Lesson #22: How to Calculate ROI on Your Marketing Spend

The worst thing an entrepreneur can do is dump a bunch of money into marketing spend, without having the appropriate reporting in place to track the results of such spend.  Although marketing can often feel like a "creative" area of the business, which it is, it is more importantly, one that requires religious "financial" discipline.  In this post, we will discuss how you infuse ROI disciplines into your marketing DNA and team.

Let's start with internet marketing, one of the most trackable mediums in the history of marketing.  Based on ad tracking tags, web server logs and other software, you can track each ad impression, and the resulting clicks, leads and transactions therefrom.  Whether that is search engine marketing, or email marketing, or social media efforts, or affiliate partnerships with third party websites, the data is easily captured.  But, the key is to make sure you are using these ad tracking tools and reporting on each of these inputs.

While I was at iExplore, my marketing dashboard told me data like: 1MM visitors came to my site that month, sourced 50% from search engines and 50% from affiliate partner sites, resulting in 1,000 people contacting our call center to book a trip and 200 actual transctions.  And, more importantly, I could disect my search engine performance between Google, Yahoo and Bing, and even further, between paid search and free search efforts within each.  I also knew that my affiliates like National Geographic were driving more leads and sales than affiliates like Travelocity.  This was very valuable data, if studied and used, to dial up and down my marketing spend online, moving monies from underperforming vehicles to over performing vehicles, to maximize my marketing ROI.

Although it is harder to do, you can also use the same level of tracking on your offline marketing activities.  As an example, if you send a direct mailer, use a unique promotion code that the customer shares at the time of purchase with your call center staff.  If you are promoting a 1-800 number in your TV advertisements, use a unique 1-800 number for each cable channel you are advertising on, or more specifically, each specific program you are advertising on.  In your magazine buys, use different promotional URLs to point your traffic by magazine (e.g., .com/TimeMagOffer). Not all consumers will end up contacting you via these tracking mechanisms, going to your main website instead.  But, a good portion will, and you will be able to make smart interpretations and extrapolations from there.

The overriding point, where you can, is to track each distinct marketing effort on its own stand alone merits, to assess whether or not you want to continue investing in that vehicle going forward.  And, worth mentioning, never start spending your full budget day one.  Take 10% of your budget, test a bunch of different vehicles you are considering, and then invest the remaining 90% of your budget in the best performing vehicles from that initial test.

Then, once you know the profitable metrics for your business (e.g., never spend more than a $2CPM on any online banner ads), you need to religiously live by those metrics.  Only buy ads that fall below that criteria.  And, often times, your desired sites will not allow you to buy committed advertising at a level well below their rate card.  So, in those cases, you need to be really creative when negotiating those deals.  Tell them you don't need to buy committed space at $10CPM, you are willing to buy remnant, unsold inventory at $2CPM, which may be more digestible to them instead of letting remnant inventory going unsold for zero revenues.

If you cannot get the appropriate line-by-line tracking of your marketing investment, then you need to make sure you are studying the overall impact on your business from that aggregate marketing investment.  For example, if you put an additional $1MM in marketing dollars to work in January, what was the resulting incremental lift in overall revenues in the following months and did the incremental profits justify the investment.  But, when you do this, it is critical you are comparing apples-to-apples data.  For example, make sure seasonality isn't skewing your data (e.g., a retailer's big Christmas sales season naturally took up revenues, not the increased marketing). 

And, it is equally important you know your normal sales cycles between the time marketing is placed and the time a transaction actually closes.  For iExplore, it was a three month sales window, and for MediaRecall it was a 6-12 month window (so study the lift in revenues in the appropriate sales window for your business).  But, for long sales cycle businesses, you do not want to keep your marketing running for too long without knowing whether or not it is profitably working.  So, instead of waiting for actual closed revenue data, study inbound sales leads immediately after the marketing period, to ensure the leads pipeline is building up fast enough to justify the marketing investment (based on your estimated and historical sales conversion rates).

Marketing departments are typically run by "creative" types, that don't necessarily understand the "financial" side of the business.  It is up to you, to make sure these financial disciplines are followed to avoid potentially wasting a lot of mis-spent marketing dollars.

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Lesson #21: Setting a Sales & Marketing Plan For Your Startup

Sales and marketing planning are my favorite part of building any company, as they are the key drivers of the company's revenues.  The lack of a solid sales or marketing plan is typically the #1 reason a business fails, as any shortcomings here will result in revenues and profitability falling short of goals.  So, this area requires intense focus for any startup to succeed.

