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Writer's pictureDimitris Adamidis

The Rule of 40: How Strategic Marketing Efforts Drive Success

Updated: Mar 17


Rule of 40

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Another study by the CMO Council found that 60% of CMOs need help to get the budget they need from CFOs. It is likely because CFOs are often more focused on the bottom line than brand awareness and customer acquisition. A study by Gartner found that CMOs spend an average of 40% of their time communicating with CFOs and COOs. These relationships are vital to CMOs.


I've seen this so often that I can almost play the roles of both sides with the facial expression for both and after meeting conversations that both sides conduct, leaving the table with discontent for each other.


Suppose you think you, as a CMO or Marketing leader, are destined to manage this broken relationship and eventually leave the company. In that case, I'd like you to reconsider your approach. Yes, your marketing job is to be creative, experiment, and constantly aspire to inspire the industry with your solution or product. However, it's also true that you are part of the leadership that must take full responsibility for the company's performance and financial well-being. That's the responsibility of every leader, manager, up role across the board. Assuming this is someone's else problem is simply not fair. Arguing that marketing can be detached or exempted from that thinking has its root cause in the inability or poor explanation to budget holders their effectiveness. This notion almost pushed some marketers to abandon the conversation and eventually leave the company. The relationship between the leadership often resembles the old friendship that, for some reason, faded away without an apparent cause or willingness to reapproach each other. Both sides could improve their relationship using an honest, data-driven catalyst that connects them through a single metric.


In the dynamic startup (and overall business) landscape, the Rule of 40 has emerged as a crucial metric for assessing companies' health and growth potential. This rule balances so dearly to marketers' revenue growth and profitability, clearly a top metric for financial professionals that provide valuable insights into a company's efficiency and sustainability.


While traditionally associated with sales and finance, the Rule of 40 can be significantly influenced by strategic marketing efforts. I'll delve into marketing's impact on the Rule of 40 in this article. I plan to explore how marketing teams can proactively shape input metrics, plan their timeline, and anticipate short and long-term impacts on this critical metric. I'm on a mission to save a lot of friendships between the CMO and CFO.


The metric it's not one of the PL metrics. It provides insight into a company's ability to scale while maintaining a reasonable level of financial discipline (yes, the discipline is the keyword here). It acknowledges that while growth is essential, it should balance operational efficiency and profitability, ensuring the company's long-term viability. The Rule of 40 is particularly relevant in the tech industry and venture-backed startups, where rapid growth is often pursued but must be managed responsibly.


Let's start with the basics. The Rule of 40 is the sum of a company's revenue growth rate and profitability margin (measured as earnings before interest, taxes, depreciation, amortization, or EBITDA margin). If the sum of these two components is equal to or greater than 40%, the company is considered to be in a favorable position.


For example, a company with a revenue growth rate of 30% and an EBITDA margin of 15% would meet the Rule of 40 (30 + 15 = 45). It applies the same way for any period you analyze your P&L.


Before discussing the solution, we must understand the typical misconceptions between marketers and finance professionals. These issues occur concurrently or at multiple levels of organizations. The size of a company doesn't matter as the tension is almost unilateral, fluctuating on the scale of escalation depending on who leads their respective functions. Let's go through them one by one to illustrate that better:


Attribution Complexity: One of the main challenges for CMOs is accurately attributing revenue growth to specific marketing activities. Marketing efforts contribute to revenue in various ways, such as lead generation, customer acquisition, and brand building. However, isolating the direct impact of individual campaigns or strategies on revenue growth can be complex, especially in a multichannel marketing environment. Yes, the key uncanny and ambiguous word here is "INFLUENCED."


Time Lag: The impact of marketing activities on revenue growth may take time and can have a time lag. Marketing campaigns and initiatives often involve a series of touchpoints that gradually influence a prospect's decision-making process. CMOs may need to manage expectations around the timeline for seeing measurable results and explain how their efforts contribute to long-term growth. That is a problem with anything you start at the beginning of the year and see results (or not) by the end of the year. Accepting the delayed gratification is much more complicated (remember Walter Mischel's marsh mellow experiment?).


Measuring Profitability: Demonstrating how marketing initiatives contribute to profitability can be challenging. While marketing is primarily focused on revenue generation, it also incurs costs. The CMOs must show how their activities drive revenue and contribute to cost efficiency and overall profitability, aligning with the Rule of 40's emphasis on balancing growth and profitability.


