“You may have the best product and best service offerings, But if you fail to market this features properly, you will never get the profit you are expecting to develop”
Marketing is the most critical function of a Business. In all the business, marketing division will generate the revenues necessary for the survival and growth of the organization. Based on the kind of services one organization is offering, the percentage of investment on marketing will vary. Due to the increase in competition, companies are forced to increase the percentage of amount spending for marketing activities. Let us have a detailed look about how much percentage of the total revenue a company spends on Marketing
How much we should spend on Marketing?
There is no specific condition or formula for calculating the percentage of amount we need to spend for Marketing Activities like market research, advertisement and other promotional activities. Any company can develop their own formula that works best for them. Public sector companies normally specify this in their financial statements. There are certain factors that determine the amount to spend for Marketing Activities.
Factors influencing the amount to spend for Marketing
- Type of Business:
Consumer goods and retail companies will spend more than other companies due to strict and focused competition in the particular sector
- Target Market
When the product of the firm comes under FMCG/Consumer goods, company needs to spend more to sustain in the market. On the other hand, when a company is focused on B2B marketing, its percentage of investment for marketing or advertisement will be comparatively lesser. Method of advertisement and medium using for advertisement will change accordingly.
- Position in Market
Companies who are in a saturated position not spend much for marketing and advertisement. Once they get into a saturation level they will get sales without putting many efforts for marketing. While in the case of a company who is in the growth stage need to put more efforts and more investments to get a competitive position in the market
- Company turnover
By definition, turnover is the total sales of the company’s product. Profit will calculate in the next step. Profitable companies would prefer to spend more to get business and for maintaining their position in the market.
- Influence of Brand
It would be much easier for a branded company to introduce new product and bring them into the market. Nothing special, just the influence of the brand image. Let us consider an example of introducing a high power processor from Microsoft and AMD, since the brand image of Microsoft is higher than what AMD has market will curiously watch the reaction of Microsoft’s new processor rather than AMD’s
- Demand of Product:
Industry demand will determine the expenses in advertisement. When the demand of the product is more and the availability of product is limited without advertisement and any marketing activities customers will buy the product. We can see similar example in the case of Tata’s new economy car ‘ nano’ It is considered to be the cheapest car in the world. So its demand is more and company can not meet the people’s request on time. Obviously without much advertisement and marketing activities people will buy this car
- Positioning of Product:
Positioning of the product in the category of people (upper, middle, high class etc). Advertisement will play major role in Middle class and lower class families but word of mouth is the main marketing techniques much beneficial for upper class families. Upper class families look brand and lower class and middle class families consider cost of the product and quality rather than other factors
Increasing competition will force the companies to invest more on Marketing Activities. Most of the time they fight to sustain in the market rather than looking for a huge amount of profit.
- Marketing Channels:
Marketing expenses will vary based on the different channels using for marketing. For example consider the sales of an FMCG Product; it requires mass communication either through television, radio and advertisement through printed Medias. More manpower needed for managing this. But in the case of a B2B Marketing or a software product, it does not require that much expense or media coverage. Normally it can attain through digital medias , internet, email marketing , search engine etc
It is a general fact, even if we spend more amount of money and we fail to take care the existing customers properly we will loose whatever we are going to spend on Marketing.
How much each industry spends for marketing?
Car : 2.5 – 3.5
Liquor : 5.5-7.5
Packaged Foods : 4-10
FMCG : 18-22
Software : 9-12
Hardware : 15-18
* Source: Various market research reports
There is a 30/60/10 rule: If you are managing a Product based firm, then you need to spend 30% of the time and developing product. 60% of the time in Marketing and 10% for administrative tasks. We need to spend more time for this kind of business. The advantage in this scenario is once we develop a product, then we don’t have to spend much time on rebuilding it, we can use same concept, ideas and technology for developing similar kind of products.
According to the above rule, when a firm is concentrating on Services, we need to spend 60% of the time in doing services, 30% in Marketing and rest 10% in Administrative tasks. The important thing in Service Industry is to meet the expectations of the customers on time and develop the product best suit to their customers. If we can satisfy the customers as per your expectations, we will get more business from them also we can generate more business opportunities from them through references.
Marketing in Software Industry:
A Software development firm can categorize into
1) Product Based firm
2) Process Based firm
Normally in Product based firm, they will develop a product first and sell this product into targeted market. In this case, the company needs to invest more on Marketing. In most of the cases, company can meet the breakdown in limited period, after attaining break down, all the new businesses comes as profit of the firm. It is comparatively risk free business; company can meet the development cost in few businesses. Rest of them depends on the smartness of the company officials showing in promoting the business. In the case of a product based firm, promoting the product will go through the following cycle.
1. Identify business and development of product
2. Identify the target audience
3. Find out the potential customers
4. Promotional activities to attract customers
5. Market the product and offer after sale support to retain the customers
The initial stages before achieving the breakdown will be critical for the firm. Word of mouth also plays an important role in promoting the business. Brand name of the company, quality of products, cost factor, after sale service etc are very important in deciding the future of the product. Let us think about how these factors affecting in a product based firm.
