Marketing Expert's Corner

This article written in 2004
 

Marketing Budgets

"A cynic knows the price of everything and the value of nothing."
             - Oscar Wilde

For marketing departments at companies using the July fiscal year, now's the time when you're sorting out the details of your budget.  So it's a good time to understand the marketing spend.  Unfortunately, the topic of "How Much To Spend" is squirrelly.  As I've written before, the critical metric of marketing and sales spend is the cost of customer acquisition.  But when it's budget time, it's a competitive skirmish for resources, so the marketing group must grab what it needs, using whatever arguments it can.

Once again, we'll present both sides of the issue in a Point/ Counterpoint format.  You be the judge.

Point:  The Best Marketing Isn't Expensive

If your company is building the right product for a hot market, marketing really doesn't cost that much.  You have to be smart and agile, but a marketing wizard can get your company on the agenda of the press and analysts who give you the best advertising in the world without charge 

The whole point is to be a topic that reporters and analysts want to write about.  When you are the source of great "gee whiz" stories, customers who've become a hero in their organization, and companies that have beaten the competition, you not only get ink.  You get visibility and prestige.  

This helps you recruit partners.  If you've got the right product and the right message, partners become more than just lead sources.  In the early days of Siebel, a significant proportion of the marketing spend came from partners.  And the credibility that partners provided in accounts was invaluable to Siebel's growth.

In contract, spending a lot on marketing is like a drug addiction - it warps your thinking.  It also distorts your cost structure with expectations for ongoing expenditures to "make the field feel supported."  In large public companies, simply amazing piles of cash are wasted on ineffective and ill-conceived marketing campaigns.

The starting point for low-cost marketing is to assume that you have no money to spend beyond your headcount.  Ask yourself what can you do to leverage: 

  • Guerilla marketing

  • Viral marketing

  • Community-of-interest marketing

  • Thought leadership campaigns (writing a contributed article, giving a speech,  moderating a newsgroup, etc.)

  • Partner marketing (lead swaps, joint webinars, strategic partnerships, etc.)

  • Being a "back channel" information source to industry analysts and press editors.  By calling them up and giving them free information -- about, say, your competitors -- you can make the analyst/editor look smarter.  As a valued asset to them, you are more likely to get an unfair share of their attention.

  • Ultra low cost venues for events (e.g., university facilities)

Necessity really is the mother of invention, and a very lean "diet" for marketing leads to creativity when you have the right situation and the people  However, if your company is in a backwater product category, or if you have the wrong people on board, the low spending rates lead to defeatism and very poor results.

Counter-Point:  You Get What You Pay For

OK, miracles and lottery winners happen every day.  Some companies can get real traction without a huge staff or high spend rate.  Luck happens -- but do you really want to bet your company on low-probability events?

Marketing is all about visibility, lead generation, channel programs, and impact.  None of these things comes cheaply, and all of them require both internal effort and external expenditure.  The fully loaded cost of marketing will be somewhere between 7% and 15% of the total cost structure for companies under $100 M in sales.  The percentage declines gradually as the company grows, with large IT companies spending  between 6-8% of revenues on marketing.

Visibility means exhibiting at trade shows (minimum fully loaded cost:  $15k / day for a medium-size show), press articles (minimum cost of decent PR:  $8k / month plus expenses), speaking engagements (fully-loaded cost to get the speaking slot: $5k or more) and contributed articles (real cost:  ~$3K, plus the PR effort).   Visibility with industry analysts means subscribing to their service (typically $15-25 K per service) and spending time "briefing" analysts (depending on who they are, $4-10k/day). 

Lead generation is more directly related to revenue, and is an expense that scales with the size of your sales force.  One way to think about lead generation is as a sliding scale, from the rawest "name" to the most highly qualified decision-maker who has taken a meeting and wants a proposal.  Using that model, the cost of "getting a first meeting" is typically between $500 and $1000, and the marketing cost of getting to someone who's willing to start purchasing negotiations is usually ten times that.  Of course, there is sales effort involved in getting prospects to that stage, but I've omitted those salaries as a "fixed" cost.

As I discussed in my Marketing Scalability report, minimum thresholds apply to all lead generation activities.  For most parts of the IT industry, the web is the least expensive source of leads.  Web site costs vary dramatically; with really big sites the costs -- and the value to the company -- are incalculable.  But for a small product-oriented site, expect the fully-loaded cost to be around $1000 per page per year.  Web advertising for banner or sky-scraper ads is several thousand dollars per site, depending on the site's popularity.  Google AdWords, my personal favorite for IT products, typically cost between $1 and $3 per "click through."  Unfortunately, for many product categories, web leads have very poor conversion rates and are the lowest-quality leads from a sales perspective.

For channel-based sales, you avoid a lot of internal sales costs.  But you have even more marketing to do:  visibility, collateral, packaging, displays, and advertisements.  The channel expects YOU to generate demand, and will participate in marketing only when there are promotional dollars and specific incentives for them.  Expect to spend at least 10% of your total company budget on marketing, plus the "points" (depending on your industry and company size, between 20 and 50%) you'll have to give the channel so that they can make enough profit.   

You have to pay to play.  

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