A YouTube video by Henning Schwinum advising entrepreneurs on how to allocate limited funds between product development and sales/marketing. Provides benchmarks: SBA recommends 7–8% of gross revenue for marketing for businesses under $5M; some startups spend 2–3% or 1–10% depending on circumstances. For sales, small businesses typically spend 10–20% of revenues, high-growth tech 25–45%, and SaaS companies often spend over 50% on sales and marketing (80–120% in first three years, plateauing around 50% by year five). Emphasizes planning, aligning spend with revenue/profit goals, and considering interim/fractional sales leaders.
Chapters
I invested all my funds in product development and I have nothing left to put towards sales and marketing. As a sales leader and entrepreneur, those are the last words I want to hear. And yet, just over the past year, I've had several conversations with founders that almost verbatim included this statement. Now every business is different and if you're starting a tech business without investment in engineering and development, there is no product to sell. And at the same time, this is not a chicken or egg type dilemma. It is part of the continuous entrepreneurial challenge of where to spend limited resources. And as you write or rewrite your business plan, there are best practices to rely upon and to not get caught in a dilemma, let's look at marketing first. The U.S. small Business Administration recommends spending 7 to 8% of your gross revenue for marketing and advertising if you're doing less than $5 million a year in sales. Some marketing experts comment that in actuality, startups and small businesses actually allocate between 2 and 3% of revenue for marketing. Still other experts suggest a range between 1 and 10% depending on how long you've been in business and how competitive your market is. Clearly there is a range. The 7 to 8% of gross revenue from the SBA seems to be a good benchmark though. Now what if you're pre revenue? Apply the same percentage to the projected revenue in your business plan Plan and how about sales? As an entrepreneur, your main job is selling. Your small business can make a lot of demands on your time and money, but you must make sure you devote enough resources to sales or your other business activities will be meaningless. Every business is unique when it comes to sales as a percentage of revenues. High growth technology businesses tend to spend 25 to 45% of revenues on sales. For small business, a product launch can boost these costs. While 10 to 20% of revenues is more typical. The average is much higher for successful SaaS companies, where many spend more than half their annual recurring revenue on sales and marketing. During their first three years, SaaS companies often spend anywhere from 80 to 120% of their revenues on sales and marketing. It then plateaus around 50% from year five on. Again, these numbers vary. The consistent element, however, is the significance of sales cost as a percentage of revenue or projected revenue. And keep in mind, the point of spending on sales and marketing is not for the sake of spending. It serves a purpose. It serves to achieve the revenue and profitability goals set in the business plan. Whatever approach you take, build a plan that includes investment in sales and marketing. Avoid a dilemma contact us to find out how interim or fractional sales leaders can help.
