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In Revenue Attribution, we are looking for the cause of human behaviour. In our case the customer purchasing our goods or services.
For a customer to make the active choice to acquire something, he or she needs to be sufficiently confident that the purchase will solve a certain active need. If not, no deal.
If we take a closer look at the customer acquisition journey we can see that there are multiple touchpoints between the potential customer and your company. Throughout the journey, the potential customer might have seen an advertising from your brand, he or she might have attended a webinar and before the closing of the deal, there were very intense sales discussions.
The figure below shows an example of the multitude of touchpoints a customer might encounter during the Customer Acquisition Journey.
FIGURE 1 EXAMPLE OF A SUCCESSFUL CUSTOMER ACQUISITION JOURNEY
Each of the touchpoints has an impact on the confidence level of the customer towards his belief that your solution will solve his needs.
This confidence level, which can also be called the purchase intent, towards your solution, is at an absolute zero when you are unknown, and at one hundred percent when the customer buys your stuff.
FIGURE 2 - EVOLUTION OF CONFIDENCE LEVEL
Figure 2 shows this customer acquisition journey in a graphical way. Once the confidence level reaches a certain threshold, a purchase transaction takes place.
Depending on the business you are in, you can split up this journey in different stage-gates. Each stage-gate represents a different generic purchase intent that is meaningful to your business.
To make this concept less abstract we will use a practical example in which we divide the customer acquisition journey in 3 stages separated ;
These stages are still very generic. To create an attribution model, we need to become more specific. This we do by introducing the concept of stage-gates.
Stage-Gates are specific moments during the Customer Acquisition Journey that you identify as being relevant for the purchase intent of your customer. These will be different based on your type of industry and your business model. But whatever stage-gates you select, they need to be measurable and linked to an action from the customer side. Without linking a stage-gate to a customer action, you remain in the land of pure speculation.
As an example, we identify the stage-gates as follows:
‘Figure 3 Example Stages in Customer Acquisition Journey’ shows these different stages and stage-gates on the graph we introduced earlier.
FIGURE 3 EXAMPLE STAGES IN CUSTOMER ACQUISITION JOURNEY
So far, we have chopped the customer journey in three pieces. Every stage representing a higher purchase intent. Now comes the moment where we will attribute revenue to these different stages. To explain this, we will make a short sidestep to physics. Don’t exasperate, we will keep it nice and easy.
Within physics you have the concepts of ‘Potential Energy’ and ‘Kinetic Energy’ to describe the two states of energy. Kinetic energy is the energy an object possesses because of its state of motion, while potential energy is because of its position of rest.
Imagine a can of gasoline, it has the potential to fuel a car, but until it is used, this energy remains potential, once it’s being used, the energy becomes kinetic.
The same hold true in a certain sense for revenue, you have potential revenue and kinetic energy. Kinetic revenue is easy, it is what hits your books when a Purchase Order is placed. Potential revenue are all the suspects, prospects and opportunities your sales and marketing teams are working on. They represent, with a certain probability, future revenue streams.
When we attribute revenue to certain stage gates, we are not attributing kinetic revenue but potential revenue according to the probability that a certain stage leads to real revenue.
Very much like you would do in financial cost allocation.
For those who are less savvy in finance; “Cost allocation is the process of identifying, aggregating, and assigning costs to cost objects. A cost object is any activity or item for which you want to separately measure costs. Examples of cost objects are a product, a research project, a customer, a sales region, and a department.”
In our case, we don’t speak of ‘Cost Objects’ but from ‘Revenue Objects’. Every stage gates becomes thus a Revenue Object.
Question remains, how much revenue do we attribute? This is the question where your data sources come in. To determine the value of our Opportunity Stage-Gate, we look at the average win-rate of quotes together with the average deal-size.
The attributed value of the Opportunity Stage-Gate can then be expressed as % win-rate times average deal-size.
For the other stage-gates, we follow similar reasonings. We will show practical calculation examples further in this paper.
With the allocated revenue, you can then calculate the return on investment of your marketing actions according to the following formula:
The formula has two elements:
-Margin of attributed Revenue; As we are looking for return on investment, it is important to use the average margin on the revenue as this is a proxy for the average profit you make.
-Total Campaign Cost; This is the full cost, both direct and indirect, you have made to enable your marketing action
By combining these elements, you can now calculate if your marketing campaign was successful from a financial point of view. Which is in the end, the only thing that matters for your organization.