The right return on your sales and marketing spend

A critical metric we look at is the return on sales and marketing spend.  In other words, if a company spends $1 on sales and marketing, how much new revenue did that spend generate? The answer varies widely based on the type of business.  For instance, companies in the ‘new hardware’ category like Fitbit and GoPro on median generated $3.58 of new revenue per $1 of sales and marketing spend (at the time they went public).  It makes sense that these companies would need to generate so much revenue per $1 of S&M spend because the customer comes back infrequently (how many Fitbits do you really need?) and there is a material level of cost of goods sold in the product.  Alternatively ‘content distributors’ which includes companies like Netflix and Yelp generated $1.90 and $0.67 of new revenue per $1 of sales and marketing spend.  While it may seem odd to generate less money than you’re spending on sales and marketing, it’s ok for these companies because their customers are recurring, coming back many times in subsequent years to use the product. 


That’s the general rule of thumb: if you have a product that is only sold once and has a material cost to produce it (COGs) such as wearables, you’ve got to generate a lot of new revenue for each $1 of marketing spend.  On the other hand, if you’re product is strictly digital (no COGs) and it’s recurring in nature like a subscription to music or movies, then you can get away with generating less than $1 of new revenue per $1 of marketing spend in the first year because that customer is coming back in subsequent years.    


The specific formula for the return on sales and marketing spend is very simple: it’s growth or change  in revenue / sales and marketing spend.  If you’re an internet company similar to the ones below and generating metrics near these benchmarks, you’re in good company.  Below we present the return on sales and marketing spend for internet companies at the time they went public and 1 year before to give you a sense of what kind of metrics it took to go public. 


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