69. Death to ROI! Marketing is not a profit centre.

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 
You're listening to Unicorny and I'm your host, Dom Hawes. Welcome, Unicorners, to part two of our myth debunking session with Dale Harrison. Now listeners to part one will know Dale is a bit of a polymath. By that I mean he has dived deep into multiple areas of business. The technical side, the finance side, product innovation, leadership, marketing. He really is a pan business expert. So he comes at marketing with a broad view of what it does for companies, rather than just taking a singular view from just one skill set. This gives him a very refreshing approach to truth. And by that I mean his ability to see the whole picture means he doesn't get blinkered by the accepted rules of a narrow silo like communications. So in part one, he was able to put demand creation to the sword.  

 
00:56 
Dom Hawes 
Despite performance marketing being an established and accepted practice right across our industry, Dale was able to show why it's flawed, largely because we can't create any more demands than already exists. And if we try, we step foot on the path to metrics. Hell, numbers based marketing that cares less about getting it right for the customer and more about how many of them are showing up on our dashboards. If you missed it is definitely worth half an hour of your life. And so in this part two, Dale is going to explain why we can't just magic up leads out of thin air. It all begins with an important thing called the 95 five rule. I'm going to let Dale explain it because he's, well, frankly, he's better at it than me.  

 
01:40 
Dom Hawes 
But it takes us into a conversation about the ability of an organization to convert demand both effectively and efficiently. You know what? I think you are going to absolutely love it. Here's Dale.  

 
01:52 
Dale Harrison 
The foundation of this is something that should be obvious to everyone, which is not everyone is in market all the time. And again, if you want to use CRM as an example, if you just install salesforce two months ago, I can promise you are not in market for a CRM because you went through too much pain to get this thing up and going. You might be in market four or five years from now, but you're not in market now. So this is the core idea behind the 95 five rule, which was developed by a professor named John Dawes at Ehrenberg Bass Institute in Australia. What he did was he looked at a handful of product categories, banking, business, insurance, some areas of software.  

 
02:32 
Dale Harrison 
And what he saw was that there was this rough pattern of about 5% of your potential customers were in market at any given time. If you do a deeper dive into this 95 five isn't a universal rule. It's what I call a parameterized rule, meaning that you have to plug in your numbers for your product category to find out what that number is for your product category. And it's really two things. How often does someone on average decide to do a competitive analysis of products for the purpose of buying? And then how long does that process take? What's the buying window? This data is readily available both as either industry benchmarks for annual churn rate if you're doing subscription products, or for what’s called inter purchase period. Average inter purchase period. And the two values are mathematically equivalent.  

 
03:20 
Dale Harrison 
Theres a formula that you can convert one to the other. The question is whats the average rate at which someone decides to go onto market and look to replace their CRM as an example? Then how long does it take to make that decision? Some decisions are very short. How long is it before you need to buy another tube of toothpaste? Then how long does it take to make that decision? Its very short. But it turns out that even for buying toothpaste, it's roughly a 95 five rule in terms of the number of people that are deciding that they need to buy some toothpaste today, versus how long it takes for them to need another tube of toothpaste.  

 
03:57 
Dale Harrison 
So in every product category there's a natural inflow of people who are prepared to make a buying decision and you know, and there's a natural period that it takes to make that buying decision. So again, if you're looking at installing an ERP in your billion dollar business, or you're installing a new CRM, that's a longer buying cycle than if you're looking to buy a bar soap, or if you're looking to different things have different buying windows. So the core idea is that there is a natural pace at which people come in market and there's a natural buying window that tends to be associated with the product. And if you combine these numbers, you can get an estimate of about what fraction of your total market is in an active buying cycle right now. But this is a moving thing.  

 
04:46 
Dale Harrison 
It's like it's a flowing river. The question then is if you're creating demand, this would imply you have basically have figured out a way to alter the natural buying cycle that you're able to take. Companies that would normally have not considered upgrading their CRM for an average of five years and you're somehow convincing them six months after they just install salesforce to buy your CRM instead. If you can do that's a pretty remarkable feat. But it also opens the door for a very simple way to measure whether or not what you think you're doing to create demand is in fact creating demand, or is it simply just capturing demand that's already out there? And so if you look at your own customers, if your customers average interpurchase period is dramatically shorter than the industry benchmarks for your product.  

