Inbound Marketing After 9 Years - From Exaggerated Expectations to Core Marketing Strategy

Inbound marketing will be ten years old in 2015. The term inbound marketing was coined in 2005 by Brian Halligan, the co-founder and CEO of HubSpot. In reality, however, some aspects of what we now call inbound marketing are much older.

It's reasonable to argue, for example, that inbound marketing began in 1886 when Reuben H. Donnely produced the first yellow pages directory featuring business names and phone numbers categorized by types of products and services. Consumers interested in a particular product or service could use the directory to find area businesses offering that product or service. The communication channels have certainly changed, but the basic objective of being "findable" by prospective customers is essentially the same.

On many occasions over the past nine years, marketing pundits have proclaimed inbound marketing to be the new paradigm of marketing. They've argued that traditional outbound marketing is fundamentally broken, and that inbound marketing is now the most effective and efficient way to create engagement with potential customers. Some pundits have contended that companies should essentially abandon traditional outbound marketing efforts and shift entirely to an inbound marketing strategy.

In my view, some of the hype surrounding inbound marketing has been overdone, and at least some marketing pundits have made unrealistic claims regarding the benefits that inbound marketing will deliver.

Like many innovations, inbound marketing is moving through a version of the Gartner hype cycle. When an innovation is first introduced, the initial enthusiasm (driven by hype) often leads to a "peak of exaggerated expectations" where users/adopters expect far more than the innovation can realistically deliver. When these unrealistic expectations aren't met, what follows is a "trough of disillusionment" where some users/adopters decide that the innovation is worthless and abandon it entirely. At this point, some users/adopters will develop a more realistic view of what benefits the innovation can deliver, and they will do the work necessary to become increasingly proficient at using the innovation to gain these benefits.

So, after nine years, what do we know about the realistic value of inbound marketing and the role it should play in a B2B company's overall marketing effort?

First, it's now clear that inbound marketing is the most effective and efficient way for most B2B companies to acquire new leads. Notice that I said the most effective and efficient way for most companies. In some cases, inbound marketing will not be the best way to generate new leads. For example, if your company sells specialized, complex, and/or expensive capital equipment, consulting services, or information technologies, the number of prospects that are qualified to buy from you is relatively small. In this situation, an effective lead generation program is most likely a combination of inbound and outbound marketing and prospecting by sales reps or business development representatives.

Second, a comprehensive marketing effort for most B2B companies will encompass more than lead acquisition, and inbound marketing is not particularly well-suited for performing some of these other important marketing functions. Therefore, even those companies that rely heavily on inbound marketing for lead acquisition will still use outbound marketing tactics and methods for several purposes. For example, lead nurturing is a critical marketing function for B2B companies that offer complex products or services and have lengthy sales cycles. E-mail is the workhorse channel for lead nurturing programs, and nurturing e-mails are an outbound marketing tactic.

The bottom line? Inbound marketing should be a critical part of the marketing efforts at most B2B companies, and it's likely to become even more important in the future as "digital natives" increasingly assume decision-making roles in business enterprises. However, inbound marketing will not constitute a complete marketing solution, at least for the foreseeable future.

What Milkshakes Can Teach Us About Marketing

The first step to designing an effective marketing strategy and creating compelling marketing content is to understand what your potential buyers are trying to accomplish when they purchase products or services like those you provide. In most cases, people don't buy a product or service because they want that product or service itself. More often, when people become aware of a job that they need to get done, they look for a product or service that they can "hire" to perform the job. Theodore Levitt, the legendary marketing professor at the Harvard Business School, captured this concept in a memorable way when he said, "People don't want to buy a quarter-inch drill. They want a quarter-inch hole."

Clayton Christensen and Michael Raynor also provided a memorable example of hiring a product to get a job done in The Innovator's Solution. In their example, a fast-food restaurant chain wanted to increase sales of milkshakes, and it commissioned market research to determine how to accomplish this goal. The most surprising finding of the research was that almost half of all milkshakes were purchased in the early morning. The milkshakes were usually the only item purchased, and they were rarely consumed on the premises.

