Sales and Marketing 2016, The Softletter Benchmark 53

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About the Benchmark 53

The Softletter Benchmark 53 are all publicly-held companies and most of our basic business metrics are derived from documents these companies are legally required to provide to investors. When we believe circumstances warrant it, we do adjust these numbers to reflect financial reality. In June, we will release the 2015 numbers once the complete Benchmark 53 10-K numbers are released (some companies run their fiscal year from June to June).

We have completely revamped our Benchmark 50, now the Benchmark 53, to reflect the profound changes the software industry has undergone over the last several years. The profiled are now broken into eight segments that provide a representative overview of industry trends and performance.

Sales and marketing expenditures are always an interesting benchmark to analyzed and the numbers can reveal a great deal about both an industry category and the challenges facing a particular company. Before we dive in, it’s important to make a couple of key points. Publicly held companies, or companies planning on an IPO, typically spend more money on sales and marketing in an effort to satisfy the demands of their investors for the type of growth that drives up the firm’s stock price. For privately held firms, expenditures between 15% to 30% are far more the norm.

This ties to another point. Many companies as they grow trade profitability for profit. The goal of this strategy is to seize a dominant position in an industry and then cash in. A recent famous example of this is Facebook. In the “Social Network,” the movie about the company’s founding and rise to dominance, Mark Zuckerberg is seen deriding one of his co-founders for his efforts to sell web advertising on Facebook. But once Facebook had driven Friendster and MySpace into minor niches, the company immediately began to explore ways to monetize its massive user base, which it has done by converting your network into its network (remember, if you’re not paying for a product you are the product) and charging you to access it (and serving up ads). Salesforce, NetSuite, and other firms have followed similar strategies, though the path to monetization often differs.

On the other hand, a  high S&M ratio for a company in an established market or niche is frequently a sign of stress. Competitive pressure, business model disruption, and bad management are often the reasons for S&M numbers to start to rise in excess of historic levels.

Another observation. Many Softletter readers often ask us how software companies allocate sales vs. marketing expenditures in this report. Public companies are not required to break out these classes of expenditures in their 10-Ks, but in on-premise markets, traditionally for every dollar spent on S&M, $.80 was spent on sales (personnel, management, and operations) for $.20 spent on marketing (advertising, email, PR, etc.). However, this ratio is starting to change. For example, in the case of Angie’s List, sale and marketing expenditure are approximately 55% sales, 45% marketing. We’re seeing this reapportionment grow in the SaaS and mobile markets as more money is spent on market education and demand generation as opposed to traditional feet on the street sales programs.

Some companies also play games in an attempt to disguise their sales and marketing spend. For example, Groupon has broken out marketing separately on their 10-K and lumped sales in with G&A! We’re not falling for that and have made an intelligent “adjustment” to their figures which we believe better reflects their true S&M ratio.

