The Press, June 2015
Three months’ salary. That is supposedly the rule of thumb governing investment in engagement rings, according to a colleague (who was using this as an excuse for not yet having bought one for his beloved).
My initial reaction was relief that such a crazy notion wasn’t popular in my circles when I was investing in my matrimonial future over 20 years ago!
It also got me curious about how such notions can gain currency, and how the same assumptions guide investing in other matters, including how much to spend on your marketing.
Like many a stupid populist idea, the ‘rule’ was born from an advertising campaign.
In the 1930s the DeBeer diamond company, struggling to cope in the depression era, pitched that you needed to spend one month’s salary to be a decent human being.
Natural inflationary pressure, and an advertising agency’s constant desire to exaggerate, increased the ‘rule’ to three months by the 1970s as DeBeers marketing campaigns upped the ante.
In terms of what you should invest in marketing, most marketing agencies would probably say three months revenue! The actual answer is more complicated and depends on multiple factors.
A good place to start is industry benchmarks.
The Market Measures study has been tracking investment in marketing and sales by technology companies for the last six years. The 2014 edition of the report tracked investment in marketing and sales by a company’s growth stage.
Start-up companies invested on average 30 per cent of revenue in all marketing and sales activity (including people), early growth firms 31 per cent and established businesses 23 per cent.
In terms of pure marketing expense, that is excluding any staff costs, start-ups are on average investing 12 per cent of turnover in marketing, early growth 10 per cent and more mature firms 8 per cent.
A reality check on these benchmarks is the spending of publicly listed technology companies. This is based simply on the figures disclosed in their latest respective annual reports, so may be measured slightly differently by each company.
Healthcare software company Orion Health invested about 1 per cent of their $165 million turnover in the 2014 financial year in marketing. Risk management and crime fighting software provider Wynyard Group spent 4 per cent, utilities billing software firm Gentrack 2 per cent and corporate travel software company Serko 10 per cent. Then there is accounting software company Xero, who pour a substantial 24 per cent of their earnings into marketing.
What the data suggests, given the variation is so wide in one single industry, is that any ‘‘three months’ salary’’ rule of thumb can’t easily be applied when deciding your marketing investment. Marketing spend is better determined by your appetite for growth, the market targeted and ongoing measurement of marketing activity.
Like any investment decision, risk profile is a key component. Some tech firms are trying to build their company as fast as possible to gain a dominant position in a new market, or trying to attract another firm to acquire them.
Others are more about growing existing customers and only incrementally adding new business, making for a different marketing investment profile.
Clarity about your market gives you the confidence to invest. How large is it, how many customers are available in a given year, what sales channels would you use, how easily can you promote your product to decision-makers?
The more you understand these factors the better you can decide what to spend on getting a product to market.
Ultimately you want to develop a model to understand the return on the cost of acquiring any customers. For example, popular in software-as-a-service businesses is a ‘months to customer profitability’ metric, where they can calculate how many months of revenue are required to pay back the investment they have made in acquiring them.
However, even building a picture of what your marketing activity is generating is a good start in proving marketing’s value to the owners or managers holding the purse strings.
How many marketing leads did a trade show produce, and how many of those converted through to qualified sales leads and ultimately customers? What are your online promotions producing in terms of web visits and converted leads?
These measures start to become meaningful when you can start tracking prospective customers through their buying cycle. From the time they initially ‘touched’ your company, for example through an online advertisement, through to the point where they become a real lead, e.g. they fill out a landing page form on your website.
Finally you need a connection with the sales team and visibility to their sales process, so you can clearly identify where any final sales were initially generated from marketing. Investing in marketing is less meaningful than finding true love and sealing it with an expensive ring, but it still pays to be smart about it. Don’t listen to all the noise telling you what to spend, do the work to understand your market and keep measuring your marketing activities to understand the customer love they are generating.