Digging a little deeper, the researchers found that most of the morning milkshake customers were people on their way to work. Many of the customers faced a long commute, and they needed something to make the drive more interesting. In addition, while they weren't necessarily hungry when they bought the shake, they knew if they didn't eat something, they would be hungry by mid-morning. Most of these customers also faced similar constraints. They were in a hurry, they were usually wearing their business clothes, and they only had one free hand.

These customers sometimes "hired" other foods to fill their morning needs, but most of the alternatives had significant disadvantages. For example, bagels got crumbs on their clothes, and breakfast sandwiches made their hands and the steering wheel greasy. It wasn't so much that these customers "liked" milkshakes better than bagels or breakfast sandwiches, but milkshakes were better than these alternatives at performing the job the customers needed to get done.

It's not difficult to find examples of this idea in the business world. For example:

• Most business owners don't really want accounting software, but many buy such software because they realize they need to generate invoices faster, know how much they owe to vendors, and understand how well their company is performing financially. Accounting software enables them to perform these jobs more efficiently than a manual accounting system.
• Most business owners don't really want property insurance, but most will purchase insurance because they know they need to protect themselves financially in case of a fire. Insurance is the best-available tool for performing this job.
• Most business owners don't really want a company brochure, or a direct mail campaign, or for that matter, a website, but many will invest in these marketing resources because they see them as effective tools for performing the job of increasing sales.

As marketers, it's easy for us to forget that most potential buyers aren't really interested in our products or services per se. What they are (or can become) interested in is what those products or services can help them accomplish. Our products or services are simply the means to an end, and it's critical to keep this fact in mind when planning our marketing efforts. To use Professor Levitt's analogy, our marketing strategy and our marketing content should be more about quarter-inch holes than quarter-inch drills.

To develop an effective marketing strategy and create compelling content, you have to know what jobs your prospects are trying to get done, why those jobs are important, what happens if those jobs don't get done, and what issues or problems can prevent your prospects from performing those jobs.

For Better Marketing Decisions, Think Incrementally

Measuring marketing return on investment (MROI) has become increasingly popular, as marketers face growing pressures to demonstrate the value of their activities and programs. Marketers are calculating and using MROI for a variety of reasons, including:

• To measure the effectiveness of individual marketing campaigns or programs
• To demonstrate and prove the value that marketing contributes to the company
• To justify and/or defend marketing budget levels

All of these reasons are valid, but the most important reason to use MROI is to improve the quality of marketing decisions. No single performance metric, including MROI, provides all of the information that marketers need for most significant decisions. However, because MROI is a ratio that compares economic returns with required investments, it has a unique ability to help marketers:

• Determine whether a particular marketing program or mix of programs should be undertaken
• Compare the projected and/or actual results of multiple and often dissimilar marketing activities or programs. This enables marketers to make sound choices when faced with alternative marketing investments.

Equally important, MROI can help marketers determine at what level a particular marketing program should be funded and executed. Unlike many investments, most marketing programs can be executed at any of several levels. For example, if your marketing database contains 10,000 contacts, you can run a direct mail campaign that is directed at all 10,000 contacts or at only a portion of the database. MROI enables you to analyze projected campaign performance at incremental levels.

To illustrate how this works, take a look at the example shown in the following table. This table contains the projected financial attributes of three alternatives for a prospective direct mail campaign. Option 1 would involve a mailing to 2,500 contacts, Option 2 would target 5,000 contacts, and Option 3 would target 10,000 contacts. For this example, we'll assume that the ROI Threshold (the minimum acceptable ROI for a marketing investment) is 25%.

Based on the projected results shown in the table, the company would not choose Option 1 because the estimated ROI is below the ROI Threshold. The projected ROI's for Option 2 and Option 3 exceed the ROI Threshold, so it might appear that either would be a reasonable choice. Even though Option 3 has a slightly lower projected ROI than Option 2 (26% vs, 28%), it would still exceed the ROI Threshold.

The real insight comes when you look at the lower portion of the above table, which shows the incremental financial performance differences between Option 1 and Option 2 and between Option 2 and Option 3.