 
05:38 
Dale Harrison 
So in other words, with CRM, it's about a 60 month average for replacement. What typically happens is businesses grow. As the businesses grow and become more complex, the needs for their CRM change. And so you have these internal pressures to look for different solutions than what you've got to better reflect the problems that you're facing within the company, because the company is different now than it was five years ago. If you look at your own customers and you discover that the average amount of time since, you know, your customers last bought a CRM and the time they bought yours was six months, then you basically have broken the 95 five rule, you figured out a way to convince a whole group of customers to come back and market at a pace much faster than they normally would have to make a purchase.  

 
06:28 
Dale Harrison 
That would be remarkable. I've done these studies. I've looked at this data in companies. Everybody looks like the industry benchmark, which is why the industry benchmark is the benchmark, right?  

 
06:38 
Dom Hawes 
Yeah.  

 
06:38 
Dale Harrison 
Yeah. It's not about what the company's doing or what the product is. It's about the pressures that are driving people to come in market. And those pressures are typically pressures that emerge internally within the organization, not something that can be applied from the outside with a marketing campaign or ads on Facebook, or cold calling from the BDR. And one of the shorthands I use on this is that your marketing did not get married to buy that box of cereal. The empty cereal box did. There is a natural pace at which we need replacements for things we buy, even if those replacements are in a different category, because that new category is solving the problem in a better way than the old products the old category did, there still is a natural underlying pace.  

 
07:23 
Dale Harrison 
One of the examples you see on this, and this is more in a consumer product area, is when you run price promotions, because one of the ways you can temporarily increase buying is cut the price in half. There's a great study that was done by a group in Australia. They were looking at mattress companies during the pandemic. You had this, a lot of promotion and a lot of discounting for these online mattress companies. And so you saw this big bump in the sale of mattresses for over a one and a half, two year period. And then what you saw was this huge dip below the long term average.  

 
08:01 
Dale Harrison 
Because what you were essentially doing is by heavily promoting and discounting the product, you were basically grabbing future demand and pulling it into the present, which means that future demand is no longer going to be there, you know, as it would normally come in market. And this is what price discounting does, is that, you know, you can increase the rate of buying but you did not increase the rate of demand, you know, so again, if the local grocery store puts detergent on sale for 50% off, you may go in and buy six boxes, but then you're not going to come back in for another three months to buy any more. Just because you bought six boxes doesn't mean that you've suddenly gone from doing one load of laundry a day to doing 20 loads a day.  

 
08:41 
Dale Harrison 
Your demand remains the same, even if your buying patterns will temporarily shift. Because you're basically pushing people up and down the price elasticity curve with discounting.  

 
08:58 
Dom Hawes 
Well there you have it, unicorns in black and white. Why you can't generate leads out of thin air. And what happens if you try, given the pressures that we all face to show results, to demonstrate value, especially in the short term, quarter after quarter, its easy to see why we all end up trying to do it to greater or lesser extents. But I think there’s another big so what moment rising majestically from all of this like a swan taking flight above a foggy river. And its the 95 five rule makes an amazing data led case for brand marketing. Because if 95% of your customers aren’t even in market, it means any response style marketing efforts, well they can only reach the remaining 5%. But any brand work you do can be registered by well 100% of them.  

 
09:47 
Dom Hawes 
Because with brand work you're not expecting them to do anything, you're not trying to make them become a lead. What you're doing is making them aware of why you're right for them. So when they do become part of the 5% crowd, well they're going to look you up. They'll be swayed by your promotion or choose you over a competitor. And it's just like that when we buy a car, we're in the market for a car on average every three years. Let's say it's a two month buying process out of every 36, which is about 5% of the time. But even though you're not in market for the other 95% of the time. You're always looking at other cars, seeing the new ones arrive, imagining what it would be like to drive one, liking some, hating others. And that is what brand work does.  

 
10:32 
Dom Hawes 
It speaks to you even when you're not buying. And it's why it's so crucial to all of the other tactics and the communications that you are going to employ. Now, regular listeners to the pod may remember the episode with Adrian Coxon. Adrian's a renowned marketer, largely because of the outcomes he delivers. And many of his clients think of him as a leads guy. But let's remember what he said on this point.  