First of all, what is the difference between sales and marketing.  Sales is typically human driven, with a salesperson introducing your company to prospective customers.  These salespeople can either be inside salespeople, residing in the home office, or outside salespeople, traveling to clients' offices.  What drives the ultimate success of your sales plan, is the quality of the salespeople in terms of their training, skill base, and Rolodex.  So, hiring the right salespeople with the right relationships will make or break your efforts here.  In addition, it is critical to make sure these people are appropriately incentivized with a meaningful commission plan for closing sales and hitting their targets.

Marketing is typically media driven, where an advertisement or other communication is introducing your company to prospective customers. Marketing can be driven via multiple channels, including the internet, social media, word of mouth, print, television, radio, billboards, events and direct mail, to name a few.  What drives the ultimate success of your marketing plan is a smart marketing team that has properly studied your prospective customer demographics, and placed the appropriate marketing messages in front the appropriate media placements where these customers are looking.  So, hiring the right marketing team with proven experience working within your industry and desired budgets will make or break your efforts here.

Most B2B companies are sales driven organizations, and most B2C companies are marketing driven organizations, with numerous examples of companies overlapping between the two.  The reasons most B2B companies are sales driven are three fold: (i) they are usually dealing with a much smaller base of customers, more easily reachable by a sales team; (ii) corporate customers are typically relationship driven, and want the comfort of working with a salesperson that best understands their needs; and (iii) the average transaction size can get very large, often into the millions, which needs the comfort provided from a face to face meeting to close a sale (e.g., the trust factor).  

So, for example, if you are an auto parts manufacturer, your prospective calling list in the U.S. is pretty small, with GM, Ford and Chrysler your primary prospects.  But, as you can imagine, given the size of those companies, tons of auto parts manufacturers are trying to get their attention, since any one order can make or break their business.  And, only a saleperson with solid relationships in the industry can break through that clutter, get the attention of the key buyers and closes those sales. 

The key downside of a sales driven organization, particularly for large ticket orders, is the lead time can be very long before transactions start to close (e.g., 6-24 months, depending on the product).  So, it will take a lot of money to keep the business funded until revenues start driving, especially when trying to break into big Fortune 500 companies, where established relationships and processes are hard to change.

The reason most B2C companies are marketing driven organizations really comes down to one primary reason: media is the most efficient way to get in front of millions of prospective customers.  It would not be practical building a salesteam to call on 300MM Americans.  Media comes in multiple forms and reach, from 500MM unique monthly visitors on websites like Google, YouTube or Facebook, to 100MM households on cable channels like Discovery Channel or History Channel, to 10MM people that drive by a certain billboard each month to 5MM people you can direct mail to the National Geographic subscriber list to 1MM people that read the Chicago Tribune.  You get the point, lots and lots of different marketing options, based on your desired medium, reach, demographics, frequency and budget.

As a startup, your marketing budgets typically can't afford that thirty second ad on the Super Bowl for $3MM, despite almost one billion people watch the game worldwide.  You need to be much more frugal in your initial spend, looking for cost effective (or even free) tactics.  Especially since you want to test all tactics first, with small budgets, to make sure they are working as planned, before hitting the accelerator and spending a bigger budget.  Here you are talking about doing search engine optimization of your website for free inbound traffic, keyword based advertisements in Google's search results on an affordable cost per click basis, leveraging the powerful word of mouth benefits of social media via Facebook or Twitter, affililate or cross marketing relationships with similar businesses, and PR based communications, to name a few.

The downsides of marketing are: (i) it can get expensive for any budget, so you will need to have cash resources to spend; (ii) the results are not always perfectly attributable to a specific marketing piece, so you may not be able to know with 100% certainty which tactics are working better or worse than others; and (iii) we are living in a world where small budget startups are competing with big budget brands for the same marketing real estate.

Given the importance of these topics, I will dig into more details in following posts.

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Lesson #20: Setting Product & Pricing Strategy For Your Startup

Product and pricing are two of the four big "P's" from your Marketing 101 class.  Your startup will never succeed if you screw up your product/service offering or pricing strategy. 

