Dave Kellogg wrote a blog post titled Why Every Startup Needs an Inverted Demand Generation Funnel. Essentially, given your average sales price, close rate, and cost per lead, how much do you need to spend on lead generation? Kellogg’s focus is enterprise software startups, but the concept can be adapted to other contexts.

« What is the right level of marketing spend at an enterprise software startup? »

« If you want to know if your company is spending enough on marketing, the first thing you should do is to make an inverted demand generation (aka, demandgen) funnel to figure out if you’re spending enough on demandgen. »

« Note that all orange cells are drivers (inputs) and the white cells are calculations (outputs).  »

In this example, a $333,333 quarterly demand generation budget is required to achieve the quarterly revenue target of $2,000,000. I’d add that this is 16% of revenue, which would factor into how much of a gross profit margin you’d need.

The spreadsheet uses a lot of abbreviations. Below are definitions as I interpret them:

  • ARR = annual recurring revenue
  • SQL = sales qualified lead
  • MQL = marketing qualified lead (vetted by marketing; passed on to sales team)
  • SAL = sales-accepted lead (MQL that has been vetted by sales team)
  • SDR = sales development representative (qualifies inbound leads)
  • BDR = business development representative (prospects for leads)

« In part II and part III of this post, we’ll discuss two ways of modeling phase-lag, modeling growth, and the separation of the new business and upsell funnels. »

From the blog comments:

« Ryan Hale: Something to consider adding when planning efficiency projects is sensitivity analysis: if any one driver cell improves by 10% (for example), which generates the largest lift in expected ARR?

Dave Kellogg reply: Yes, yes — playing with any driver-based model to see sensitivities is a huge part of the process. It helps you understand where the real leverage points are — e.g., in this model SAL to SQL is a big lever. As is cost/MQL. »

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