Data Integration: To provide a comprehensive view of the impact of the Rule of 40, CMOs may need to integrate data from various sources, such as sales, finance, and marketing analytics. Data integration challenges can arise from differences in data formats, systems, and methodologies, making it challenging to present a unified picture of the relationship between marketing efforts, revenue growth, and profitability.


Short-Term vs. Long-Term Trade-offs: The CMOs must often make decisions that balance short-term revenue goals with long-term brand building and customer engagement. Rapid promotions or discounts may drive short-term sales but could impact profitability. Explaining these trade-offs and outlining the strategic rationale behind marketing decisions is crucial for aligning with the Rule of 40's focus on sustainable growth. Setting up the goals for planning purposes is complex due to the codependency on other functions' performance.


Educating Stakeholders: The Rule of 40 may be familiar to some stakeholders, and CMOs may need to educate leadership, investors, and cross-functional teams about the metric and its implications. Clear communication ensures everyone understands the relationship between marketing efforts and the company's financial health. Marketing is almost always on the back foot while communicating with leaders on the hook for tangible results.


Market Dynamics: External factors, such as changes in market demand, competitive landscape, or economic conditions, can influence revenue growth and profitability. CMOs must articulate how their marketing strategies consider and adapt to these external factors while working to achieve Rule of 40 alignments.


Managing Expectations: The CMOs may encounter expectations for rapid revenue growth without understanding the need for profitability. Balancing these expectations while explaining the importance of maintaining a sustainable growth trajectory aligned with the Rule of 40 can require effective communication and negotiation skills.



Solution:


To address these issues, CMOs should focus on data-driven insights, aligning marketing strategies with broader business goals, and fostering cross-functional collaboration to ensure a holistic understanding of the impact of the Rule of 40.


Attribution Approach. Remove from silo or separate Marketing Kingdom data. You must integrate marketing data into your company's data repository, other sales and financial results, renewals, and product adoption data. Having the ability to create more sophisticated analysis and test the correlation between the multiple teams that the marketing team's work can impact. The second aspect is understanding the lead and customer lifecycle that must be tracked along the typical sales process. Remember that marketing efforts must be run parallel to what sales are doing. This usually is not associated with the first step in the upper funnel generation but throughout the entire customer lifecycle. Having a good understanding and data alignment between these parallel processes helps to understand where to allocate resources based on the accessible resources with the higher ROI.


Shift your mindset

The CMO must align with the rest of the company's thinking about the tangible results. Staying in this cloudy space called "Influenced" won't fly anymore. Not in the economy where companies must justify every penny in their budget. Your team's focus must shift towards the measurement beyond your control that makes the team uncomfortable. Saying that your data end and stop at the upper funnel b/c after your hand over things to your sales or SDR team is not enough. Your leadership must enter the CFO and COO world, not the other way around. If you stay out of the tangible results-oriented leader, you will likely be able to create a long-term strategy, therefore, unable to execute it. Your team needs enhanced support for what you do and how you perform. Thus keeping your narrative can't prove in the data is a bad strategy for your team and organization. It is time to be part of the system and operate with a more finance-focused approach.


Marketer's Profit & Loss Metrics.


Create a profit and loss metric for all marketing-attributed pipeline generation, acceleration, and renewal stages. Having that is not the end of the story but just the beginning of what you should do next which is to create a parallel lead lifecycle, TAL, and customer journey stages that can help you to translate the ongoing sales and customer interactions into marketing efforts and set of mind of your prospects and customers. Ultimately your actions will be based on their stage of mind created by the interaction with your sales and renewal/ CSM teams but product adoption. Only then will you see the full impact on your bookings, revenue growth, and cost/ expenses reflected in your Rule of 40. Getting this right requires the full scope of the marketing department to be aligned with the sales and renewal team. Include all conversions to estimate the expected or actual impact. Your view should include the cost from the CAC metric associated with the marketing. Having an LTV is very important as well.


Input and output metrics

This one is a bit tricky and more manageable, said than done. Think about this as a simple circuit where you have input-process-output phases. The first and third are what I'm describing in this bullet point. At the beginning or the end of your P&L-like view, you will have to get the proper tagging for these two categories of metrics, very likely adding several additional like customer acquisition cost (CAC), customer lifetime value (CLTV) for marketing-generated leads, conversion, and retention rates.