When setting your product or service offering, you must first do an in-depth study of competing products and services currently in the market place and set a plan on how you will differentiate yourself.  When I was at iExplore, we differentiated on the basis of offering adventure tours, compared to the big online travel agencies selling air, car and hotel reservations.  And, versus other adventure travel companies, we further differentiated based on offering customizable tours leaving on any date versus the normal packaged group tour leaving on set dates.  Given the clients a lot more flexibility in designing their dream itinerary around dates that worked best for them. 

What is going to make your product or service different or set you apart from your competitors?  Is it a core ingredient (e.g., veggie burgers vs. beef burgers, cherry vodka vs. plain vodka)?  Is it a core upsell (e.g., free fries with any burger order)?  Is it a faster technology or more efficient crowdsource?  Is it some feature or functionality that sets you apart, like a past customer reviews database to given clients more confidence in their purchases?  Without a unique differentiator, you are just one of many companies trying to push your story uphill.  The downhill comes with that eureka moment when the customer says, "wow, that is really different and better than what I am doing today".

The perfect example is Google's search technology.  They were not the first search engine to the market, there were several others like Excite, Alta Vista, Inktomi and Lycos.  Remember these guys?  Probably not.  So, how did Google take over the search business?  With a better product!!  When people searched key words, they actually got very relevant results that quickly took them to what they were looking for.  And, how did they do that?  With a new technology that studied the backlinks of third party websites linking to those pages?  If big Expedia is linking to iExplore for "adventure travel" terms, iExplore must bet pretty important for "adventure travel", so let's move them up the list of results.  Or, if 1,000 people are linking to a site using the same keyword, they must be pretty important for that keyword, and more important than the site with only 10 people linking to them.  And, the rest is history as Google's quickly dominated the world wide web.

But, product is only part of the offering; price is the other key driver.  If you are not offering your clients a substantially better value than current solutions, you might as well pack up your bags right now.  At iExplore, we not only offered a unique product in the market, as described above, we offered it at a price point 35% lower than similar products in the market (the exclamation point behind an already terrific product offering).  And, at my other business, MediaRecall, our entire value proposition was largly around price (and speed).  Why spend $10MM on your project, when we can do it for $1MM (in a fraction of the time)?

In determining the right price for your product/service, the first thing to do is see where competiting products are priced today.  And, then set your prices at a material discount, at least to start, to get the attention of your prospective buyers.  If customers are currently spending $150 per hour for a certain service, and you can offer than exactly the same thing for $50 per hour, who isn't going to listen to that pitch?  You are going to save them a ton of money, and make them look like a genius to their boss.  The percent discount is largely driven by the difficulty of market entry in that industry (e.g., big entrenched Fortune 500 competitors), the quantity of competitors (e.g., 100s of companies vs. a handful), and obviously, your cost structure that can profitably sustain those prices. 

Shoot for a minimum of 33%-50% savings versus current competitors, to have a reasonable chance to get the attention of your customers.  Unless you are in a very consolidated industry with a handful of players selling a high frequency product, where a 10%-20% savings could mean a material improvement to their bottom line.  And, if you are a techology or software company, remember you are continually dealing with a "buy vs. build" psychology of your clients.  For SaaS models, price your product (on an annual basis) at 10% of the equivalent "build" price for clients (getting them 10 years of outsourced value for a product that you will continually improve vs. 5 years of built value for a static product they build themselves).

And, on the world wide web, prices are often moving to FREE, with alternative ad supported revenue models.  Why do you think all the newspapers are going out of business?  Because people do not want to pay for day-old content that a user can now find up-to-the-minute on the internet for free.  Why do you think the music industry has been struggling?  Because people do not want to pay $14.99 for a whole album of songs, when they can simply buy the one track they like for $0.99 on iTunes or find it for free on any of the file sharing services.  This trend is particularly true for mobile apps.  In my opinion it is better to offer it for free, for some period of time, to build up mass user adoption and word of mouth, and then implement your revenue model later.  That is exactly what Google, Twitter and Facebook did, and we all know what happened to those companies, dominating the web..

Anyway, product and pricing are complicated topics with tons of variations you can pursue.  But, most importantly, start with your best offering, as it is very difficult to change a customer's first impressions down the road.  Good luck!

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Lesson #19: How to Identify your Competition

Webster's Dictionary defines a competitor as "one buying and selling goods or services in the same market as another."  Pretty self explanatory at the high level.  But, I can't tell you how many times executives do not properly assess their full competitive set.  The goal of this post is to teach you how best to not miss any competitor that could get between you and your goals.

