50questions-accountant

The Press, March 2015.

It’s that time of year again.

When your accountant starts warnings about those big tax bills coming up, and nagging about why your budget for the next financial year is not yet in place.

Readers may think that as a marketer my recommendation would be to budget as much as you possibly can for sales and marketing, and then add another 10 per cent.

Actually, investment in sales and marketing is less about an amount or a percentage of turnover, than working out what the right amount should be.

You need to stop spending on marketing, and instead look at how you can invest in acquiring new customers.

In the 2014 Market Measures study of hi-tech sales and marketing, the average (yes average) spend on sales and marketing is 29 per cent of annual revenue.

That is, the 305 firms participating, indicated what proportion of total income was spent on all sales and marketing costs, including salaries.

The study also showed that on average firms invested 9 per cent in marketing alone, that is the nonstaff costs related to promoting their wares.

For the average tech company these averages aren’t that useful as they are simply too broad to be easily applied to an individual situation. The marketing and sales challenge for software-as-a-service based company like SLI Systems is completely different from a firm selling large value items like Tait Communications.

Another way to answer the pesky accountant’s question is calculating your customer acquisition cost (CAC). It’s a metric more commonly used by web-based businesses as their model of doing business makes it easier to calculate, but is now being applied more widely.

A simple method is to take your total cost of sales and marketing over a given period, including salaries and other people-related expenses, and divide it by the number of customers acquired in the same period.

That alone is not so interesting, even though the actual number might be pretty scary, especially if you have an expensive offshore sales team.

Where it gets fascinating is calculating your CAC as a proportion of the value of typical customer to your company.

A common method for doing this is to assess the gross margin you expect to make from an average customer over the lifetime of your relationship, referred to as lifetime value (LTV).

Instead of an arbitrary discussion of what percentage of revenue you are spending on sales and marketing, you can examine the relationship between investment and return.

If I invest X in acquiring a customer I can expect Y in total returns from them. A rule of thumb for a good LTV to CAC ratio is 3:1. That is, you would expect three times the amount of revenue from a customer than you spent on acquiring them.

Getting to this equation can take time and effort, and require you to segment customers into different groups to get a sensible answer, but it is worth the effort.

Not only is it a more useful way of looking at how you invest in sales and marketing, it creates good dynamics in your business.

Existing customer relationships are recognised as an asset. If you are measuring lifetime value, you will focus on activities that keep customers happy and convinced of your value. While you want to increase the LTV metric, the natural driver at the other end of the process is to reduce your average costs of acquiring a customer.

It really makes you focus on everything you do to find, secure and sign new customers.

Which marketing tactics deliver the best value in terms of leads generated, what sales approaches convert customers most efficiently?

Companies that focus on CAC will tend to move away from relying on traditional marketing activities like tradeshows, print advertising and direct marketing unless they can show clear results. The focus becomes more on online, automated ways of getting people to engage with your product.

On the sales front they tend to look at other ways of closing new customers than simply relying on a highly paid sales teams. Working with channel partners, or using lower cost telemarketing sales, being a couple of examples.

The talented sales people are still crucial, but the focus is on them closing deals not trying to find and convince prospective customers to evaluate their product.

It’s a fascinating area, and one that starts to push marketing towards more science and less art. More metrics and less creative long lunches.

This doesn’t mean a company will spend less on marketing, in fact if they can prove its effectiveness the budget may well go up. It’s all about the efficiency and effectiveness of generating leads for the sales team to convert.

If the bean-counters are demanding your sales and marketing budgets for the year ahead, don’t just rinse and repeat last year’s number with a tweak for inflation or optimism, think about whether you can build a model that makes sense.

 

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