The Nature of the Beast: Marketing in Growth Tech
Gartner does an annual CMO Spend Survey that I find very useful as a benchmarking exercise of how much industries are spending on marketing. On average across all industries, Gartner reports that approximately 11% of revenue is spent on marketing. This has fluctuated over the years from 10.2% to 12.1% now down to 11%. So let’s say approximately 10% of revenue.
SaaS companies however, spend much more aggressively on sales and marketing than their industry peers. According to Tomasz Tunguz, a prolific tech investor and blogger had said:
“In the first 3 years, these public SaaS companies spend between 80 to 120% of their revenue in sales and marketing (using venture dollars or other forms of capital to finance the business). By year 5, that ratio has fallen to about 50% where it remains for the life of the business.”—-Tomasz Tunguz- Venture Capitalist at Redpoint
The idea here is that the SaaS business model values the Annualized Recurring Revenue (ARR) stream that is long-term in nature, predictable and extremely profitable as a company grows. As a result, SaaS companies are willing to invest heavily on acquisition with this long-term bet in mind, even if they do not have the cashflows to support the investment in the short-term. They raise significant amount of capital with the aim of driving ARR growth, with the hopes that it will figure itself out through the lifetime value of the customer.
This is great when your company is growing. But not every company is a unicorn. In fact most companies are not, they just have not realized it yet. As a result what happens is that when economic fluctuations occur (i.e the pandemic), or when revenue growth is stalled, the immediate reaction is to cut budget, which usually starts with the Marketing Budget, since it is the largest discretionary spend that is not associated with people. The challenge is, the people component of the marketing spend (Approximately 40-50% of the budget) is reliant on the execution of program budget. So if there is no program budget, there is no need for the people either. Hence the catch 22 that marketers often find themselves in. And there is no one to blame for this phenomenon as I have accepted over the years. This is just the business of growth tech.
The CMO and Tech SaaS Industry: A Relationship of Convenience?
The realization that the CMO is a job of high risk and turnover, and that this was a natural reality that we must all face, made me wonder if the gig is for me. I am a long-range thinker. A strategist. A foundation builder. A people builder. My best work usually bares fruit a year after I have left the role! Did I need to go back to Major Tech where they had the luxury to have a plan and stick to a plan? These were all things I was grappling with after I left my last gig. And made me wonder If i needed to change my line of work. This is when the Fractional CMO concept was first introduced to me and started to intrigue me.
I was skeptical when I first heard about the Fractional CMO. Coming off my second stint as the head of marketing in the growth tech world, I couldn’t understand how an arrangement like that could work, given the deeply collaborative and cross-functional nature that Marketing leaders play in the core functions of a business. But after further thought, I started to wonder if there was something really novel about the concept and decided to explore it more. The concept is not as absurd as one might think, especially for fledgling tech companies riding the volatility of hyper growth. As I write this post there are over 350 professionals on LinkedIN that have ‘Fractional CMO” in their title and over 233 thousand who have it as a keyword on their LinkedIN profile. In fact over the last 5 years, interest in this concept has seen increasing interest with Google searches in 2015 at 19 to 360 searches in 2020.
The more and more that I researched this concept, and spoke to those that were doing it, I started to realize that their could be a number of potential benefits:
- Increased flexibility: If there was one thing that COVID-19 forced me to do was reconsider my sense of balance. The stress of the shifting marketing landscape, and increased revenue pressure as an operating executive pushed my body and mind to new limits I never experienced before. This forced me to think about work life integration in another way. I started to force walks in my day, pushups and squats, and experiments with mediation and intermittent fasting. I started to experiment with ‘walking meetings’ in nature, and shifted as many of my calls to walking 1:1’s. But I really started to realize the benefits of being home. Eating lunch with my family. Spending more time with my children. The 2.5 hours of commute time, gave me almost 10% of my day to reinvest into myself. I just didn’t want to give this up. How could I continue my executive career from home? This is where Fractional CMOship can really help. Most fractional CMO’s are remote by nature, and because their clients are typically in other cities, have already adopted virtual work as a part of their modus operandi. This is promising for me as I explore the next phase of my career, and how I want to organize it around my life!
- Career versatility and diversity of experience: This was particularly appealing to me. Traditionally as a CMO, you are always learning about new markets and new strategies and tactics to capture the market opportunity. You deep dive into a particular industry or market with one employer, spend a few years there, and then do it all over again with another employer. And then you start to get called an expert in a market/technology, and then you are off to the next one. Imagine a world where you can learn a number of markets at the same time? And in the process, add more market depth to your set of expertise? A Fractional CMO significantly benefits from this type of experience.
- Career Versatility & Resilience: It is a well known fact that companies, especially in the tech industry tend to churn out their CMO’s faster than any other position in the C-Suite (more on this later). Imagine a world where you don’t have to go through the stress of churning out a customer and finding your next? You have a handful of clients that could potentially be your next gig if you like working with them, otherwise, you have the choice to fire a job/client that is not working for you and find another one that does.
Why should you get a Fractional CMO?