I typically start with high level industry research.  Find the major trade association in your industry and see who they are talking about as key players in your space.  Then do Google searches with the same keywords that will be important for your business, to see who is advertising around those keywords.  If those keywords are important to those advertisers, they are most likely directly competitive with you for all, or at least a part, of their businesses.  That should pick up the launched businesses.  But, you should also look in the venture capital funding records at sites like Crunch Base and Venture Beat, as well as as searching patent registrations at the USPTO to see if anything new is in the works, that directly overlaps with your business.

Once the high level research is done, you need to start digging even deeper.  This will include asking prospective customers of your business, if they are aware of any similar businesses in the market.  And, similar businesses could also include tangential businesses that could easily pivot into your space if you are successful.  For example, if you are launching an online restaurant reservation software, competition could easily pop up from tangential players like point of sale register manufacturers (e.g., Micros, Radiant) or other large online businesses in the restaurant space (e.g., Restaurant.com, OpenTable.com, Zagat.com).

Another example includes making sure you think about all players that are aggressively going after the same target audience, even if in very different businesses.  Let's say you are building a fishing website.  In addition to all the fishing websites, you are also competing with magazines like Field & Stream, cable networks likes Sportsman Channel, retailers like Cabela's, fishing gear manufacturers like Daredevil lures and online portals like Yahoo (that may have a fishing content section).  All of these businesses will be putting a lot of consumer marketing muscle to work to own the online fishing space, so prepare for a lot of competition from many different businesses all looking for the same fisherman eyeballs.

Once you fully assess who your current or potential competitors are, then you have to assess their strengths (e.g., customer base, revenue base, cash resources, product offering) and weaknesses to see if you can build a better "mouse trap" within your budget.  Some companies decide not to move forward at this point, because it is simply too much of an uphill battle to win the space, or will require much more monies than are available to spend.  But, if you are confident you can offer a better product, better pricing, better marketing tactics or bigger budgets than your competitors, then "bring it on!"

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Lesson #18: The Right Work-Life Balance for a Startup

Let's face it, startups often feel like an all-out sprint to get your product to market before your competitors do.  That typically means you are living and breathing your startup around the clock, often putting in long hours.  And, you typically can't ever get away from it, even in your limited free time.  Your friends want to talk about it, your best thinking is while you are alone in the shower, you get that great idea while at the gym, etc.  That is all fine and dandy, until you realize that a sprinter can only go all-out for a limited period of time, before collapsing from exhaustion.  So, I prefer to think of a startup as more of a marathon (albeit a really fast-paced marathon), and not a 100 yard dash.  So, like any good athlete, you are going to make sure you set your pace accordingly with the proper work-life balance.

You have to make time for your personal life, to clear your head, and start fresh each day.  You simply can't think clearly if you are continually exhausted, working the midnight oil seven days a week.  Now, this is going to sound completely out of character for a typical startup executive, but why can't you work a normal 8am-6pm, Monday to Friday work week, leaving your evenings and weekends for yourself, if you are religious about your work prioritization and how you actually spend your work time.

Prioritization is the absolute key to solving the work-life balance for any startup. Every minute you spend on non-mission critical items, requires you make up that time in other ways, late at night or on the weekend.  Do you like to sit back and chit chat about last night's ball game?  If so, do it in a minute, not ten minutes.  Do you like to brainstorm ideas with your team.  Fine, do so in a pre-scheduled hour, not an impromptu four hours, tying up your time, and your team's time.  Do you really need to call your phone service to resolve a billing dispute, or can someone on your team do that for you.

I try to prioritize all tasks (for myself and all team members) in a way that will maximize revenues and increase the odds of hitting our business goals.  So, if ten projects are on the list, you have to knock off #1 before you start wasting any time on #10, since your prioritization efforts dictated a higher ROI from those efforts. And, guess what, if you were right in your assumptions, revenues and profits will be soon to follow, and then you will no longer feel you have that "cash burn-out gun" constantly pointed at your head (which is never healthy to any startup executive's peace of mind).