 
10:56 
Adrian Coxon 
The lead generation, the cost per lead, the conversion rates, the retention rates. I've been in businesses where they've come in and they've gone, right, do what you did. And I've gone back to them and I said, right, we need to build the brand. And they go, no, not that, not that. The cost per lead bit and the conversion rates, because what they do is they try and plug you into a calculator and go, well, if I give you a million pounds, how many leads could you generate? And, well, currently not as many as you think. But if I invest in the brand and invest in that customer experience, we'll move the dial. But that dial doesn't move short term. It'll take two, three years for us to see the dividends.  

 
11:32 
Dom Hawes 
So next time some smart arse at work says, yeah, but show me the ROI for brand, you can sit them down and take them to school. Okay, let's get back to Dale. I want to evolve what we've been talking about across both part one and part two of our discussion. I want to see how all of this affects two big subjects for us marketers, the efficiency and the effectiveness of what we do. And this takes us to one of my biggest bugbears, how we measure those two things. In other words, r o I. Right, let's get back to the studio and deal with it. So there's something at the moment that is at the top of the agenda of pretty much every marketer, that every marketer has been asked to do more with less.  

 
12:13 
Dom Hawes 
And the route to doing that is often seen as efficiency. We have that ghastly contradiction then between measure what matters, and if you can't measure it then probably doesn't matter. And I think that skewed a lot of people's behaviour. Now, I know, Dale, you've got very specific views on. On efficiency and effectiveness, right?  

 
12:30 
Dale Harrison 
If you think about what this distinction is between efficiency and effectiveness means that what you're doing works or works better. Efficiency is about the cost of doing that thing, that what you're doing is cheaper than some other way of doing the same thing. And again, if you want to do more with less, you can either do more or you can do it with less. But the problem is that in the digital era, because of the nature of the data that tends to be captured, marketers are almost exclusively focused on looking at efficiency metrics and not effectiveness metrics, to the point that I think most B, two B marketers are incapable of telling you the difference between an efficiency metric and an effectiveness metric.  

 
13:16 
Dale Harrison 
My very rough rule of thumb is that efficiency metrics will tell you how fast you're burning the budget, not whether you're doing any good. And you can tell it's an efficiency metric because they're all what I call the C metrics and the r metrics, anything that has the word cost in it. So, you know, CPM, cost per click, cost per lead, all they're doing is they're telling you about how fast you're burning through your budget allocation. And then the r metrics are the ones that have the word rate, because, again, this is how fast is something happening? So, you know, things like click through rate, conversion rate. But the worst of the efficiency metrics is ROI.  

 
13:55 
Dale Harrison 
And my view is that ROI in marketing is almost a completely worthless metric, certainly in the way that it's being calculated and in the areas that people are attempting to calculate it. And it's really something that I think marketers need to abandon unless they're able to really do the work to measure true effectiveness. Because, again, you can get a solid ROI calculation, but not through any of the standard tools that are out there. You basically have to run some sort of an MMM model or an econometric model, so that you can see incremental revenue lift by marketing channel, and you can see the time lags, because one of the problems is that marketing activities, their impact is spread out over long periods of time.  

 
14:40 
Dale Harrison 
Your marketing activities this month, even if you're doing just pure performance marketing, will likely not turn into recognized revenue for anywhere from two to five quarters into the future. Because, one, not everybody is in market, but they saw your ad and they remember you, so they'll think about you when they do come in market, say, two months from now. It still takes time to sell them and collect the cash. And so there are these long lag times between revenue and marketing expenditure. That also means that the revenue you're seeing this month, only a tiny fraction of that's coming from your marketing this month. Much of it's coming from the marketing you did over the last two to five quarters. And what most marketers are doing is they're taking current period marketing cost and comparing it against current period revenue.  

 
15:27 
Dale Harrison 
And they may as well just be taking two random numbers and dividing them, because that would be no less incorrect.  

 
15:33 
Dom Hawes 
Yeah, ROI is a particular pete noir of mine.  

 
15:36 
Dale Harrison 
So here's the other problem with ROI is even if you can accurately measure it, and I would say that's the number one problem with 90% of companies, is that they literally don't have the tools in place to accurately come up with a number to start with. But let's assume you can't accurately measure it. The question is, does this metric have high fidelity? Meaning is it a reliable predictor of something important in the business? So, for instance, the speedometer on your car, it produces a high fidelity metric, meaning that it's a set of numbers. The bigger the number is, the faster you're going, the slower the number is, the less fast you're going. And there's a very clear linear relationship there.  

