Benchmarks: sales & marketing cost ratios.(Metrics & Benchmarks: Benchmarks)

Sales and marketing costs have always been one of the software industry's biggest budget items, and often the most difficult to compare from company to company. The marketing mix that builds high-volume sales for a branded retail title is almost certainly wrong for companies that sell big-ticket enterprise solutions or vertical-market products. Competition, price, growth objectives, product reputation, channels--the list of key marketing variables can be almost endless.

And yet there have to be some points of comparison, some way to set reasonable benchmarks for sales and marketing spending. To see if we could carve out such benchmarks, we recently polled our readers and other software company senior executives to see how they divide up their individual S&M budgets. We collected usable data from a total of 99 respondents, who also supplied demographic data about their annual revenues and the price of their best-selling products. With the help of this data, we've uncovered some interesting guidelines for sales and marketing cost comparisons:

S&M Spending as a Percent of Total Company Revenues

We asked our survey respondents to tell us the percent of total company revenue they spend on "all forms of sales and marketing," and we found that the overall average was 20.7%, with half of the companies in our sample reporting S&M spending between 12% and 26%. (As a point of reference, Microsoft currently spends 18%-19% of its revenues on sales and marketing.) The real surprise, however, is that company size and product price seem to have almost no impact on this ratio:

Of course, there are companies that find themselves spending far more aggressively to win market share or to grow rapidly (in fact, S&M spending among public software companies is usually in the 45%-50% range). And there are certainly others that--at least temporarily--have found niches where single-digit S&M spending levels bring in acceptable sales. But for most software companies, a sales and marketing budget of 18%-22% of sales is squarely in the mainstream.

S&M Spending by Category

Software companies may invest roughly the same overall percentage of their revenues in sales and marketing, but when we drill down to specific expense categories we begin to see more significant variations. Using survey data on category-level spending, we assigned our respondents to six groups based on each company's primary S&M spending focus-e.g., support for a direct sales force, reseller channel promotion, Web sales, etc. We then looked at how companies in each group typically allocated spending for other S&M categories. Here's what we found:

* The direct sales category: For slightly more than half of our respondents, a direct sales force (including inside telesales and outbound sales reps) is the company's top S&M spending priority. Moreover, companies with a direct sales emphasis tend to commit almost two-thirds of their dollars to this one category; their budgets have little room for other marketing activities and channels. Predictably, companies with a direct sales emphasis tend to sell higher-priced products; median product price for this group is $17,600.

* The reseller channel category: Another fairly large group of companies rely on third-party resellers (VARs, retailers, catalogs, etc.) as their primary sales channel, and they spend heavily on channel-related lead generation programs and promotions.

However, the total S&M budget for this group-and for other groups-includes greater spending on marketing communications and trade shows and seminars than we see in the direct sales group. Product prices for this group also tend to be lower than among direct-sales companies, though the median is still almost $10,000

* The Web/e-commerce category: The Web offers an economical alternative to traditional sales channels, and we identified eight companies that commit the biggest piece of their S&M budgets to online channels. All of these companies are small (under $5 million in sales), and they have the lowest total S&M spending--an average of just 13.4% of sales. Median product price for this group is quite low, at $523.

* The direct response category: Eleven companies in our sample sell through direct mail and other direct channels; like the Web group, these companies typically sell lower-priced titles (median $795).

* The trade show and seminar category: Although we found only five companies in this group, event marketing does appear to be a viable strategy for at least some companies (mostly smaller firms). Median product price for this group is $1,200.

* The marketing communications category: We found nine companies that invest the biggest chunk of their budgets (39%) in activities that are chiefly brand-building-advertising, public relations, demos, sales collateral, and research. No other category of spending gets much emphasis in this group, yet their total S&M spending is a fairly efficient 15% and median product price is $2,000.

 S&M spending ratios                  Average   50% Range  Entire sample (99 companies)          20.7%     12%-26%  By company size:   $10+ million                        18.6%     10%-26%   $5-$10 million                      21.8%     15%-25%   Under $5 million                    20.2%     12%-27% By price of best-selling product:   $10,000+                            21.0%     10%-25%   $1,000-$9,995                       22.2%     15%-30%   Under $1,000                        19.6%     10%-25%  "50% range" represents the middle half of all responses.  How software firms spend their S&M dollars  Direct Sales                42% Web/E-Commerce               9% Direct Response              8% Shows/Seminars               9% Marketing Communications    13% G&A/Unallocated              9% Reseller Channels           10%  Software companies typically focus their marketing efforts on one or two distribution channels, so industry-wide cost ratios aren't useful as benchmarks. However, this chart shows the relative importance of key spending categories-particularly the industry's heavy reliance on direct sales.  Company Focus: Direct Sales  Direct Sales         65.0% Marketing Comm.       8.4% Reseller Channels     4.6% Shows/Seminars        7.0% Web/E-Commerce        5.6% Direct Response       4.7% G&A/Unallocated       6.3%  Average S&M spending: 20.8% Median product price: $17,600 Respondents: 51  Note: Table made from bar graph.  Company Focus: Reseller Channels  Direct Sales         19.8% Marketing Comm.      11.2% Reseller Channels    38.6% Shows/Seminars       11.2% Web/E-Commerce        5.5% Direct Response       5.8% G&A/Unallocated       8.2%  Average S&M spending: 26.7% Median product price: $9,998 Respondents: 13  Note: Table made from bar graph.  Company Focus: Web Site/E-Commerce  Direct Sales            11.1% Marketing Comm.         15.0% Reseller Channels        7.5% Shows/Seminars           8.0% Web/E-Commerce          35.4% Direct Response          7.5% G&A/Unallocated         15.9%  Average S&M spending:   13.4% Median product price:    $523 Respondents:                8  Note: Table made from bar graph.  Company Focus: Direct Response  Direct Sales             16.4% Marketing Comm.          10.9% Reseller Channels         8.4% Shows/Seminars           10.1% Web/E-Commerce           10.0% Direct Response          30.7% G&A/Unallocated          13.5%  Average S&M spending:    18.6% Median product price:     $795 Respondents:                11  Note: Table made from bar graph.  Company Focus: Trade Shows and Seminars  Direct Sales             17.8% Marketing Comm.          18.2% Reseller Channels         7.4% Shows/Seminars           29.8% Web/E-Commerce            5.6% Direct Response           6.6% G&A/Unallocated          12.6%  Average S&M spending:    24.4% Median product price:   $1,200 Respondents:                 5  Note: Table made from bar graph.  Company Focus: Marketing Communications  Direct Sales             17.1% Marketing Comm.          39.1% Reseller Channels         5.4% Shows/Seminars            8.7% Web/E-Commerce            6.7% Direct Response           8.1% G&A/Unallocated          13.9%  Average S&M spending:    15.0% Median product price:   $2,000 Respondents:                 9  Note: Table made from bar graph.