A lot of time gets wasted in startups, particularly from the perspective of reinventing the wheel.  You are not the only startup to ever launch, quite the contrary.  So, surround yourself by proven entrepreneurs that have "been there, and done that" that can be your sounding board on various issues you run into.  Because the odds are, nine times out of ten, that they have already run through the same problems before, and can help you solve it in one hour, not one day.  So, piggyback on their learnings to save you the time from trying to solve that same dilemma from scratch.  And, if you don't directly know people that can help, there are tons of online Q&A sites, like Quora and ChaCha, and business networking sites, like LinkedIn, that may be of use.   If you can free up all those wasted hours, now you have more time to focus on the problems that really matter, issues specific to your business.  And, did I mention, more free time to spend on your personal life.

Also, it is important to avoid the usually time sink a founder experiences: their inability to hand off tasks and key projects to their staff.  You are not doing this all by yourself and you are not the only smart person in your office, if you are hiring correctly.  So, delegate where you can, to get back some much needed time for other things, while at the same time empowering your team and making them feel like they are valued and contributing to the overall success. 

To me, your personal life is the ying to your yang (work life).  You simply cannot have one without the other.  How can you possible focus on your work, if in the back of your head you know you are missing your kid's school play. Or, your marriage is suffering because your spouse feels they never see you.  Or, you just need a change of scenery from a quick vacation to clear the head.  You have to make time for these kinds of things to recharge your batteries and make your work time that much more efficient (the key word to all of this).  And, equally important, you have to encourage and permit your staff do the same, offering flexible work hours or otherwise (in this case, preaching what you practice).

Now, stop wasting time reading this blog and get back to work!  ;-)

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Lesson #17: Pitfalls to Avoid When Joining Someone Else's Startup

Typically an entrepreneur starts up their own business.  But, from time to time, they will see a unique opportunity to join somebody else's startup, either as investing CEO or team member.   There are five areas you need to assess before making that leap: (1) your fit with the founders, in terms of skillset and personality; (2) management control; (3) equity ownership control; (4) board control; and (5) corporate governance control.  I will tackle each of these points in the following paragraphs.

The fit with the team in terms of skillset and personality is obvious enough.  It is important you can get along with your new partners, giving the long hours you will be working together.  So, if you clash in style or personality, it will never work.  And, it is important that you each are bringing a unique and non-overlapping skillset to the table.  So, if the company already has a strong tech leader and operations leader, maybe you bring strong marketing or financial skills to the table, to balance the team.  You don't ever want to be in a situation where job roles are not clearly defined upfront, to avoid stepping on eachother's turf, especially when empassioned founders are involved.

As for management control, let's say you have been made an offer to become the new CEO of the business.  You need to be perfectly clear up front that you have the final decision making authority in terms of business direction, and that the founders are willing to follow your lead, even if it may be in a different direction than the company was currently heading.  This could even include making a change in management, if the CEO believes the founder is not the right person in that position.  That said, you have to do this in a consensus building way, making sure you support any moves with hard numbers that back up your assumptions.  Since the founders will clearly need an education to make a material move from where they may had been heading, with firm and entrenched ideas there.

Equity control is your option, whether you are willing to work with a majority or minority stake in the company.  Your equity stake is typically dictacted by your level of cash investment and importance of your role in the company.  But, if absolute control of the business is important to you, as a new CEO, for example, make sure you invest enough to get you over that 51% threshold.  Or, if economically you cannot get there, put in a mechanic like super-voting shares to make sure no strategic decisions get made without your support.

Same story holds true for board control.  If it is important to you as a new CEO to control more than 51% of the board, make sure at least 51% of the seats around the table are friendly to you and your cause.  And, that most likely means these individuals will not be the founders or their investors to date, which will most likely be loyal to the founders.  So, get good outside board members or new investors that will have your back.  And, worth mentioning, your board voice is typically in line with your equity position.  So, if you want 51% board control, make sure you are prepared to invest enough to own 51% of the equity.

This last piece about corporate governance is the one that people typically forget about, especially in LLCs.  There are scenarios where you may be the strategy leading CEO, with 51% equity ownership and 51% board control, and still not control the key change in control decisions of the company.  The operating agreement of an LLC, or the charter of a corporation, may have special rules in place around changes in control.  For example, it may require the sole approval of a founder for any change in control, who may veto any deal that you are a proponent of.  So, get your lawyers engaged, and read the fine print in the corporate governance, to make sure nothing gets in the way of your long term desires.

I have run both my own startups, and other people's startups, so have learned these valuable lessons first hand.  Good luck!

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