Option 2 requires an additional investment of $30,000 (compared to Option 1), but it will produce a 41% ROI on that incremental investment. Option 3 requires an additional investment of $60,000 (compared to Option 2), but it will only produce a 23% ROI on that incremental investment. Since the incremental ROI generated by Option 3 is below the ROI Threshold, the company should typically choose Option 2 over Option 3.

In reality, the optimum "size" of this direct mail campaign falls between Option 2 and Option 3 (in other words, somewhere between 5,000 and 10,000 contacts). With additional data, that optimum size can easily be determined.

Because marketing programs can be executed at different levels, measuring MROI on an incremental basis can be a powerful tool for improving marketing decision-making and performance.

Great Marketing Content Always Requires Trade-Offs

In a landmark article for the Harvard Business Review, Michael E. Porter wrote that the essence of business strategy is choosing to perform business activities differently - or to perform different activities - than competitors. Porter also argued that a powerful strategy always involves trade-offs. If you design and arrange your activities to excel a delivering a specific value proposition, you will be less able to effectively and efficiently deliver other types of value. Therefore, strategy is about deciding both what to do and what not to do.

A variation of Porter's principle applies to content marketing. To be highly effective, each content resource you develop must be designed to address the concerns and interests of a specific target audience. And when a content resource is truly designed for a specific target audience, that resource will inevitably be less appealing to other audiences, some of which may be important to your company. It can be tempting to design content resources that will appeal to multiple audiences, but this is usually a mistake. The title of a recent blog post by Joe Pulizzi makes the point clearly:  "If Your Content Marketing is for Everybody, It's for Nobody."

Whenever I talk with prospective clients about starting a content marketing program, one of the first questions they ask is:  "Why can't we create one content resource, say a white paper or an e-book, that tells the whole story? It could include a description of the problems we can solve and the benefits our solution can provide, and we could include a couple of customer success stories to demonstrate that we can deliver what we promise."

At this point in the conversation, the image of a Swiss army knife always flashes in my mind. As you probably know, a Swiss army knife is a tool that's about the size of a large pocket knife. In addition to regular knife blades, it has several other attachments, such as a bottle opener, a can opener, a screwdriver, and a file. So, a Swill army knife is a real multi-tasking tool and a handy thing to have on a camping trip or a hike.

Some B2B marketers believe they can create one content resource that will appeal to all of their target audiences and fill all (or most) of their content needs. In essence, they want to create the content marketing equivalent of a Swill army knife. Unfortunately, however, the Swiss army knife approach to content marketing doesn't work well. Here are two of the primary reasons.

Diluted Relevance - When you create a content resource that's designed for multiple audiences, it will inevitably include information that's not very relevant or interesting to some of those audiences. Suppose, for example, that you offer a technology product that must be sold to plant managers, IT directors, and CFO's. Each of these buyer types will have distinct concerns and priorities. If you create one content resource for all of these buyer types, you are essentially asking each potential buyer to wade through material that doesn't particularly interest him or her in order to find the information that addresses his or her primary concerns.

Excessive Length - Even if the relevance problem didn't exist, when you try to "cover all the bases" in one content resource, you are likely to end up with a very long resource. The problem with long content resources is that most potential buyers now have short attention spans. They usually prefer to consume content in small doses, especially when they are in the early stages of the buying process. Most early-stage buyers simply won't be willing to invest the time it takes to read a 50-page white paper or e-book.

The bottom line is that developing good marketing content always requires you to make trade-offs. When you develop a content resource for a specific target audience, it probably won't be appropriate of other audiences. For an effective content marketing program, you'll need distinct resources for most of your primary audiences.

Marketing Budget Shifts From Traditional to Digital Are Slowing

For most of the past decade, numerous research studies have documented two clear marketing trends:

• First, spending on digital marketing methods, channels, and tactics has been growing rapidly; and
• Second, companies have funded a significant portion of the increased spending on digital marketing by moving funds from traditional advertising and marketing budgets.

Two recent studies indicate that the reallocation of spending from traditional advertising and marketing to digital marketing channels and tactics is slowing.

