Sundar’s experiMENTAL

Hello experiMENTAList, it’s Sundar 👋

I’m a former Head of Marketing Science at Uber where I optimized $1Bn+ in spend across Brand, Performance, and Lifecycle. Now, I share weekly playbooks that help you prove and scale your Marketing ROI.

Now let’s get experiMENTAL!

Want to get the most out of ChatGPT?

ChatGPT is a superpower if you know how to use it correctly.

Discover how HubSpot's guide to AI can elevate both your productivity and creativity to get more things done.

Learn to automate tasks, enhance decision-making, and foster innovation with the power of AI.

Download the free guide.

How Marketers can woo Finance

Every day I see another post talking about how Marketers need to speak Finance. It’s a fair criticism and the biggest blocker for why Marketers can’t succeed. But, first, let’s start with “How we did we get here?”

Those that studied Marketing in college inevitably took a Marketing 101 class that talked all about the 4 Ps. Then, they took more classes all about Marketing from a theoretical and academic perspective. And for decades, that was okay. That's how Brands were built. Just as importantly, CEOs and CFOs believed it too.

Then enters a new era of Marketing called “Performance Marketing”. You could track and measure everything and it created the fake illusion of precision. With that, we created a whole generation of Marketers, Finance folks, and Executives who bought into the idea that every penny of Marketing is measurable and therefore accountable.

But, this created a gap. The old Marketing guard didn’t have to prove the ROI of Marketing while the new guard thought they were with metrics like CAC / ROAS.

This new guard is now in leadership positions being asked to prove the ROI of Brand Marketing and other “intangibles” but no one has taught them how to.

And that’s the story of how we got here.

But fret not, we will persevere together!

What Finance really cares about

A common misconception is that Finance cares only about money. By having that view, we minimize the role of Finance and their value in the organization.

Here’s what Finance truly cares about:

RISK and RETURNS.

A CFO's job, at the simplest level, is to make sure the company:

  1. Does not run out of money (RISK)

  2. Is investing in the highest ROI activities (RETURNS)

This naturally creates friction with Marketing for 2 reasons:

  1. Marketing is the biggest line item outside of headcount on the P&L

    (RISK)

  2. Marketing Teams are pretty bad at reporting ROI. It’s often dubious at best and non-existent at worst.

    (RETURNS)

The metrics Finance wants to see

If we take the lens about the concerns of risk and returns, how do we surface and optimize Marketing metrics that alleviate them?

CAC Payback Period → RISK

CAC Payback Period is defined by measuring how quickly it takes to recoup from the user what you had to spend to acquire that user.

Mathematically, defined as:

Fancy way of saying when do I get my money back.

Now, how does this metric alleviate Finance’s concern of Risk? Because it tells Finance about the velocity of their finite budget.

Example

It cost $100 to acquire User X:

  • After 1 transaction, User X’s contribution margin is $50

  • After 3 months, it’s $75.

  • After 6 months, it’s $100.

User X’s CAC Payback Period is 6 months.

But now imagine that the payback period is actually 1 year. This is 2x worse for Finance. Why? Let’s plot out the cash flows:

  1. You’ve spent $100 on Jan 1st.

  2. With 6 month payback, $100 is back in the bank account on Jul 1st.

  3. With 1 year payback, $100 is back in the bank account on Jan 1st.

Again, why does this matter?!

Situation 1: 6 month payback period

  1. On Jan 1st, $100 out to acquire User X.

  2. On Jul 1st, $100 back from User X and acquire User Y

  3. On Jan 1st, $100 back from User Y and acquire User Z

  4. On Jul 1st, $100 back from User Z and acquire User X2

Situation 2: 12 month payback period

  1. On Jan 1st, $100 out to acquire User X.

  2. On Jan 1st, $100 back from User X and acquire User Y

In Situation 1, over 2 years I acquired 4 users while in Situation 2, over 2 years I acquired 2 users. With the same $100, I acquired 2x the number of users AND my money wasn’t locked up for a whole year.

This is why Finance loves CAC Payback Period.

Incremental and Marginal → UNCERTAINTY

Most of you have heard of incrementality so I won’t touch on it much. Instead, I’ll focus on Marginal which is just as important of a concept.

Incremental → If we turned off Marketing, what do we lose?

