Tomicide Solutions, March 2010

Setting Marketing Budget For Optimised Client Acquisition

By Tom "Bald Dog" Varjan

Podcast version: MP3 Version. Right click the link and click "Save As".

Do you know that more people are allergic to cow's milk than any to other food?

The reason why I mention this hair-raisingly (your hair not mine) interesting fact is that in many IT companies' executives seem to be more allergic to setting their marketing budgets than anything else. Actually there is only one topic they are more allergic to: Setting their fees and prices.

Therefore budget-setting becomes guesswork, and very often this guesswork creates pathetically small marketing budgets, which, in turn create pathetic bottom lines in the following year.

Many small and medium-sized IT companies invest only a mere 1-3% of their gross revenues in marketing.

Why so little?

Hell knows?

Most of them can cite the now famous Peter Drucker quotation on marketing even in their sleeps, but in real life they seem to ignore it.

You know the quotation I mean?

"Because its purpose is to create a client, the business has two - and only two - functions... Marketing (creating a customer) and innovation (creating a new dimension of performance). Marketing and innovation produce results, all the rest are costs."

Yet, most IT businesses shrink their marketing budgets in order to boost their other budgets to buy more company cars, more technology, more gadgets and all sorts of useless bits and bobs that may look great on the surface but contribute precisely dick to revenue-creation.

And it's all because their dumb owners, often to the advice of their tightwad accountants, regard marketing as an expense that must be reduced or, if it is all possible, completely eliminated.

Sadly so many accountants advise their business owner clients to reduce overhead costs, and since many accountants don't understand business beyond number crunching, they believe they do business owners a favour by advising them to reduce everything to the bare minimum.

"Hey, we don't make money, but we don't spend it either!"

This reminds me of former US president, Jimmy Carter's period in the White House. He didn't do anything, so he didn't make mistakes.

I've met business owners, who, to their accountants' advice, terminated marketing initiatives that brought in $3-8 on each $1 invested. The dumb accountant was so hell-bent on cutting operating costs that he advised the business owner to forego the potential profits in order to save some money.

So what does this all mean?

It means that so many IT businesses spend more money on chasing apathetic suspects than they are willing to invest in attracting self-selected and self-qualified buyers through good marketing systems.

Although Ian Gillan sang on Deep Purple's 1984 album, Perfect Strangers "It's not the kill, but the thrill of the chase"...

I dare to assume that Ian wasn't involved in prospecting for audience members on a daily basis. So, it's easy to enjoy a process one is not forced to do every day.

However, most businesspeople can easily imagine their lives without doing cold-prospecting grunt work, but if you don't want to do the prospecting slavery, you have to play the prospecting automation game. You have to create the proverbial honey pot that will attract the right people. And that requires a budget.

But the earth-shattering question is...

How To Set A Marketing Budget

When it comes to setting marketing budgets, we can split people into two groups. By the way this idea is nicely outlined in Clark A. Campbell's book, "The One Page Project Manager for IT Projects: Communicate and Manage Any Project With A Single Sheet of Paper"[1]. I may be using different words, but it's his idea.

Oh, and I think this book should be mandatory reading for every employee in the IT industry who is involved in project work.

Forwards Thinkers

These people try to figure out what they can achieve by using their current resources. The achievement remains uncertain but the resources used to achieve those outcomes are rigidly fixed.

It's like a farmer who says that he has only one sack of seed corn and that's all he's willing to plant. He doesn't even seem to care about outcomes.

Some virtues of forwards thinkers...

Some vices of forwards thinkers...

Backwards Thinkers

These people set their expected outcomes and adjust their investments accordingly. They are proper farmers who plant according to their expected yield.

Some virtues of backwards thinkers Some vices of backwards thinkers

And we haven't even discussed childhood conditioning yet but not being a psychologist, I shouldn't really go there.

But now we can see how different people think differently about setting budgets.

But first let's...

Look At Some Statistics On Marketing

These statistics are especially for SMEs - small and medium-sized businesses collected from several sources by different marketing and market research companies both in North America and overseas.

And while the numbers may deviate from country to country, what's really important is the magnitude of the numbers not their absolute value. These are not only IT companies, but again, look at the range of numbers and their relationships to each other, not the exact numbers.

In 2009, only a mere 32.8% of SMEs did any marketing at all, which is a significant increase from the 18.7% in 2002. The other 67.2% used oversized sales forces to hunt for buyers. That's a bit sad because they don't even realise that hunting for buyers is more expensive both financially and emotionally than using good marketing to attract buyers.

Contrary to the recommended 5-10% in the marketing literature, most SMEs invest only 4% of their CURRENT gross revenues into marketing. The top-notch SMEs invest 13-15% of their PROJECTED gross revenues in marketing and grow way higher than 50% annually.

