The marketing funnel has been around for over 120 years. It’s a tried-and-true marketing strategy, but its effectiveness has recently been questioned.
According to a recent report on Drift, three eras have shaped marketing history: the brand era, the demand-gen era, and the revenue era.
As you can see from the image above, we’re currently operating in the revenue era. This is the time when marketers are expected to demonstrate exactly how their efforts contribute to revenue generation.
As Drift puts it:
“[M]arketing and sales teams need to be aligned around customer lifetime value and revenue goals.
The problem is, many B2B companies rely on the same-old lead generation processing and demand generation funnels developed 10 years ago.”
Many B2B marketing companies, including Drift, are now questioning the validity and usefulness of top-of-funnel metrics, given the long sales cycles they face and the gap between MQLs (marketing qualified leads) and revenue KPIs. And you might be having some of the same thoughts.
But don’t worry. I’m here to put your mind at ease.
My goal in this article is to help you reclaim any lost trust in ToFu metrics and secure their place in any thriving marketing strategy. I will share the steps you need to ensure your ToFu metrics translate into a real business impact and stay clear of becoming nothing more than vanity metrics.
As a result of this shift in thinking about ToFu metrics, you will be able to confidently justify your marketing activities and clearly demonstrate the contribution your marketing efforts make towards the bottom line of your company.
Why do we use ToFu metrics like leads, MQLs, & SQLs in the first place?
Tofu metrics are still relevant because the timeframe between the marketing activity and their measurement is much shorter than more lower funnel metrics.
Given the inherent problems with the old way of using the marketing funnel, many marketers have simply written off ToFu metrics, leading with dramatic statements like The death of MQLs, but there’s a lot they’re missing. Let’s take a closer look.
When choosing optimization metrics, smart marketers will take two parameters into consideration: revenue predictability and the funnel velocity.
Revenue predictability is important, as we all know. The more accurately a metric predicts revenue, the more central it becomes to the marketer’s optimization process.
For example, we could argue that opportunity is the best metric to optimize because the conversion rate for ‘opportunity to closed-won’ is much higher than the conversion rate for a ToFu metric like ‘lead to closed-won’ (37% compared to 0.02%, according to this benchmark report).
That said, sales velocity, or the speed of conversion, is also a critical metric. If the gap between the marketing activity and the metric is too wide, it’s harder to accurately measure its impact. We’re good, but we’re not magicians.
According to a Salesforce analysis, the average lead-to-opportunity cycle spans 84 days. This lengthy timeframe is why ToFu metrics are so vital. They are data points that marketers can actually optimize for within a reasonable feedback loop.
So, how can we get our hands on some juicy insights into the real revenue impact of ToFu metrics? Let’s take a moment to explore a couple of steps that will help you do just that.
Step #1 – Think of Top-of-Funnel metrics as proxy metrics and measure the weighted conversion rate to revenue
Let’s just slow down and take a minute to differentiate between KPIs, vanity metrics, and proxy metrics, so we’re all on the same page going forward.
If you’ve been in marketing for more than a week, you’ll have heard of KPIs (key performance indicators). These are the quantifiable, outcome-based metrics that demonstrate the actual value that was generated by your marketing efforts. For example, the CLV (customer lifetime value) is a KPI for the monetary value of each new customer.
In contrast, vanity metrics are those surface-level metrics that make you look good to others. While they do have their uses, they generally provide little insight into the actual performance of an activity and they have limited place in informing future strategies. In other words, and for the sake of this article, vanity metrics are metrics that are not directly correlated with revenue.
The concept of Proxy Metrics
The third metric type—here at InfiniGrow, we like to call it the proxy metric —is different from a KPI because there isn’t a direct line of connection between its value and the activity you want to measure. It is important to note, however, that it’s also not a vanity metric. After all, it is somewhat correlated with that result you are after.
The best way to think of a proxy metric is as a milestone on the way to your true KPI or a lower-level metric that will bring you closer to your main goal, which should be revenue.
ToFu metrics can be analyzed as proxies to revenue since you can still measure their correlation to revenue. This correlation is actually very useful. It allows you to make revenue predictions by converting each metric into a financial metric—just like we do for opportunities with Pipeline.
For example, if we think of MQLs as proxies with a strong correlation to revenue, we can begin to re-establish the link between MQLs and revenue.
By using ToFu metrics as proxies, we can better align ourselves with management and finance, and also gain a much clearer understanding of the real business impact of our MQLs or other funnel metrics.
