People respect what is inspected. SBI 100 companies have the largest sales forces in the world. But that does not make them the best. So we took our analysis one step deeper, through income statements and other sources, to evaluate the implications of sales spend, marketing spend, and R&D spend as a percentage of revenues generated.
From SBI’s viewpoint, the total spend for sales, marketing, and product is the collective cost to acquire customers. With that in mind, we compared these spend amounts and the corresponding spend/revenue ratios to a variety of performance measures, such as profit and growth.
The biggest finding: More than 60 percent of SBI 100 companies saw the total spend for sales, marketing, and product categories fall between 30 and 40 percent of topline revenue— making these the largest expense items on the income statement. In comparison, less than 15 percent of SBI 100 companies had an aggregate spend in these three categories dip below 30 percent of topline revenue.
We also found that nearly 40 percent of SBI 100 companies do not separately track, discuss, or report their sales and marketing expense. They leave it at the highest expense category level—selling, general, andadministrative (SG&A). And yet, the sales component of SG&A, which includes sales, marketing, and advertising spend, is the most significant aspect of customer acquisition and retention.
We see this as a strategic gap in their outward-in view. When companies lump sales and marketing spend in with the administrative spend, executives can be forgiven for concluding they’re not vital to the business.We see this as a strategic gap in their outward-in view. When companies lump sales and marketing spend in with the administrative spend, executives can be forgiven for concluding they’re not vital to the business.
SBI unearthed some noteworthy findings from firms that do separately track and report sales and marketing spend. We validated the following correlations for SBI 100 companies.
Advertising and Marketing Services, Technology, and Software
Companies competing in these verticals have the highest concentration of sales and marketing employees as a percentage of the total workforce.
Implication: It’s not just about the aggregate spend, which often includes program spend with third parties. It’s also about the people. Companies in these growth verticals hire more sales and marketing people relative to their total employee population than SBI 100 companies in other industries. They put their money where their strategy is when it comes to talent.
Publishing and Media, Software, and Business Services
Companies competing in these verticals have the highest SG&A expense as a percentage of topline revenue. Publishing and media show an average SG&A percentage of over 50 percent, while both software and business services exceeded the 35 percent threshold.
Implication: On the aggregate spend front, the companies in these three industries are investing heavily to acquire new customers. This is an indication of the competitive slugfest, where the battle being fought centers around acquiring new customers. Companies in these saturated industries recognize the importance of investing heavily on the front end to acquire and develop a customer over a long period of time.
Marketing Expense Rate
Firms that have a higher marketing expense rate than other SBI 100 companies in our analysis positively correlate to three-year revenue growth. However, these same companies do not correlate to three-year profit rates.
Implication: The correlation between marketing spend and three-year growth is not surprising, given most marketingrelated investments are intended to drive customer acquisition. It is a high-cost strategy and usually takes a couple of years to pay off. But if a company is looking to capture new markets or new buyers, a proportionally heavy investment in marketing is a must. Our SBI 100 data confirmed that.
Sales Expense Rate
Firms that have a higher sales expense rate than other SBI 100 companies in our analysis strongly correlate to three-year revenue growth and moderately correlate to three-year profit rate.
Implication: More so than marketing, our findings indicate that a high sales spend drives growth. Surprisingly, it also drives profits. At first take, that struck us as paradoxical because conventional wisdom suggests that a major investment in sales (as a percentage of revenue) would place a burden on both short-term and long-term profits. However, the reality appears to be different for SBI 100 companies. What is the likely reason for this correlation between sales spend and profit realization? The SBI 100 companies that invest most heavily in sales know their customers best. As a result, they can price to market most effectively and are most likely to keep key accounts. They have enviable close rates, effective sales processes, and solid sales infrastructures. These advantages help prevent profit-killing conditions such as high customer churn, low-margin deals,and large sales force turnover.
R&D Expense Rate
Firms that have a higher R&D expense rate than other SBI 100 companies in our analysis correlate to a three-year profit rate.
Implication: This finding is most illuminating. SBI 100 companies that invested heavily in their product development are realizing the benefits, not just in revenue growth, but also in profit. Coupling this with the sales spend finding, we can state unequivocally that these customer-facing investments tie to long-term corporate health.
Interestingly, we found no relationship between the size of a sales force and the sales expense rate in SBI 100 companies. A little less surprising, but still significant, was the similarly weak correlation between sales expense rate and total employee head count.
Your spend on customer-facing business functions results in growth. If topline growth is part of your strategic objective, your spend priorities should reflect that. Based on our analysis of SBI 100 companies, we make the following recommendations to both SBI 100 executives and those whose companies aspire to SBI 100 ranking:
- Spend allocation: Make sure your spend allocation decisions optimize business functions with one another to achieve strategic alignment across the company.
- Customer experience: If you have a customer experience strategy, make sure your spend allocation decisions reflect that to reap the expected benefits.
For this analysis, we collected, parsed, standardized, and validated a massive amount of data. With an SBI 100 sample set that reflected the world’s largest sales forces, we were not able to delve into the specifics of each company’s business units, product lines, or geographic dispersion. That will be fruit for a future article. Nonetheless, the data for this year’s study of SBI 100 companies was clear and the trend lines strong.