Do you see the two types of people in action?

Forwards thinkers base their marketing decisions on resources (Present). Backwards thinkers base their marketing decisions on the company's goals (Future).

Forwards thinkers want to plant as little as possible (Cost-focus). Backwards thinkers want to harvest as much as possible (Value-focus).

Boston Consulting research between 1980 and 1995 showed that what companies do when the shit hits the fan has a huge impact on the company's future. Those companies that reduced marketing during hard times grew by 5% over the next 15 years. The ones that stepped on the marketing accelerator grew by 500% over the next 15 years.

Only 19% of SMEs invest 5-10% of their revenues in marketing. Sadly, another 19% invests nothing whatsoever. 35% of SMEs have no earthly idea how much they spend on marketing. Well, without tracking it's not really investing is it?

54% of SMEs use the Internet for marketing purposes. 35% uses printed marketing. 26% uses flyers.

I'm not 100% certain, but I have a sneaking suspicion that a large chunk of printed marketing is some kind of full-coloured self-centred bragging document, not properly written client-focused marketing documents.

And here is a good reflection of how SME owners regard marketing. Only 7% of SMEs employ dedicated marketing people. 3.99% employ one person and 0.98% employ two people.

Only 33% of SME marketing people rely on their practical experience in their positions. 25% participate in professional development programmes, while 22% use hope and prayer to get things done.

65% of SMEs fail to offer any professional development to their marketing people.

Among all SME marketing people only 16% attend conferences, seminars and workshops; 15% subscribe to marketing magazines; 14% subscribe to newsletters; 12% read books. But most of them just go to work, go through the daily motions while daydreaming of the upcoming weekend booze-up weekend and go home.

Only 7% of SMEs ever enlist external marketing help and support. Interestingly, large companies have a couple of consultants working on major initiatives all the time. For SMEs using consultants is a waste of money. For large companies it's a wise investment with excellent returns. It seems, merely thinking and acting differently creates miracles.

An alarmingly high percentage of SMEs are obsessed with the kind of image marketing which is great for large corporations with multimillion dollar marketing budgets, selling commodities to consumers, but it's useless for IT SMEs selling complex, high-ticket solution in the B2B world.

Most SMEs invest the most of their marketing money in generating new clients, while investing almost nothing in converting first-time clients into repeat clients.

So, we can easily conclude that most SMEs are cost-obsessed and ROI ignorant.

But let's take a closer look at larger companies' marketing budgets.

Microsoft's marketing budget is 21% and Adobe's is 33%. Interestingly, for blockbuster movies, the total budget's 40-60% is dedicated to marketing. That's why they're blockbusters.

And now let's take a look at...

Some Of These Large Companies' Productivity

This way we can establish whether or not the larger budget is justified.

And we can do that by looking at revenue per employee (or profit per employee), in my view, the only meaningful financial success indicator for SMEs.

Based on data from Google Finance, at $1,080,914 revenue per employee and $209,624 profit per employee Google is the best performing high-tech company (19.3% pre-tax profit).

At $663,956 revenue per employee and $194,297 profit per employee Microsoft is the second best (29.2% pre-tax profit). And remember, Microsoft's marketing budget is 21% and the return is pretty sweet.

Adobe's 33% budget produces $488,056 revenue per employee and $118,856 profit per employee (24.3% pre-tax profit). Still pretty brilliant.

At $413,637 revenue per employee and $12,010 profit per employee Sun is the bottom of the pile (2.9% pre-tax profit).

HP, at 368,735 revenue per employee and $25,947 profit per employee is pretty close to the bottom of the pile (7.03% pre-tax profit).

But conventional wisdom doesn't measure revenue per employee. It measures gross revenue and assets.

In gross revenue HP leads with 118.36 billion. But in terms of revenue per employee and profit per employee, HP is at the bottom of the list.

In assets HP leads with 109.63 billion.

But there are some other points to consider.

Yes, Google is the most profitable but also has the highest cost of doing business. At this point companies can focus either on reducing costs or increasing profits. I guess Google is more concerned with increasing profits than reducing costs.

What we can also see is that Google ($33.51 billion in assets) and Microsoft ($68.85 billion in assets) are asset-light knowledge-based companies, while HP ($109.63 billion in assets) and IBM ($101.95 in assets) are asset heavy factories.

While not included in the original list, Nintendo with its $1.6 million revenue per employee beats most high-tech companies. For the first quarter of 2009, Nintendo made $993 million in profit. With some 3,000 employees this is about $331,000 in profit per employee. Remember Google's annual profit per employee is $209,624, some 60% of Nintendo's quarterly profit.

