How Your Competition is Spending on Marketing
Shelley Harrison, Founder and CEO, Launch Pad

May 1, 2003

Launch Pad recently published their second annual survey and report on marketing budgets which serves as a barometer for evaluating marketing expenditures in high-tech, business-to-business start-up companies. The 18-page document summarizes marketing decisions made by those start-ups that are learning to thrive in today's economically challenged, hyper-competitive business-to-business markets.

QSC: Launch Pad is not really a research house. Why then did you undertake this annual marketing expenditures study?

SH: We've been working with start-up companies since 1994. We were repeatedly asked, "How much should we be spending on marketing and how should we allocate those funds?" While lots of consultants, including us, can offer their opinion as to an appropriate budget size and allocation, we wanted to be able to show trends and offer benchmarks. From my own experience as the VP of Marketing for several start-ups, I always felt it would be helpful to know whether as a corporation we were over- or under-spending vis-ˆ-vis other start-ups, and whether my spending choices were in keeping with the industry in general. Using the information in our annual report, a CEO can determine whether the recommendations from their marketing department to spend, for instance, 20% of corporate expenditures on marketing are in line with other start-ups.

QSC: Your 2001 survey of senior marketing executives from thirty-two surviving technology start-up companies highlighted that awareness was considered the number one challenge. This was backed up by increases in actual PR budgets, an overwhelming consensus that PR was considered the most effective marketing activity, and that PR is typically the largest marketing expenditure for technology start-ups. What aspects make PR effective and so highly regarded?

SH: PR can be exceedingly cost-effective if managed properly. One solid article in a well-respected publication can be worth far more than other marketing programs that cost several times more. One caveat: publications have been hit badly in this economic downturn. Reporters have been laid off in droves and because there must be balance between ads and editorial, magazines are decidedly thin. Start-up companies are no longer the darlings of the press - in fact, in many circles there's some disdain for small, emerging firms. It's therefore even more difficult than ever to get coverage. Start-ups should spend judiciously on PR and be vigilant about how their PR agencies are spending their time to avoid over-spending with little to show for it.

One reason PR is so highly regarded is that unlike direct marketing or advertising, PR is relatively well understood by high-tech executives. An article gets written, prospects learn more about the company's offering, and products get sold. It's also very heady to see your company's name in print.

QSC: Expenditures on tradeshows and advertising activities were down year over year while direct marketing and collateral were up. Increased focus on verticals and the ability to measure results were some of the reasons behind this shift. How do you measure results of marketing activities?

SH: It seems silly to have to state that every program should be measured to determine if it met objectives - financial or otherwise - but it's amazing how few companies go through the exercise. Granted, some areas of marketing prove more challenging than others in terms of measuring success. There's no doubt that it takes substantial effort; for instance, the sales force, not a group known for their happily doing detailed analysis and administrative tasks, needs to track the results of every lead.

For nearly every marketing activity, there are basic, easy-to-calculate metrics for success. Two examples include cost-per-lead for trade shows and response rate for direct marketing. Calculating, as closely as possible, the cost of each sale is a good start. Even these simple metrics, however, only paint a portion of the picture. How many leads or responses converted to a sale? Following each lead through to its ultimate conclusion requires a concerted effort by multiple departments. Nirvana is to track sales to the point of understanding the lifetime value or incremental margin of each customer.

QSC: Why was the value proposition listed at the lower end of marketing challenges with a 16% respondent rate - this seems to be a direct contradiction to the prevailing mood of the venture capital community?

SH: Awareness was overwhelmingly cited as the biggest challenge by 59% of our respondents. I can only surmise that before a start-up can discuss value proposition they first have to make prospects know they exist! This makes other challenges such as value proposition seem less significant in comparison.

QSC: In my new book, "Funding & Financial Execution for Early-Stage Companies," which is being released later this month I point out that financial planning requires an allocation decision between different company functions. Your survey points out that both sales/business development and engineering functions were allocated a higher percentage of the overall spending, year over year, compared to marketing. Your firm thought this reallocation went too far, why?

SH: As our study noted, the number one issue among start-ups is generating awareness about their company and offering. It's hard to do this without conducting a minimal set of marketing activities. While there is definitely backlash from the excesses of the dot-com era, I would hate to see the high-tech world slip back into thinking that if you build a great product, customers will flock to buy it. Many companies bet on a technology provider only to have that vendor's products not live up to expectations or go out of business entirely. There's a healthy load of skepticism out there. We recommend conducting highly targeted marketing efforts that can be exceedingly effective and cost-effective. To run a start-up without sufficient funds to run basic programs while spending heavily on business development and engineering, though, is simply a mistake.

QSC: The first dollar for marketing research - where should it be spent?

SH: Your question is an excellent one because it enables me to reiterate some marketing fundamentals. Assuming that basics like market size and the competitive landscape have been answered, it is imperative that organizations have answers to several challenging questions before spending on marketing programs. These include:

• Who will find your solution compelling? (The more specific the better!)
• How is your offering positioned and differentiated?
• What key messages should you convey to prospects?

The first dollar of market research must go to answering these questions. Research might then be applied to pricing (models, elasticity, revenue maximizing price points), distribution channels, or determining the optimal set of functionality for follow-on products.

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