 
16:15 
Dale Harrison 
Now, imagine you had a speedometer on your car, and sometimes it said 80 when you were parked, and sometimes it said ten when you're flying down the Audubon, you know, as fast as the car will go. What you would realize is that in that world, speedometer isn’t something you rely on to make decisions with. Its just a number that may or may not have any connection to the real world. So the analogy for this in marketing is, if you’re the head of marketing for a restaurant, what is the highest ROI campaign you can perform?  

 
16:50 
Dale Harrison 
The answer is standing next to the hostess stand handing out 50% off coupons to every person that walks in the restaurant that already has a reservation, you're going to have nearly zero cost per lead, you're going to have absolutely 100% conversion rate, and you're going to have thousands and thousands of dollars of marketing influence revenue. It is like the ultimate marketing campaign from an ROI perspective. The only problem is that you're going to run the business bankrupt if you do it there. There's no issues with lag or anything else. You know, you can do a very accurate ROI measurement. And the problem is that even if you can do the ROI measurement completely correctly, it still is not a reliable indicator of whether or not what you're doing is effective.  

 
17:37 
Dale Harrison 
And this goes back to this idea of efficiency versus effective, you have found an extremely efficient campaign. You know, we have very little marketing cost for a lot of revenue in that campaign, but it is not an effective campaign because what's effective in the business is that the business wants to see net incremental revenue lift for every incremental dollar spent in marketing. And that's not what you're giving them with this. It's just not a reliable measure.  

 
18:04 
Dom Hawes 
Sometimes I'm a bit glib about this because I hate ROI for many reasons. Certainly as a measure in marketing, I think it's completely bogus, as you've just very eloquently explained. Thank you very much. But that doesn't necessarily help marketers who are struggling to communicate value to their CFO's. So if they can't get into the sophistication of econometric modelling that we'll discuss in a minute, and we're telling them that ROI doesn't work right now, how would we throw our audience a bone and help them justify their expenditure?  

 
18:38 
Dale Harrison 
Here's the thing that I think marketers need to understand for whatever reason, for whatever sort of internal cultural reason within marketing, they have taken just one of what is a wide range of valuation tools from the financial world and they've just latched onto it as the one and only. If you come up through finance, if you're an FP and a analyst, or if you're a CFO, you're going to have a whole bag of tools to establish value. ROI is just one, and it's a fairly minor one. There are only certain specific asset classes where ROI really works. If you're buying annuity, ROI works great for that. But there's lots of other things where it doesn't. And the thing is to become more sophisticated with how value is perceived by the financial people in the company and speak that language.  

 
19:29 
Dale Harrison 
Don't just sort of randomly pick one term and just sort of cosplay it. One example I always give, it has very direct impact on marketing, especially brand marketing, because one of the problems with brand marketing as well. What, you know, we can't. We can't report an ROI on brand marketing. Then you're right, you can't. So don't try. But the question is, what's the ROI on that building that your factory is in? Not only is it not zero, it's less than zero. You got to spend all the money upfront to build a thing before you ever get any use out of it. And then once you've got it built. You just keep spending money forever because there's just endless maintenance cost and it never puts a dollar in the bank. So you have a major capital asset with a negative ROI.  

 
20:14 
Dale Harrison 
So why aren't all factories simply built out in the open in the middle of a field? And the answer is because CFO's aren't idiots. And because there are fundamentally different ways to establish value for an asset. And you have to choose the right valuation approach for the asset class. The way the CFO looks at that building is that, yeah, it's a money sink, but everything inside that building is going to be both more efficient and more effective. All my machine tools are going to last longer before I have to replace them because they're not going to rust away, because they're being rained on all day. They're going to have a higher operating cycle, meaning that they're down for maintenance less often. The workers are going to be more productive. The factory doesn't have to shut down every time it rains.  

 
21:00 
Dale Harrison 
That asset of the building is basically taking these other assets and making them more efficient and more effective than they would have been on their own. And this is what marketing does. Especially brand marketing. But marketing as a whole, unless you're running a DTC e commerce company, marketing doesn't sell anything. Marketing is a cost, sorry to tell you, but it is a cost. It doesn't put a dollar of revenue in the bank, because if you're a b two B company with a sales team, every dollar that goes in the bank passed through the hands of a salesperson. If you're the CFO and someone asks you, where does dollars come from? You say from sales, and they're true. But what marketing does is it makes the sales organization more efficient and more effective than it would have been without marketing specifically.  