Yes, large public companies need to please Wall Street with assets and gross revenue, but for SMEs, the real measure of success is profit per employee. If this number is pretty good, then everything else can be improved.

But IT SMEs can't operate as if they were multinational corporations. So, they have to set their marketing budgets in such a way that they can make good money and the overhead costs don't kill them.

Actually this seems to be easier for smaller companies due to the lower headcount. It's easier to get high performance out of a few people than out of a crowd.

So, let's take...

A Quick Look At Economies Of Scale

In microeconomics, when more units of a product or a service can be produced on a larger scale, yet with the same or even less input costs, we've achieved economies of scale (ES).

The human resources aspect of the economies of scale is when the company can produce more profit without adding additional people.

So, 1-person operations' production costs are high for the business owners do everything. As owners hire help, they start moving down the economies of scale until the optimum number of employees is reached for optimum production.

Hiring more people only increases production costs thus putting business owners on the diseconomies of scale curve.

Economies Of Scale in HR

The idea is that an optimum number of people are needed to produce the company's revenue. Profit per employee is the highest at the optimum number of employees.

Small businesses and very large companies operate under the diseconomies of scale by not having the optimum number of people, so they produce their products and services at higher than necessary costs.

So, first every SME has to get the economies of scale right. For the same reason, I always to hire people as the very, very, very last resort, unless some totally amazing talent walks in. Telling these unique people that the company is not hiring now is retarded because then they go to the competition and get to work to get the others out of business.

Marketing Budget Percentages

Next let's look at the percentages of how to split up the marketing budget.

This is an investment split I've seen work pretty effectively and like using it with my clients too...

20% To Generate Sales Leads

Yes, generate sales leads but how. There are so many ways. Some are expensive some are cheap. You know what? Never mind the cost for now but let's look at the potential return.

High Investment-Low Return Lead Generation

High Investment - High Return Lead Generation

Low Investment - Low Return Lead Generation

Low Investment-High Return Lead Generation

Now we know that both costs and returns are relative. Either we choose low cost or high return, we use different approaches.

Content is so important that having access to a great writer can make or break your marketing. By writer I mean both copywriter and general content writer. Both are expensive, so when you hire one the first time around, you may get a crying fit, but this is how you get great return.

Hiring an army of $10 per hour kids to do cold-calling is cheap but decision-makers don't talk to $10 per hour school kids. Somehow they don't speak the same language. So, cold calling becomes bloody expensive.

Ideally, we want to operate in the midway point of Low Investment-High Return and the High Investment-High Return areas. Test everything and expand your budget according to your test results.

One more point here. Use only those marketing methods that you would be comfortable with to receive as a buyer.

So, if you hate receiving cold calls, then don't do it to others. If you hate reading long sales letters, don't use them.

For instance, I hate when people use manipulative sales techniques on me, so I don't use them on my prospects. Yes, at traditional standards I suck at selling. But as long as my marketing brings me self-qualified prospects who are ready to buy from me, I never have to sell in a traditional sense.

A while ago I found a poem on the web by Cy Dethan, entitled The Slaughterman's Creed. I'm not sure if it's a poem, but let's call it a poem for now. It's vital for me because I frequently slaughter on my joint venture farms.

"Thine is the task of blood.
Discharge thy task with mercy.
Let thy victim feel no pain.
Let sudden blow bring death;
Such death as thou thyself would ask for."

And as long as I'm willing to die the way I slaughter animals, I'm comfortable with the process.

20% To Nurture Sales Leads To First-Time Clients

In complex sales, we generate sales ready leads in one step or two steps.

In the two-step process, you generate leads and nurture them to the point of conversion by offering them valuable content to establish your company as respected and recognised experts.

It takes some time, but is still a lot better than trying to sell something as a fungible vendor, or as they're called, bloody peddlers.

So, invest 20% of your marketing budget to generate new sales leads, and focus on the two-step process.

Yes, sales can be generated in one step, but in my experience to reach the cream of the target market, the truly value-driven clients need two steps.

The one step process usually leads to false opportunities like allowing your company to respond to an RFP. And then you're bleeding in a bidding war. That's a miserable way of doing business.

So, we might as well forget the one-step process.

40% To Convert First-Time Clients Into Repeat Clients

This is about taking care of one-time clients. This can be a bit tough. Since they've already bought from you, you can't "push" them because you can lose their trust.

But you can set up various stay-in-touch channels through which you can provide them value on an ongoing basis.

This is where you can use social media very well... provided you have a good writer. No, a $10 per hour school kid won't cut it. The quality of this follow up material can shape your future, and if it's done poorly, the process can demote your company to the fungible vendor category.

