility is crucial. And I gave an example late in the show of a CMO who believed their work ended after passing leads onto sales. It's clear to me that mindset is flawed. Actually, no, it's not. It's gross incompetence because marketing isn't simply about passing leads, it's about generating valuable leads that ultimately convert into successful sales. That closes the loop on marketing efforts, adds value, especially if the contract makes it a quality sale. And marketers are also an essential part of the due diligence team when it comes to M. A it staggers me that more CMOS aren't brought into the team at the outset.

25:11
Dom Hawes
We discussed this with Georgie Gilmore and Joel Harrison in March. This year on this podcast. You know, private equity houses get the importance of the marketer's view. When they acquire, they often hire expert agencies like ours to help. So why doesn't business marketing should be instrumental in due diligence, understanding customer relationships, analyzing business contracts? Why? Because that's where the value is. The value creation moments in private equity, such as customer acquisition, onboarding retention and growth, they're all primarily driven by effective and strategic marketing. So should they be in your business, too? That's it. As always, I'd love to hear what you think of today's subject, especially if you can add knowledge to The Unicorny Project. We would love it if you'd rate, review, or refer us. Reviews and referrals are how shows like this one grow, and it takes us ten to 12 hours to record each and every show.

26:10
Dom Hawes
So please, we'd be very grateful if you take a little time right now to support The Unicorn Project. Now, if you're interested in joining our community, you can register at Unicorny Co. UK, where you can also ask questions or leave comments. That's it, folks. For now. I'm going to foray back into the forest and see what inspiration I can find for future episodes of The Unicorny Project. See ya.