No Product Sells Itself

They All Require Investment in Sales and Marketing

“A person can have the greatest idea in the world… but if that person can’t convince enough other people, it doesn’t matter.”

Gregory Berns, Psychiatrist and Author

“I invested all my funds in product development and have nothing left to put towards sales and marketing.”

“I hate paying salespeople big bucks. My product will be designed so well that it sells itself.”

As a sales leader and an entrepreneur, those are the last things I want to hear because no product sells itself! If you disagree, I challenge you to name one.

And yet, just over the past two years, since launching my business targeted at helping start-up founders, I have had several conversations that almost verbatim included these statements.

As a result, I published an article titled “ The Start-up Dilemma “ about a year ago. What follows is an updated and further researched version.

Every business is different. And if you are starting a tech business without investment in engineering and development, there is no product to sell. But this is not a chicken-or-egg type dilemma. It is part of the continuous entrepreneurial challenge of where to spend limited funds. And as you write — or re-write — your business plan, there are best practices to rely upon and not get caught in a dilemma.

Marketing

Marketing budget refers to all costs for marketing, advertising, public relations, promotions, and anything else you might blanket under that very wide-cast net called ‘marketing’ on a day-to-day basis: for example, Google AdWords, social media, print ads, sponsorships, collateral, and events. To address the question of how much, here are a few benchmarks:

1. The U.S. Small Business Administration recommends spending 7 to 8 percent of your gross revenue for marketing and advertising if you’re doing less than $5 million a year in sales and your net profit margin — after all expenses — is in the 10 percent to 12 percent range.

2. Some marketing experts comment that, in actuality, start-ups and small businesses usually do allocate between 2 and 3 percent of revenue for marketing and advertising. Still, other marketing experts suggest a range between 1 and 10 percent and more depending on how long you’ve been in business and how competitive your market is.

3. A 2016 survey of 168 Chief Marketing Officers revealed that marketing budgets account for as much as 40 percent of a firm’s budget, with a median of 10 percent of the overall budget and a mean average of 12 percent. When shown as a percentage of total revenue, the mean was 8 percent, and the median was 5 percent.

4. And as a final data point in this context, Abby Pearson has the following recommendation: “… as a general estimate, it is recommended that young companies spend around 20–25% of their revenue on marketing costs, while this figure is in the range of 10–15% for more established companies. The answer will depend on your company’s unique circumstances, like product, target market, location, …”

Clearly, these numbers initially look like they are all over the place. And while some may be self-serving, the 7 to 8 percent of gross revenue from the SBA seems to be a good benchmark. Now, what if you are pre-revenue? Just apply the above percentage to the projected revenue in your business plan.

Sales

As an entrepreneur, your main job is selling. Your small business can make a lot of demands on your time and money, but you must make sure you devote enough time and resources to sales, or your other business activities will be meaningless.

Sales expenses include salaries, bonuses, tools, possibly T&E, and administrative costs.

Every business is unique when it comes to sales as a percentage of revenues. A manufacturing company, for example, must spend money to make products, whereas an e-business that sells information can focus on selling without worrying about physical product manufacture and storage. Here are two benchmarks:

1. According to Steve Smith, Head of Sales for Encoding.com and former top salesperson for Yelp, companies like Google pay as much as 40 percent to affiliates, while Amazon pays very little in sales expenses because of its online presence and dominance in its field.

2. High-growth technology businesses spend 25 to 45 percent of revenues on sales. A new product launch can boost these costs to 30 percent for a small business, while 10 to 20 percent of revenues is more typical.

3. The average is much higher for successful SaaS companies, where many spend more than half their annual recurring revenue (ARR) on sales and marketing costs. According to Tomasz Tunguz, a partner at Redpoint Ventures, during their first three years, SaaS companies often spend anywhere from 80 to 120 percent of their revenue on sales and marketing. It then plateaus around 50 percent from year five on.

Again, these numbers vary. The consistent element, though, is the significance of sales cost as a percent of revenue or projected revenue.

The point of spending on sales and marketing is not for the sake of spending. It serves a purpose; it serves to achieve goals set in the business plan. And as such, it is like any other investment you make in your business.

Rodrigo Martinez is emphasizing investment over spending when it comes to sales and marketing: “What I mean by investing in sales and marketing is about your goal and approach to it. You’re investing … when you’re in a “trial and error” mindset:

• You try to experiment to see what works and what doesn’t in order to attract and convert customers. You must try to get your whole team into this mindset. Involve everybody in the team in thinking how to further grow the business. Great ideas can come from everywhere!
• Try to get some sense of how those channels will scale and when they would saturate.
• Document those things so new people who join can get up to speed quickly.”

Now, maybe you disagree with the statement I made earlier that no product sells itself. Well, I still challenge you to name just one…

__________________

Abby Pearson — How much should marketing costs be for my start-up?

Jason Andrews — How Much Should my Business Spend on Sales and Marketing?

Rodrigo Martinez — INVEST in Sales and Marketing!

Photo by Anne Gosewehr

Originally published at https://www.vendux.org on December 6, 2021.