The CMO Survey

The first study to reveal the slowdown is the latest edition of The CMO Survey from Duke University's Fuqua School of Business. The CMO Survey has been conducted semi-annually for the past several years. In the February 2014 survey, CMO's on average predicted an 8.2% increase in digital marketing spending over the next 12 months. In the two surveys conducted in 2013, CMO's projected increases of 10%, which was down from projected increases of 11.5% in the August 2012 survey and 12.8% in the February 2012 survey.

Meanwhile, CMO's are less pessimistic about traditional advertising spending. In the August 2011 survey, CMO's were projecting an increase of 1.3% in traditional ad spending. By February 2013, they were forecasting a 2.7% decrease in traditional ad spending. In the February 2014 survey, CMO's said that spending on traditional advertising would be essentially flat (-0.1%) over the next 12 months.

The chart below shows the projections for both digital marketing and traditional ad spending from August 2011 through February 2014.

The SoDA Report

The second study is the 2014 SoDA Report by the Society of Digital Agencies. The SoDA study was based on a survey of global digital marketing decision makers and influencers. Forty-two percent of the respondents were from corporate brands, while 43% were from agencies and production studios.

In the 2014 survey, 25% of client-side respondents said they were increasing their digital marketing budgets by reallocating funds from traditional marketing activities. In the 2013 survey, 39% of client-side respondents said they were funding digital marketing growth by taking funds from other marketing activities.

These studies suggest that the dramatic shift from traditional to digital marketing channels and tactics is slowing, at least. Marketing thought leaders have been predicting the demise of traditional advertising and marketing tactics for more than two decades, but that clearly hasn't happened. It's unlikely that large brands will completely abandon TV and radio advertising in the foreseeable future. It's more likely that we are approaching some kind of equilibrium as marketers fine tune their marketing investments to match customer preference patterns.

When Will Price Changes Be Profitable?

Price is one of the traditional 4P's of the marketing mix, and pricing is or should be a core component of every company's business and marketing strategy. Unfortunately, many marketers today focus almost exclusively on marketing communications (the promotion component of the 4P's), and they have largely ceded the remaining components of competitive strategy to other business functions. As a result, marketers often have little influence over several factors that drive business success.

In my view, marketing should play a leading role in formulating competitive strategy, and this necessarily means that marketers must get more involved in pricing decisions.

The reality is, no marketing strategy is complete unless it addresses pricing issues and includes a strategic approach to price setting. That's because pricing can be the single most powerful tool that company leaders can use to impact profits. To illustrate the power of price, consultants with McKinsey & Company analyzed the average income statement of the Global 1200, an aggregation of 1,200 large, publicly held companies from around the world. The objective of the analysis was to quantify the profit impact of various types of financial improvements.

The McKinsey researchers found that a 1% improvement in pricing would yield an 11.0% increase in operating profits at the average Global 1200 company. By comparison:

• A 1% decrease in variable costs would produce a 7.3% increase in profits
• A 1% increase in sales volume would yield a 3.7% increase in profits
• A 1% decrease in fixed costs would produce a 2.7% profit improvement

Pricing decisions are typically based on input from several business functions, but marketing should play a leading role in these decisions because marketing is (or should be) particularly well-attuned to the company's external market and competitive environment.

One issue that arises fairly often is whether a change in prices will result in more profit. Decisions about increasing or reducing prices are inevitably challenging because of the inherent uncertainty about what the financial impact of the changes will be. Company leaders must ask themselves:  If we lower prices, will we generate enough new sales to increase our profits? If we raise prices, will we lose so much business that our profits will be harmed rather than helped.

These questions are extremely difficult to answer. In fact, to answer them accurately, company leaders must know what the "elasticity of demand" is for their products or services. And unfortunately, your company's elasticity of demand isn't something you can find via a Google search or at your local library.

The good news is that there is a simple calculation that can help company leaders make more rational decisions about price changes. The calculation is simple because it doesn't try to predict what will happen if prices are increased or decreased. Instead, this calculation describes what must happen for a price change to be profitable.

Specifically, this calculation can help company leaders answer two questions:

• How much would we need to increase sales volume in order to profit from a specified price reduction?
• How much could our sales volume go down before a specified price increase becomes unprofitable?