There are 4 levels to it:

  • Campaign level → If you turn off the campaign

  • Channel level → If you turn off the channel

  • Objective level → If you turn off the objective (eg. Awareness campaigns)

  • Marketing level → If you turn off all marketing

Knowing incrementality directly addresses the question of ROI and how reduces the uncertainty of giving Marketing that budget.

Marginal is a bit more nuanced and is more representative of what happens.

Marginal → If I give you or take away $X, what additional return will I get?

Marginal is best understood with an example.

Example

At $100 budget, you acquire 10 new users.

At $200 budget, you acquire 15 new users.

At $200, your Blended CAC = $13.33 but your Marginal CAC = $20. How?

Difference in budget / Difference in new users = ($200-$100) / (15 - 10)

You can’t acquire a new user at $200 for $13 which is the BIG mistake many Marketers (and often growth and finance people) make. You have to spend $20 for any new customer.

Marginal CAC for every new user will always go up.

Why does Finance care? Well, it ties directly to answering their mandate of “Is investing in the highest ROI activities”. Finance as the stewards of the cash are trying to understand where to deploy the budget in the most efficient way and Marginal CAC directly answers that.

The same logic applies to Marginal ROAS / Marginal LTV, but the point is Marginal is the most useful metric to have to unlock more budget.

“If you give me the next $100, here’s exactly what you get”.

Other metrics

Now each Finance team might have some specific metrics they also want to track, but the two above will cover 90% of use cases. Just for fun here are some other noteworthy ones:

  1. Blended metrics → This tells finance as a whole if the business can support Marketing. If the business can only support a $10 blended CAC and you’re at a $20 then you’re f*cked. Get your Blended guardrails aligned with Finance.

  2. Contribution $ growth → Finance needs contribution $s to offset the investments in headcount / offices etc. Contribution $s are a close proxy to profitability so growth in Contribution $ is something Finance tracks closely. Finance wants to see Contribution $ growing faster than Revenue $ because it means you’re growing sustainably.

How to strengthen the relationship

Here are some some tips on building a long lasting and healthy relationship:

  1. Regular check-ins.

    Communication is the foundation of every relationship and it’s no different here. The lack of it causes problems and the presence of it creates a strong ally. With Finance, you want regular check-ins on a weekly to bi-weekly cadence. Finance has all the power in the Power Dynamic so it’s important to understand if they are 😃 or 😠 .


    In these meetings you should:

    1. Understand Finance's current goal (eg. growth or profitability)

    2. Understand their concerns and create a plan to address

    3. Share your wins and your upcoming roadmap

  2. Shared Measurement strategy

    Another tactic is to ensure Finance understands your measurement strategy. This includes the HOW you measure and the WHAT.

    For example, there may be times when you can't run a clean A/B test. So, how are you going to de-risk the campaign? Are you going to use proxy metrics? Will you create a go/no go if a test isn’t working? You don't have to share this with every campaign, but it is good to walk the Finance team through your strategy.

  3. Better reporting

    Nothing is more demoralizing than doing great work, wrapping it up, celebrating the win, and then delivering a presentation to non-Marketers and just absolutely fumbling it.

    Here's how you can improve your reporting:

    1. Remove Marketing verbiage

      Don't include metrics like traffic, clicks, etc.

    2. Replace with revenue or other $ based numbers

      This can be in the form of just that campaign impact or annualized but be consistent and align with Finance to see how they want the numbers presented.

      If you can't show direct impact, it’s okay to show estimates with an appendix on the methodology you've used. Keep the methodology simple because you don't want to discredit by making it seem like you're making up numbers. Again, if you’ve done step 2 then this won’t feel made up.

    3. Include statistical significance where appropriate. Just adding something as simple as ranges and confidence levels instantly creates the optics that it's more rigorous and has likely gone through a data science team, which also adds to the credibility.


      Example: CAC up 10% vs CAC up 10 ± 2% (95% CI).

      Very different.

That’s it for this week!

Thank you for reading experiMENTAL!

Was this article helpful?

Login or Subscribe to participate

Enjoyed this article? Forward this to a friend or colleague or point them here.

Need 1:1 help on your Marketing problem? Let’s chat!

Stay experiMENTAL,

Sundar

Reply

Avatar

or to participate

Keep Reading