The reality is based on what I described above, is that most companies do not need a full-time CMO. I would even further argue from experience, if you are not spending at least $5M in marketing spend with a full-stack marketing strategy, you do not need one. A CMO is only needed to on a full-time basis when you have a team of 25 marketers or more, with 5 or more functional disciplines (i.e Product Marketing, Digital Marketing, Demand Generation, Brand & Comms, Marketing Analytics & Operations), to be the cohesive agent that brings these teams together and aligns them to the corporate goal. If you are not at this level yet as a company, chances are you do not need a CMO.
But does that mean you do not need a strategic marketing leader? The answer here is that you DO need a strategic marketing leader but probably not full-time. You need an executive that will have a seat at the leadership table and ensure that you have:
- The Right Goals: Having someone who can be a peer to your executive team, and understand the goals of the business and be able to translate the business goals to marketing goals is key to success for any growth company.
- The Right Plan & Operational Rhythms: Translating those goals into a plan with very specific and contextual operational KPIs is critically important since it gives direction to the team on their day-to-day goals.
- The Right People and Culture: Being able to hire the right talent, coach this talent and lead them to meet their goals but also set them up with a flight path to reach the goals tomorrow.
This is why you need a Marketing Executive at least part-time or fractionally on your leadership team.
Top 3 Scenarios where you can use a Fractional CMO
- Transitions: As previously mentioned, the average tenure of marketing leaders is much shorter than other executives. Every 18-24 months, you will likely have your marketing leaders leave or will likely need to replace them yourself. This is quite normal in the technology industry that grows quite fast, there will always be a higher paying job that will lure your best marketing talent away. This is OK. The reality is, the attrition is good because with every new person that you bring in, you will infuse a new way of thinking and marketing to your company. Marketers come with a variety of experiences and strengths. In early stages of companies, you may need a leader that is really great at executing campaigns to support sales. Tactical Demand Generation is the number # 1 thing to look for in a leader at this stage. But as the company progresses, marketing starts to become more strategic. You have a brand now, that needs to be tended to and cultivated. You are using more channels, and are evolving to having a full-stack marketing team–which requires a different type of leader. One that can lead a diverse team towards a singular goal. The transition is a good thing, but how do you mitigate the risks associated with this transition? This is where a fractional/interim CMO can step in and take the reigns of the team over and alleviate pressure from the CEO/CRO or Founders to lead the team. They can assess the situation, understand the current strategy, recommend some tweaks, or maybe an overhaul. They can give you an external perspective on the current operations of the team, and work with your executive team to ensure that the marketing plan is still aligned to the current goals of the business. They can assess your people. See which ones are the right ones for the future, and which ones probably need to move on to their next gig. And lastly, they can also help you find your next permanent marketing leader, and bring you candidates that will be the right fit for your organization. This is a huge pain for CEO/Founders when a marketing leader leaves–and can really ensure that the team and the company is set up for success in the next chapter.
- In-House CMO Development: According to Wharton management professor Matthew Bidwell, “external hires” get significantly lower performance evaluations for their first two years on the job than do internal workers who are promoted into similar jobs. They also have higher exit rates, and they are paid “substantially more.” About 18% to 20% more. On the plus side for these external hires, if they stay beyond two years, they get promoted faster than do those who are promoted internally. It is very common in tech companies where you have early employees who are junior in their careers and grow with the company in its early stages. They typically have domain experience that is very valuable, they have great connections and relationships cross-functionally and they have a deeper commitment to the company and the cause. Often times I feel that companies need to develop their internal ‘champions’ to take on more responsibility in the company in order to retain them and grow their talent in the organization. But what if this home-grown talent doesn’t have a clue about the increasingly technical and creative world of Marketing? This is where you engage a fractional CMO to be their mentor and coach, and have them work with your leadership team to ensure that the business goals are understood and work with your homegrown talent to become a marketing leader. This works especially well if the person has deep domain expertise. They will often understand the customer journey and experience better than any external CMO can right away. But these people will not understand the latest marketing strategies or how to hire great marketing talent. And this is where a Fractional CMO coach can really help to bring the best of both worlds and grow the talent that has been loyal and committed to your company and cause.
- Strategic Shifts: It is inevitable that companies in the SaaS industry will have to go back to the drawing board as it grows and re-evaluate strategies. Maybe they want to reduce their reliance on an outbound salesforce by generating an inbound inside-sales capability. Or maybe they want to launch a new product in the spirit of a Product-Led go to market with a freemium upsell motion. Or maybe you just want to get more surgical with your outbound methods and introduce a more refined and standardized ABM/X methodology into your company. These shifts often have great cultural ramifications on the marketing teams hiring them, and require a significant amount of cultural change in how a company goes to market. This can be a good time to think of a Fractional CMO to bring a framework to the table and facilitate the change management and shift that is required in this new strategy. The fractional CMOs can come in and work with all the executives across the entire customer lifecycle and align them on a new playbook, and train and coach the requisite players to adopt the new behaviours necessary to succeed.
So this is what I have been looking into for the last 90 days of my sabbatical. And this is what I will be doing in immediate future. This is not to say that I will not go back full-time into an executive CMO gig. If i do, it will likely be with one of my fractional CMO clients that i assess good fit with, and that is aligned to the way I see the world. Life is too short to not walk in shoes that fit! In the meantime, if anyone is interested in talking to me further about Fractional CMOship, and if you think you need my help, or know someone who does, please do not hesitate to reach out!
Wish me luck!