The measure of "profit" used in this calculation is contribution margin (sales minus variable costs), and the calculation uses the actual contribution margin (expressed as a percentage of sales) generated during a base period (usually a year). When a company reduces selling prices, the contribution margin goes down, and new sales volume must make up for that decline before profits will be improved. On the flip side, contribution margin goes up when a company raises prices, and the company can afford to lose some sales volume before profits are impaired. This calculation will tell you where those "breakeven points" are.

The formula for this calculation is:  -(Price Change) / (Contribution Margin + Price Change)

To give a simple example, suppose that your contribution margin during the base period was 80% and that you are considering a 10% price reduction. How much will your sales volume need to increase for the price reduction to be profitable. The answer is 14.3%, calculated as follows:

Breakeven Sales Volume Increase = -(-10%) / ((80% + (-10%))

Breakeven Sales Volume Increase = 10% / 70%

Breakeven Sales Volume Increase = 14.3%

If your company had sales of $20 million during the base period, you would need to increase sales by more than $2,860,000 for the 10% price reduction to be profitable.

This approach can be used to evaluate across-the-board price changes and price changes that apply to individual products or product lines. It cannot be used for individual deals.

I've created a simple Excel worksheet to calculate these breakeven points. If you'd like a copy of this worksheet, send an e-mail to ddodd(at)pointbalance(dot)com.

Who Should Be Responsible for Acquiring New Leads?

For B2B companies that sell complex products or services, keeping the sales pipeline filled with qualified leads is vital to sustaining both revenue growth and profits. When it comes to acquiring new sales leads, B2B companies must address two distinct but related issues:

• How can we acquire enough sales leads to enable us to meet our revenue objectives?
• What is the most efficient and cost-effective way to acquire the volume of leads we need?

Historically, most B2B companies have relied primarily on their salespeople to identify and acquire new leads. "Prospecting" was considered to be a core part of every sales rep's job, and effective prospecting has long been a popular topic at sales training events. Unfortunately, the traditional approach to lead acquisition no longer works very well for many B2B companies. 

Today, buyers can go online and find most of the information they need to evaluate products and services. So, many buyers are delaying conversations with sales reps until later in the buying process, and as a result, it's becoming a lot harder for salespeople to create the initial engagement with potential buyers.

In recent years, a growing number of B2B thought leaders have argued that marketing, rather than sales, should be primarily responsible for lead acquisition. The proponents of this view make two compelling arguments. 

First, they contend that lead acquisition is an inherently inefficient activity that has a high input (work required) to output (success) ratio. Because of the inherent inefficiency, it's important to acquire leads using low-cost resources when possible. Salespeople are expensive resources, and their prospecting activities don't scale because they're labor intensive. Marketing programs, on the other hand, scale very easily, and many can be automated on a cost-effective basis.

Second, moving primary responsibility for lead acquisition from sales to marketing will improve sales productivity. Reducing the amount of time that salespeople must spend prospecting means that they will have the ability to manage a larger number of high-value sales opportunities. This allows sales reps to close more deals and generate higher revenues for the company.

Despite these compelling arguments, it's clear that many B2B companies are still relying heavily on sales reps for lead acquisition. The following table is based on the Sales Performance Optimization surveys conducted by CSO Insights and includes data from the survey results published in 2011 through 2014. The surveys asked participants to specify what percentage of their leads are self-generated by sales reps, what percentage are generated by marketing, and what percentage originate from other sources.

As this table shows, the percentage distribution of leads has remained fairly stable for the past four years. In fact, data from earlier CSO Insights' surveys shows that little has changed for the past eight years.

It's clear that most B2B companies should rely more on marketing and less on sales for lead acquisition. This allows a company to use its sales reps to do more of the things that only they can do - have meaningful, personal, one-on-one conversations with prospects who are truly sales ready.

So, what is the right division of responsibility for lead acquisition? The answer will depend on what you sell and on the economic structure of your market. Based on my work with clients and on a review of current demand generation best practices, here's a framework that should work for many B2B companies:

• Percentage of leads generated by sales reps - 20% to 30%
• Percentage of leads generated by marketing - 40% to 60%
• Percentage of leads from "other" sources - 10% to 20%