Calculating the impact of proxy metrics
If we’re considering MQLs, leads, and other ToFu metrics as proxy metrics to revenue, then we need to always keep speed (or velocity) in mind. Velocity is a factor that can make or break your planning. Unfortunately, it’s often overlooked.
Let’s consider a scenario where you need to market a medical device and the sales cycle is approximately two years. You sit down to make your budget for 2022 and plan to spend $10K dollars to get 100 MQLs.
Here’s the rub. In this scenario, you will inevitably reach the end of 2022 without getting any sales in because sales for these 100 planned MQLs will only close two years later.
When assessing campaigns and channels, marketers tend to focus on two factors: volume (were we able to 10X our MQLs?) and ROI (Did our MQLs drive revenue?).
As a marketer, if we know the accurate conversion rates between stages, the average deal size, and the sales cycle’s velocity we can build our entire funnel with our desired financial outcome in mind.
For example:
- 1 customer = $100K
- MQL-to-customer conversion rate = 10%
- Sales cycle = 4 months
So, from a purely statistical point of view:
1 MQL = $10K of predicted revenue four months from now.
The formula we used is: REVENUE GENERATED X TOFU CONVERSION RATE over SALES CYCLE LENGTH.
Action item: As a marketing leader, it’s essential that you calculate and remain aware of the weighted revenue contribution for each ToFu metric (leads, MQLs, SQLs, etc.).
This way, you’ll always have the information to hand when explaining the predicted business impact of every part of the funnel.
Step #2 – Measure ToFu weighted conversion rates more accurately by accounting for velocity
The first tip was the big jump, and hopefully, you’ve made it through in one piece!
Next, we’re focusing on the much easier task of improving the accuracy of your prediction.
In the previous step, we explained why it was so crucial to account for the average sales cycle when using ToFu metrics.
When you’re using any platform that measures your marketing activities—like Google Analytics, for example—it’s essential to allow for a timeframe that is greater than your sales cycle, or at least greater than the remaining part of the funnel.
For example, if your sales cycle is nine months long and you want to measure the conversion rates of leads to closed-won, you need to make sure the dates you select span at least nine months.
Action item: Always measure your ToFu to revenue conversion rates over a timespan that is longer than your sales cycle. That way, you can rest assured that the measurement accounts for the time it takes for your actions to generate sales.
Step #3 – Monitor each marketing channel and compare it with your chosen weighted conversion rate
We mentioned that the weighted conversion rate to revenue for one MQL was $10K, 4 months from now.
We can now calculate the same MQL to revenue conversion rate per channel.
You don’t have to calculate this on an ongoing basis. Instead, you can run it every once in a while. This way, you can gather valuable information that will keep you informed as a truly data-driven marketing leader.
When other departments come asking about Google Ads contribution to revenue, pull up the weighted conversion rate to revenue. You’ll quickly gain a reputation as not only an informed, data-driven marketer, but a savvy, revenue-driven one as well.
Action item: Make a table listing all of your marketing channels. Then, calculate the conversion rate to revenue for each one, according to your chosen ToFu metric.
Bonus step – Utilize machine learning to calculate a deeper weighted revenue contribution
Besides the sales cycle, there are many other variables to factor in when calculating your weighted conversion rate to revenue.
At InfiniGrow, we’ve built a machine learning engine that takes these numerous variables into account.
A few examples of the variables our platform factors in are:
- Funnel transition velocities
- Channel costs
- Channel effectiveness in terms of the volume of each funnel step (number of leads, MQLs, customers, etc.)
- Mixes between different variables (for example, velocity X cost)
Action item: Book a demo! We’d be delighted to show you how our customers use ToFu optimization in their planning for 2022.
To sum up…
Proxy metrics and weighted conversion rates are not as easy to understand as commonly thought. This is why many marketers were quick to announce the death of part or all of the funnel.
However, it is crucial that marketers reconsider this stance and start analyzing the marketing funnel in relation to revenue. That’s the only way we can avoid turning MQLs into vanity metrics that lazy marketers boast about at cocktail parties.
In this article, we’ve shared three impactful steps you can take to bring ToFu metrics closer to revenue. These were:
- Calculating the weighted revenue conversion rate for each of your ToFu metrics.
- Adding velocity to measure your conversion rates more accurately.
- Improving your marketing planning by calculating the weighted revenue conversion rate per channel.
Having a deeper understanding of the road from ToFu metric to revenue can make you a smarter B2B marketer who can justify her activities to management and other departments more clearly.