 
21:47 
Dale Harrison 
Marketing is a nonlinear multiplier of other linear aspects of the business. So if the board comes and says we need to double revenue next year, and I'm looking at my sales team, it is unlikely I'm going to get each salesperson to talk to twice as many prospects and close twice as many deals. So if I need twice as much revenue, I probably need at least twice as many salespeople, probably a bit more, because they're going to be less efficient than the ones I already have. And so there's a very linear relationship between investment in sales and revenue for the business. If I can make those salespeople more efficient, if I could increase their close rate, reduce their sales cycle, reduce the level of discounting, that has to be done to close deals. Salespeople have power over it, but marketing does.  

 
22:35 
Dale Harrison 
And so by putting the marketing organization in place, by making people aware of us, then we're going to have customers coming that are more likely to buy. So we have increased close rate. There's already going to be preexisting brand trust, so there's going to be less work involved to convince the customer to close the deal. So we have shorter sell cycle. And if we are, you know, a trusted supplier, because we're known and we've explained what we're doing and why you can trust us, then the salespeople are generally going to have to do less discounting to close deals. And so you're hitting them on every point of efficiency and effectiveness within the sales organization. And none of this would have occurred if marketing didn't exist. And so marketing is like the building that the factory is in, and sales is the factory.  

 
23:24 
Dale Harrison 
And we really need marketing because sales is very expensive, and we can reduce the cost of sales in a very non linear way, but only through marketing. That's the value proposition.  

 
23:37 
Dom Hawes 
I wish you can see me now, Unicorners. I'm standing on a clifftop, bow in hand, and I've just fired a flaming arrow into a viking longship that's drifting out to sea. And on that viking longship is a funeral pyre, now engulfed in flames. And on top of that burning funeral pyre lies the dead body of Roi. And I'm giving it this great send off, because over the years, it's been a worthy foe, and I fought it, and for the most part, it has defeated me. But today, I feel like the last battle's over, and I'm on the winning side. In our great war for common sense, Dale wielded the sword that finally brought Roi down. But behind his fatal thrust was the weight of a thousand marketers like me. Okay, okay, forgive me.  

 
24:31 
Dom Hawes 
I'm waxing lyrical here, Unicorners, but I'm pretty happy about this podium, as many of you already know. I hate the obsession with ROI. And Dale has calmly stabbed it for me, opened it up, and explained exactly why we're measuring the wrong thing. In doing so, he's also explained very beautifully the true role marketing plays and its exact relationship to sales. We are not a profit center. We don't make money for the organization, so stop measuring us that way. We are a force multiplier. We make sales more effective and more efficient, and we do it best by building a large warehouse like brand up and over the engine room of the business. Ever heard of the warning, beware the man of one book. Well, what I love most of all here is where Dale's insight is coming from.  

 
25:25 
Dom Hawes 
He's not basing this on his experience of something narrow, like communications. He's not even basing it on something broader, like marketing. This is his view of how it all works from right across the whole business, because he's worked and succeeded in just about every aspect of business, from finance to product innovation. Dale is a man of many books, and that is what makes what he has to say so valuable. Over the two parts of the pods, we've heard why lead Gen or lead creation is frankly just flawed thinking. We've seen how the 95 five rule makes it impossible for us to just conjure up more leads, and we've seen how that makes a pretty damn good case for brand marketing.  

 
26:09 
Dom Hawes 
That is something that's building an impression in our customers minds, even when they're not in market, which, by the way, is about 95% of the time. And then we wrapped it all up with Dale's killer insight on ROI and critically, where our real role is as marketers. So thank you, Dale. This will go down in the annals of Unicorny as a great day. And it's inspired me to go out and make the next pod. If it's inspired you, I'd like to ask a favor. Please subscribe to the show. It makes it easy. No, no. It makes it effortless for you to get the next episode. And the more subscribers we get, the more people like Dale I can bring on the pod to share their wisdom with you. You have been listening to Unicorny. I'm your host, Dom Hawes.  

 
27:02 
Dom Hawes 
Nichola Fairley is the series producer, Laura Taylor McAllister is the production assistant, Pete Allen is the editor, and Peter Powell is our scriptwriter.