Owning It

1The measure marketing chose

Marketing's search for commercial credibility is not recent and it has not been idle. For three decades the function has tried to report something that finance and the chief executive would recognise as a contribution to the business rather than an account of its own activity.

The candidate it settled on was revenue. Specifically, two versions of it: revenue that marketing added to the sales pipeline, and revenue that sales closed but marketing contributed to.

The choice was reasonable. Revenue is the language of the business. If marketing could demonstrate a reliable connection between what it did and what the company earned, the argument would be settled.

An industry grew behind that ambition. Marketing technology exists in its present form largely to substantiate the claim that marketing contributed to revenue. The attempt to sharpen the claim produced attribution modelling, and attribution produced a sequence of increasingly elaborate methods: first touch, then last touch, then multi-touch, each more complex than the one before and each offering a more refined account of credit. Alongside the models came the dashboards, and the funnel divided into top, middle and bottom, each stage with its own metrics and its own reporting.

Through all of it, most businesses distilled marketing's contribution to one thing: leads, and the rate at which leads convert.

This was not a failure of ambition. It was a convergence on the one concept that travels. A lead is legible to finance and to the chief executive in a way that reach, engagement and share of voice are not. A lead can, over a sales cycle, become revenue. If the business counts leads and counts how many convert, it has something that looks like a contribution measure. For most organisations, that is as close as the question has ever been answered.

2The consequence nobody names

The arrangement has a structural effect that is almost never stated, and it explains more about the annual budget meeting than any amount of analysis of the meeting itself.

Sales can be given a revenue plan. The number is written down, the function commits to it, and the discussion that follows is about what is required to achieve it. The plan creates obligation in one direction and entitlement in the other. A sales leader arrives at the budget meeting with something to trade.

Marketing cannot be given a revenue plan. Not because marketing is less accountable, but because the function does not control the conversion of its output into revenue. Marketing can be held to lead volume, and routinely is. Lead volume is not a plan in the sense that a revenue number is a plan, because nobody in the room believes that hitting it guarantees anything about the result.

So marketing arrives at the budget meeting with no lever. It cannot say: give me this and I will return that. It can only say: here is what we spent, here is the activity it produced, and here is why it should continue. The conversation that follows is therefore a defence. Not because the marketing leader is weak or the finance leader hostile, but because the structure of the exchange offers nothing else. One party has a plan and the other has a history.

Mark Jeffery's observation that a function unable to tie itself to the profit and loss account will always be fighting for budget is usually read as a warning about measurement. It is better read as a description of this asymmetry. The fight is not caused by poor measurement. It is caused by having nothing to commit to.³

3What the ratio changes

The CLV:CAC ratio is a different kind of number, and the difference is not that it is more accurate.

It is a capital return measure. It states what the business gets back for what it spends to acquire a customer. That places it in the same category as the other measures the board uses to allocate capital, and it admits of something lead volume never could: a goal expressed as improvement, on both sides, for which a function can be held.

A chief marketing officer who proposes the ratio, takes ownership of it, and takes goals to lower acquisition cost and raise lifetime value has changed the nature of the budget conversation. It is no longer a discussion about how much to spend. It is a discussion about capital allocation and the return expected from it. The CMO now has the thing the sales leader has always had, which is something to commit to.

The second effect is larger and slower to appear. The movement of the ratio informs the marketing plan in a way that lead generation planning never has. A plan written to produce leads is a plan about volume and channel. A plan written to move the ratio is a plan about which customers to pursue, what they cost to win, what they return, and which parts of the acquisition engine are worth more investment and which are worth less. The planning question changes from how much activity to buy to which customers are worth acquiring. Nothing in the lead generation tradition produces that question.

This is the argument for marketing stepping forward to own the ratio, and it carries with it an argument for stepping back from something else. Reporting marketing's contribution as revenue, influenced or sourced, should stop. Not because the figures are dishonest but because they answer a question the board has never been able to act on, and because retaining them alongside the ratio invites the board to treat the ratio as one more marketing metric rather than as the capital return measure it is.

4The obvious objection

There is a problem with what I have just proposed, and it is a serious one.

The ratio is not a fact. It is built out of judgements. Which costs count as winning a customer and which count as keeping one. What discount rate to apply. How many years to count. Where to draw the line between one customer segment and the next.

Every one of those has a range of reasonable answers. Every one of them moves the result.

So a CMO who needs the ratio to look good does not have to lie about anything. They only have to pick the kinder answer each time. Each pick is defensible on its own. Add them up and the ratio has stopped telling anyone the truth.

This is a known problem with a name. Economists call it Goodhart's Law: once you start using a measure to control something, the measure stops being reliable.¹

Any finance director will recognise it without the theory. The person who produces the figure has an interest in the figure.