I remember a few years ago I had downloaded a white paper from Salesforce, one of the leading sellers of CRM systems. Within 15 minutes after the download, the sales rep was on the phone trying to pin me down for a telephone appointment to sell me Salesforce. It was a pretty bitter experience as she went through the company's script arguing with me why I should agree to spend an hour with her on the phone listening to her sales pitch.

This is the process that can be nicely automated. The point is consistency.

You can send both some of your articles and relevant articles from other experts.

What matters is the goodwill you build up over time. This gesture also demonstrates that you're willing to offer value even when not paid for it.

The sad reality is that most IT companies invest the most money in generating new clients and invest almost nothing in converting first-time clients into repeat clients.

20% For Emergency Reserve

This is the bit that is often missed.

While your marketing is constantly tested, so results improve day after day and major surprises may not happen for a long time, but once in a while some major shit can hit the fan pretty badly and stink up your company so badly that is smells like a whorehouse at low tide.

Imagine you're running some large-scale Google AdWords campaigns, and one day Google pulls the rug from under your feet. Your ads are gone and Google has banned you for some reason.

Now what?

You have to re-group, design and execute another programme that fulfils the same purpose that your Google ads were doing.

This is the time when this 20% comes handy.

And Now The Marketing Budget Percentage Itself

This is more of an art than a science. There are no rigid numbers here. But remember Peter Drucker's words again...

"There will always, one can assume, be need for some selling. But the aim of marketing is to make selling superfluous. The aim of marketing is to know and understand the customer so well that the product and service fits him and sells itself."

So, if you create a marketing-driven organisation, as opposed to a production or sales-driven organisation, you can have the cream of the crop of the target market come to you ready to do business with you at our fees and prices and on your terms.

Yes, sales and production can produce high gross sales but the profit per employee is questionable.

Deciding about the marketing budget is like for a farmer to decide how much seed corn he needs to achieve his desired yield.

It's not about buying a new tractor or a more powerful truck, but about buying more seed corn. Or maybe not even more seed corn, but if possible, less but better seed corn.

We humans try to achieve more by doing more of the same.

If you advertise in five magazines that results in X sales, the goal to achieve 2X is not by advertising in 10 magazines. Let's try to achieve 2X by improving the five ads, tracking where the results are coming from, and then ditch the low-performing magazines. Your costs keep going down, while your results are getting better and better.

One important point is that you always use your projected revenue as the basis of your marketing budget.

Let's say your company made $50 million in 2009 and projects to go to $65 million in 2010. Then you establish your marketing budget as the percentage of the projected revenue of $65 million.

But the key is not really the percentage itself but that you track your marketing results and as your results improve, your confidence to increase your budget will go up too because you know what magnitude of ROI you can expect.

And don't let your accountant to convince you to shrink your marketing budget to reduce operating costs. That's bullshit. What's the logic in reducing costs by X if it also means to forego 3-5-10X of revenue?

So, constantly improve the performance of your marketing tactics, and if you can quadruple your return by doubling your investment, then go for it. And if your accountant tries to talk you out of it, then you may consider firing him.

On Summary

Buyers don't want to buy solutions on silver platters. They want to participate in the diagnosis of the problem and the development of the solution.

Clients are willing to change suppliers even when the new supplier is exactly the same as the current supplier. Clients are naturally itching to change just for the sake of change.

Buyers' buying experiences trump sales tricks and techniques. You can hire more aggressive salespeople to push your stuff onto the market but all you achieve is that the market gets pissed off with your company and your carefully built brand quickly turns into shit. The key is to pull self-qualified buyers to you.

Buyers buy ideas first and then services. Respected and recognised experts start buyer relationships by sharing valuable ideas. Only fungible vendors, street peddlers and bazaar hucksters try to sell in the first step.

That's why most vendors end up with the kind of buyers who are willing to buy after the first contact.

The chicken and the egg dilemma is up for debate as to which one came first, but in the ROI equation, the investment comes before return.

The farmer can't just go out to the field and scream at the soil...

"Give me crops, and next year I'll consider planting!"

All the worms in the soil would laugh their arses off at the dumb farmer.

I used to be a farmer on a small scale and tried everything to skip the hard work, but nothing besides real work did the trick. Using sweet-talking or harsh language didn't compel the soil to give me harvest.

So the lesson here is that if you truly believe in your solutions, then make a decent investment and trumpet your message in all directions to bring down the resistance.

And on this note, let's end this month's trumpeting.

Come and let's discuss this newsletter issue on my blog...

[1] The One Page Project Manager for IT Projects: Communicate and Manage Any Project With A Single Sheet of Paper. Continue where you've left off...

Attribution: "This article was written by Tom "Bald Dog" Varjan who helps privately held information technology companies to develop high leverage client acquisition systems and business development teams in order to sell their products and services to premium clients at premium fees and prices. Visit Tom's website at http://www.varjan.com.