A reader wrote to ask why I was so against m__k_t__g and always focused here at SF on sales. A fair question which obviously requires clarification. I actually think m__k_t__g has a role in managing a business but not until annual revenues approach $30 million. First let me explain why sales is the focus of a start up and then I will explain the magic of $30 million in revenue.
- Available capital is usually the constraining resource and therefore it should be devoted to customer acquisition (sales) and not the softer, more broad based notion of m__k_t__g.
- Most people are taught in university about m__k_t__g but rarely do these courses translate the concepts into practical applications to generate sales; most young entrepreneurs do not, therefore, know how to use m__k_t__g and should therefore just focus on sales.
- Revenue growth is the principal objective of a start up to demonstrate a market for the product, keep investors happy, attract additional capital and keep the staff motivated; sales create revenue--not marketing.
- A typical sales person is self-motivated by their bonus based on closed sales and bonus represents at least 50% of total compensation; a good m__k_t__g person has a fixed cost twice that of a sales person and rarely has an incentive bonus based on sales (capital management).
Now why do I change my view at $30 million in annual revenue. Two things happen at $30 million:
- At this stage one man management breaks down and future success depends on bringing in a management team approach in order to sustain a healthy growth rate in the business.
- A healthy growth rate would be at least 20% per annum, or $6 million in additional sales; marketing provides the leverage required to achieve such growth and it is affordable in most companies this size with EBITDA of 5-10% of sales.
Why do I think of marketing as leveraging resources? Marketing is basically the process of acquiring and retaining customers. Yes-marketing involves branding, advertising and market share but these mushy concepts never close a sale. Marketing, properly done, does expand awareness of product and company, communicate to a customer need and helps the sales force or the sales close. To generate sales of 20% per annum at this level even a good sales force needs help. Marketing leverages the sales force and increases their productivity. It's still about the closed sales!
Many successful start ups sustain growth rates of 50-100% per annum well past $30 million in annual revenue. $30 million is the trigger for when to consider marketing, not the expected growth rate of 20%. In the company I took to $1 billion in annual revenue we never hired a marketing person until sales reached $300 million. We did however constantly talk about and define the customer need, spend heavily to promote new store openings and carefully scrutinize spending that did not impact the customer. $30 million is just a good guideline.