Software sales & marketing costs
Periodically I’ll find a post in the blogosphere lamenting the amount of money that enterprise software vendors pour into sales & marketing. In most companies, sales & marketing expenses are 2-3X those applied to product development. While there are countless articles, books, methodologies and consultants available to increase the efficiency of product development, the cupboard is comparatively bare when it comes to efficiency in sales and marketing.
Sales and marketing expenses are, in the abstract economic sense, wasted money. If customers were omniscient they could order whatever they needed on a web site without vendor prompting or encouragement and take vendor sales & marketing costs down to zero.
I believe the root cause of sales & marketing expenditures is a two way street. Reducing these costs would neither be a vendor-only solution nor a customer-only solution.
Where does the money go? If all sales & marketing expenses are 100%, the breakdown for an average enterprise software company might look something like this:
Brand & general awareness building – 10%
Tactical marketing (demand generation, etc) – 20%
Quota carrying salespeople & associated overhead – 35%
Sales specialists (sales engineers and various other specialists) – 35%
I’m sure there is wasted money in marketing, but at 70% of the total, the bigger opportunity for improvement is in sales.
If you were to show sales costs as a simplified function of revenue it might look something like this:
Cost of Sales as a % of revenue = Revenue Per Sale / [ (N * S * T + C) * 1/P(w) ]
N is the average number of people working on a sale
S is the average salary of those people for a month
T is the average amount of time in months it takes for the sale to reach a decision (win or lose)
P is the probability of winning the sale
R is the revenue a company takes in a given year
C is costs associated with the sale (e.g. travel)
Three parts of this equation are relatively uncontrollable:
S is not an opportunity for savings. There is a market rate for good people in any profession. If you pay less than the market rate, you either get bad people or no people at all.
I don’t think there’s a big opportunity to reduce the average number of people working on a sale. You could argue that fewer sales specialists would reduce N, but I’d predict that this would result in salespeople doing this work themselves which would increase N back to the original level. Possibly there’s some optimization to do here but not a ton.
Revenue per deal is a big but I think untouchable lever. Doubling the amount you sell in one shot cuts sales costs nearly in half. Of course customers aren’t too thrilled about paying double and vendors aren’t too thrilled about receiving half, so I think we’ll have to let the market sort out the average deal size.
Three parts of the equation are controllable if everyone (vendor and customer) is willing to do their part.
Time is a big lever. With a similar sales team and win rate, a company with an 18 month sales cycle will spend twice as much on sales as a percent of revenue as a company with a 9 month sales cycle. There are tons of pockets of wasted time throughout the sales/purchase cycle but the first order problem is this:
People are free to waste what is not their own. So vendors frequently waste the customer’s time, and customers frequently waste the vendor’s time.
Some ways vendors waste the customer’s time:
- Avoiding describing what the product or service actually does in favor of abstract marketing and positioning statements like “end to end” or “best in class.”
- Reluctance to disclose product weaknesses.
If you’re a large purchaser of technology, go to one of your vendor’s account managers the day after New Year’s and say:
“Whatever quota you’ve been assigned for me for this year, I’m guaranteeing you’ll make it. Now I just guaranteed your income so you work for me. You will be my savvy shopper. I want to get precise descriptions about what your products do. I want to know about their issues and weaknesses before anyone else does. I want to have access to your company’s expertise as fast, or faster, than anyone else. If you fail to do these things I can ensure you get kicked off this account and probably fired.”
Some ways customers waste the vendor’s time:
- RFP’s. Everything in moderation, but most book-sized RFP’s are huge time & resource drains for vendors with low probability of success.
- Concentrating purchase authority in the hands of one or two people who take months to get access to.
If you work in sales management for a large technology vendor, pulls a customer aside at the end of your first meeting and say:
“On average my company spends 12 months with customers before they reach a decision on our product. If you are willing to commit to a yea or nay decision on my company’s product within 6 months, I will discount the price an additional 7% in addition to whatever discounts you regularly negotiate.”
Sales costs are roughly 25% of revenue so by cutting them in half the customer and the vendor can share the savings equally at a 7% discount.
Win rate is another big lever. If a vendor won 100% of the deals it pursued, its sales & marketing costs would be half that of a vendor that won 50% of the time. This is a big reason why the #1 vendor in a software market typically makes 80% of the profits in the market. If #2 vendor wins half as much as the #1 vendor, their sales & marketing costs as a % of revenue are higher than that of the leader, and this causes them to starve R&D to fund additional sales & marketing. Of course this further reduces the win rate, sending the #2 or #3 vendor into a vicious cycle.
It’s in the technology buyer’s power to increase win rates industry wide, reducing vendor sales & marketing costs. If you’re a shopping for software, how many vendors do you typically evaluate? When do you cut most of them loose so you’re down to the likely two?
Cost associated with the sale is yet another lever. Over a 12 month sales cycle, the airfare, meals and extraneous expenses can add up. I’ve personally never seen a compensation plan that rewards salespeople for saving the company money. I’m not sure why this is but perhaps someone can explain to me why this would not work. A sales manager tells his salespeople:
“On average our company spends 3% of revenue for a sale on travel & miscellaneous expenses (this is a total guess on my part). If you come in below the company average, you can have half of the savings.”
Just as in product development, there’s no silver bullet to reducing sales and marketing costs. But the prize (in the form of increased profits, more money ploughed into R&D, and customer savings) is so great, it seems crazy not to try. So let’s light a candle rather than curse the darkness. Has anyone attempted these or any other approaches to streamlining the enterprise software sales and marketing machine?