- Brand Name: Brand Name can play an important role in promoting the business. When Microsoft/IBM introduces a new product, interested people will consider this product without waiting for a review. The kind of image the company generated is the reason. We will be assured that when they develop a product, it will be an outstanding one and they made it after proper R&D and we can expect better service from them. Marketing and other promotional activities will be comparatively easier for this kind of firms. They just need to push the product into the targeted audience.
- Need of the Product: The industry demand of the product can call as “need of product “. The kind of innovation the company is adopting, USPs of the product, how the product reduces the need gap etc are some of the factors comes under here. How much a company or product can reduce the need gap, that will determine the profitability of the product.
- Quality of the Product: Quality is the major factor determines the product. A company can promote the product through various marketing activities. But to capture market and develop an outstanding position as well as to sustain there to meet the future demands, company should have certain quality criteria. Once the company fails to maintain the quality it will affect the brand, product as well as the company.
- After Sale Services: In the case of IT companies, customer care and support is playing a major role. Once the company fail to offer the customer support it will affect the goodwill of the firm. After selling the product most of the companies offers AMC (Annual Maintains Contract), when company can maintain AMC properly, definitely customers wouldn’t think about a new product or company for their future needs.
Once the company develops a product, it will not be the end of everything. They should do proper R&D in a specific period of time to meet the change in demand of the customers.
We can see there are many stories about how a product based company fail after a period of time. In 1990s most of the computer applications were desktop based and later people preferred to do everything online. The increase in demand of web in the daily life of the people, the trend has changed into web applications. When the company fails to understand this demand and still concentrate on desktop applications rather than web based one, obviously people won’t prefer their product. Similar twist we can see in the case of mobile based technologies. Today when a company goes for a website they will consider the portability in mobile devices also. Only those companies who can adapt the changes/demand in battle field definitely they will sustain in this competitive environment.
Due to competition and price factor in Software Industry, in the case of a product based software firm who has an annual revenue of 100$ million in revenue need to spend at least 12-15% for Marketing activities and business development.
When we consider about the Process Based Companies we can see the investment for Marketing and Advertisement will be comparatively lesser then a product based company. While selling software services, the quality of services, support and innovation etc are the major factors. We can see the application of ‘ Pareto Principle’ here. Pareto Principle in the case of marketing can write like this “20% of the customers of a firm will create 80% of the revenue “. While selling services to a firm in the first two months both parties will understand each other and they can work more closely. Instead of looking for big revenue from them when we focus on caring them properly in a professional manner they will never think about considering other firms and we will get maximum revenue from them. Also it is a reality that satisfied customers will bring more customers.
Delivering the product on time is a biggest problem in software industry. Normally all the developments will take more time than expected. When we are working closely to the clients they might be running on tight schedule, but also they will understand this fact. Instead of this, when we are working to a client who is working in the first time with us, they may not think about our schedule and development time. This will create issues and they may consider other firms for future projects.
Those companies working on this sector need not spend more for marketing. If a company can offer best service and support then an investment of 7-10 % of revenue in Marketing will bring them into a higher level
Sales and Marketing Expenses for Software firms
Sales and Marketing expenses of a software firm varies based on the product or services they are managing. Based on the secondary data available in the internet, it has been indicated that software companies spending an average of 18-21 % of the total revenue for their marketing activities. Even Microsoft also spends 18-19% of its revenue in Marketing. Of course some of the companies spending more aggressively for Marketing Activities to capture more market.
Various Marketing expenses
- Direct Sales: Direct sales force including business executives, tele marketing people etc are most of the company’s major Sales Marketing expenses. Also these people are the major source of bringing revenue to the firm
- Distribution Channels: Distribution channels eat the majority of the marketing expenses of a firm. Because company needs to spend heavily on channel related lead generation programs and promotions.
- Online Marketing: The expenses in online marketing are comparatively lesser than other marketing activities. Online marketing includes email marketing, banner advertisement , expenses for search engine optimization and other web related promotional activities
- Trade shows/ campaigns : Promotional activities through trade shows and campaigns are common in IT related companies
- Brand Building : Brand building activities includes associating values with brands and developing a situation where people can remember the product the while hearing brand name
- Advertising: Most of the software firm advertises through internet and magazines. As we know the target market of a software firm is focused and they won’t get any kind of benefit on advertise it through popular Medias like television or radio.
- Public Relations: Public relationship includes developing new business opportunities through alliances/developing partnership etc
- Market Research: Proper research in the market is necessary for understanding people’s preference and tastes. Many companies failed in their market while inventing the product without proper Market Research and analysis. Normally market research activities are managed by third party companies. MR will help to understand the change in trend, people’s preference, taste as well as the current market scenario.