Cost Attribution

The cost categories should be understood in marketing departments. The teams focus so much on growth that they must remember proper cost units and categories. More often than not, the cost of your campaign, promo, or webinar will impact multiple segments or personas. Associating the cost will require analysis and assumptions that must be verified and re-validated periodically (I'd go with your planning cycle). Don't avoid your FPA but work with them to create the model so that they can advocate for you with greater transparency and elaboration in the Finance department. Having that alignment is priceless before your strategic decision conversation. Demonstrating a frugal and cost-control approach, you increase your credibility in the eyes of your CFO and COO. That's when they feel you are on board with their objectives.


Impact of Timeline: Short-Term vs. Long-Term

While talking to your stakeholders, separate and group your initiatives impacting Rule 40 at different points. They must see that you balance this out, trying to secure the long and short-term objectives while remaining swift and agile. Separate them and include this view in your regular updates.


  • a. Short-Term Impact: Immediate and Incremental Gains. Short-term marketing strategies often yield immediate results that can impact the Rule of 40. Initiatives such as targeted ad-hoc digital campaigns, special promotions, and seasonal marketing efforts can swiftly enhance revenue streams. Moreover, optimizing conversion rates, refining sales funnels, and improving lead quality can lead to immediate revenue growth while controlling costs.

  • b. Long-Term Impact: Building Sustainable Growth. Sustainable growth is the cornerstone of the Rule of 40. Long-term marketing strategies contribute by fostering brand loyalty, customer advocacy, and market penetration. Investing in content marketing, thought leadership and community engagement creates a strong foundation for continuous growth. Over time, these efforts reduce CAC, increase CLTV, and result in a more favorable Rule of 40 score.


Anticipations vs. expectations. Following the short and long-term impact, you can demonstrate your ability to plan appropriately for all upcoming events based on the ongoing reporting throughout the sales and renewal processes. By understanding the cost units for the short and long-term efforts, you can demonstrate your ability to change the anticipated trajectory of the business outcomes as a leader. I'd split it in the following way:


  • a. Short-Term Anticipations. The purpose is to expect an initial boost in revenue from short-term marketing efforts in a month or quarter. Improved conversion rates, increased lead quality, and optimized marketing channels should lead to higher revenue growth without a substantial rise in costs. This short-term impact creates a positive trajectory for the Rule of 40 score. If not, you will have more room to experiment, helping your CFO to understand how much it costs them, why and based on what historical performance you make your anticipated outcomes.

  • b. Long-Term Aspirations. Over the long term, strategic marketing efforts will drive sustainable growth. As customer retention rates rise and CLTV improves, the Rule of 40 scores reflect a healthier balance between revenue growth and profitability. This trajectory signifies a company on the path to long-term success. Think about something that must change your perception of the market. A good example would be your POV, which can only be turned around after a time.


Determine the correlation between the data:

You recall the number of conversations about the "multi-touch" attribution that is the holy grail of marketing. I believe it once I see it. You can't build that model without understanding your last touch attribution, cost units, and alignment between the abovementioned processes. Until then, I'd use the broadly available tool to help you determine the relation between the data points. Do it and use it frequently to estimate the impact enabling you to save a lot of time, cost, and company resources. A/B testing is a younger brother of that metric that I suggest using extensively as well; for big brother fans, use the Random Forrest model in R to recommend key decisions. Yes, yes, data is always a problem. Remember that correlation does not imply causation, and other factors may influence the relationship between these metrics. Additionally, the correlation only measures linear relationships and might not capture more complex interactions between variables.


Conclusion:

In the era of data-driven decision-making, the Rule of 40 is a compass for companies navigating growth and profitability. By honing the power of strategic marketing, businesses can influence the Rule of 40 through meticulously planned input metrics and carefully timed strategies. The interplay of short-term gains and long-term sustainability paints a dynamic picture of marketing's role in shaping this crucial metric. As marketing and finance collaborate to steer the ship, the Rule of 40 becomes a yardstick of performance and a testament to the collective efforts propelling a company toward lasting success. In the company, it's like in life. You need friends to stay mentally healthy and get a sense of belonging. The same is in companies. You want to be surrounded by individuals and leaders who share the same affection for the principles they follow or make decisions. Regardless of the different opinions that always occur between friends, the principles keep them together. While running your Marketing department, ask yourself how effectively you can manage the department that is isolated or cut off from the resources your organization needs to achieve its targets. On the other hand, if you are a CFO or COO, you must realize that this is a two-way street, and understanding the nature of Marketing is critical. We can't treat all departments based on one function's specifics, but we can manage them based on the commonly shared principles that reflect their actions in financial data.


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