It is worse here than in most places, because this is the exact failure the ratio exists to fix. The book is about businesses whose ratio was wrong, always in the flattering direction, through an accumulation of ordinary decisions nobody thought twice about. Handing the corrected ratio to the one function with a reason to want it high puts that same failure straight back in, somewhere harder to spot.

The objection deserves an answer rather than a dismissal.

5Why handing it to someone neutral is the wrong answer

The obvious fix is to give the ratio to somebody who does not care what it says. An independent person, answerable to marketing and finance both, with no stake either way.

It does not work, for two reasons.

The first is that nothing then happens.

Picture it working perfectly. Every quarter the independent person calculates the ratio correctly and reports it. Enterprise customers come in at 5.3:1. Small business customers at 0.3:1. Both figures are right. The person reporting them has no view about them, because having a view is not their job. The board notes it. And nothing changes, because nobody whose budget or plan is affected has been asked to do anything about it.

Getting the figure right was never the hard part. Acting on it is. The failure this book describes is not the business that calculates badly. It is the business that calculates well, hears the answer, says that is interesting, and carries on exactly as before. An independent person prevents the first problem completely and the second one not at all. You end up with a figure that is accurate and useless.

The second reason matters more.

Handing the ratio to somebody neutral means marketing is once again being judged by a figure that somebody else produced. That is the arrangement this whole argument exists to end.

Marketing's problem was never that it was measured by the wrong figure. It was that it was measured by a figure it did not choose, could not move through planning, and had no standing to argue about. A figure handed to marketing by a neutral third party is still a figure handed to marketing.

The point is not that marketing finally gets measured properly. It is that marketing picks up a commercial figure, says out loud that it will move it, and takes what follows. That cannot be done through somebody else.

Caring about the answer is not a flaw in the person who holds it. It is the reason holding it means anything.

6What stops the CMO fiddling it

So the CMO owns the ratio, and the CMO would like it to look good. Four things stop that becoming a problem. Each one blocks a particular way of quietly improving the answer.

Table 1Four ways to make the ratio look better, and what makes each one unavailable.

How you could make the ratio look better	What stops you
Leave costs out, so winning a customer looks cheap	Finance checks the cost side. The CMO owns the answer but does not decide what goes into it.
Decide the rules after seeing the result	The rules are written down, signed by both functions, and fixed before the first calculation. They change once a year, never in a quarter when somebody is unhappy with the answer.
Hide a bad segment inside a healthy average	Report every segment separately, and watch the direction of travel, not just whether it sits above or below a line.
Report it where nobody will question it	It goes in the board pack next to EBITDA, on the same timetable, and the CMO explains any movement.

Finance checks the inputs. The CMO does not build the cost base alone. The fully loaded cost of winning a customer, the gross margin, the cost to serve and the discount rate are all checked by the people who hold the underlying data. That is what makes it fair to hold the CMO to a figure they cannot quietly adjust.

Agree the rules first. Rules agreed after you have seen the answer are not rules. They are an argument between people who now know what they would like the answer to be. Bain, working with Google across nearly 1,400 senior marketing and finance people, found that the best organisations agree how they will measure before budgets are set, and then stick to it.²

Never act on the average. An average hides the spread. A business reporting 2.6:1 may hold one segment at 5.3:1 and another at 0.012:1, and the average conceals it. Direction matters as much as level. A segment going 4.2, then 3.6, then 3.1 sits above the 3:1 benchmark the whole way down, so a rule that only fires below 3:1 fires too late.

Explain it in public. People who understand the subject have to be able to ask awkward questions about how the figure was built. That is what keeps it honest. A figure explained once a year to a room that is not paying attention is a figure nobody has to be careful with.

None of these four removes the CMO's interest in the answer. They assume it, and they make the easy shortcuts unavailable. That is the right way round. Appointing somebody who does not care guarantees that nothing happens. Making it hard to fiddle lets you use somebody who does.

7What the CMO has to accept

None of this works if the ownership is only on paper.

A CMO who puts the ratio forward is putting forward a figure that can embarrass them. It will sometimes fall. It will sometimes fall for reasons outside marketing's control, and the CMO will have to explain that to a board without it sounding like an excuse. In most businesses calculating it properly for the first time, it will open well below what everybody believed.

That exposure is the price of having something to trade. The sales director's revenue plan carries exactly the same risk and buys exactly the same standing. The reason marketing has never had that standing is that it has never taken that risk, and the activity figures it reported instead were chosen, not always knowingly, because they could never produce a bad answer.

A figure that cannot come out badly cannot come out well either.

That applies to the ratio as much as to everything it replaces. The CMO who understands that is the right person to own it. The CMO who wants the authority without the exposure will produce, within four quarters, a ratio that is always healthy and means nothing.