Sales and Marketing Ratios, The Softletter Benchmark 53

  S&M 2014 S&M 2013 Rev 2014 Rev 2013 2014% 2013% Avg 2013-2014
Big Four              
              10%
Microsoft $15,811,000,000 $15,276,000,000 $86,833,000,000 $77,849,000,000 18% 20% 19%
Google $8,131,000,000 $6,554,000,000 $66,001,000,000 $55,519,000,000 12% 12% 12%
Apple $11,993,000,000 $10,830,000,000 $182,795,000,000 $170,919,000,000 7% 6% 6%
Oracle $7,567,000,000 $7,062,000,000 $38,275,000,000 $37,180,000,000 20% 19% 19%
        Medians  15% 16%  
SaaS Sales and Marketing              
              53%
Constant Contact $125,809,000 $111,374,000 $331,678,000 $285,383,000 38% 39% 38%
Marketo $98,843,000 $62,769,000 $149,954,000 $95,918,000 66% 65% 66%
Netsuite $290,961,000 $210,079,000 $556,284,000 $414,508,000 52% 51% 51%
Salesforce $2,168,132,000 $1,614,026,000 $4,071,003,000 $3,050,195,000 53% 53% 53%
HubSpot $78,809,000 $53,158,000 $115,876,000 $77,634,000 68% 68% 68%
Cvent $61,764,000 $78,874,000 $142,245,000 $111,136,000 43% 71% 57%
LivePerson $83,253,000 $62,488,000 $209,931,000 $177,805,000 40% 35% 37%
        Medians 51% 55%  
SaaS Enterprise              
              45%
Workday $197,373,000 $123,440,000 $468,938,000 $273,657,000 42% 45% 44%
Zendesk $77,875,000 $37,622,000 $127,049,000 $72,045,000 61% 52% 57%
Veeva $41,507,000 $19,490,000 $146,621,000 $73,280,000 28% 27% 27%
Demandware $74,432,000 $52,384,000 $145,879,000 $95,733,000 51% 55% 53%
ServiceNow $341,119,000 $195,190,000 $682,563,000 $424,650,000 50% 46% 48%
Benefit Focus $48,467,000 $36,072,000 $137,420,000 $104,752,000 35% 34% 35%
LogMeIn $119,508,000 $88,794,000 $221,956,000 $166,258,000 54% 53% 54%
        Medians 50% 46%  
SaaS Verticals              
              40%
Angie’s List $178,000,000 $140,000,000 $315,011,000 $245,642,000 57% 57% 57%
Wix $97,742,000 $53,776,000 $115,733,000 $80,473,000 84% 67% 76%
Pandora $277,330,000 $169,005,000 $920,802,000 $600,233,000 30% 28% 29%
Blackbaud $107,360,000 $97,614,000 $564,421,000 $503,817,000 19% 19% 19%
Qualsys $48,049,000 $42,523,000 $133,579,000 $107,962,000 36% 39% 38%
Realpage $111,563,000 $95,894,000 $404,551,000 $377,022,000 28% 25% 27%
Callidus $47,040,000 $34,916,000 $136,618,000 $112,337,000 34% 31% 33%
        Medians 34% 31%  
Mobile B2B              
              36%
Millenia Media $53,621,000 $38,682,000 $296,164,000 $259,171,000 18% 15% 17%
Medl $3,776,825 $4,522,426 $2,805,632 $2,310,815 135% 196% 165%
Glu Mobile $45,076,000 $26,120,000 $223,146,000 $105,613,000 20% 25% 22%
Turbine $1,915,000 $668,000 $24,404,000 $3,855,000 8% 17% 13%
Perion $25,388,000 $10,298,000 $330,757,000 $277,275,000 8% 4% 6%
Intellicheck $1,374,004 $1,096,486 $6,613,000 $7,298,000 21% 15% 18%
NQ Mobile $29,962,000 $25,810,000 $332,324,000 $196,702,000 9% 13% 11%
        Medians 18% 15%  
Mobile B2C              
              27%
King Digital $455,408,000 $376,898,000 $2,260,241,000 $1,884,301,000 20% 20% 20%
Fitbit $112,005,000 $26,847,000 $745,433,000 $271,087,000 15% 10% 12%
Electronic Arts $680,000,000 $788,000,000 $3,575,000,000 $3,797,000,000 19% 21% 20%
Zynga $157,364,000 $104,403,000 $690,410,000 $873,266,000 23% 12% 17%
Majesco $7,264,000 $7,854,000 $34,368,000 $47,267,000 21% 17% 19%
Yelp $201,050,000 $131,970,000 $377,536,000 $232,988,000 53% 57% 55%
Renren $38,340,000 $62,198,000 $82,954,000 $147,947,000 46% 42% 44%
         Medians  21% 20%  
Social Networking              
              34%
LinkedIn $774,411,000 $522,100,000 $1,528,545,000 $972,309,000 51% 54% 52%
Facebook $1,680,000,000 $997,000,000 $7,872,000,000 $5,089,000,000 21% 20% 20%
Twitter $614,110,000 $316,216,000 $1,403,002,000 $664,890,000 44% 48% 46%
Groupon $710,000,000 $680,000,000 $1,627,539,000 $1,654,654,000 44% 41% 42%
MeetMe $7,277,719 $7,799,077 $44,817,436 $40,378,007 16% 19% 18%
Mediabistro $1,184,000 $747,000 $3,557,000 $2,810,000 33% 27% 30%
Sina $228,927,000 $160,411,000 $768,241,000 $665,106,000 30% 24% 27%
        Medians 33% 27%  
On Premise              
              32%
Microfocus $118,000,000 $117,000,000 $418,100,000 $414,000,000 28% 28% 28%
Autodesk $842,600,000 $875,500,000 $2,273,900,000 $2,312,200,000 37% 38% 37%
Red Hat $597,885,000 $514,554,000 $1,534,615,000 $1,328,817,000 39% 39% 39%
Progress $101,496,000 $105,997,000 $332,533,000 $333,996,000 31% 32% 31%
Symantec $2,439,000,000 $2,789,000,000 $6,676,000,000 $6,906,000,000 37% 40% 38%
Nuance $424,500,000 $419,700,000 $1,923,500,000 $1,855,300,000 22% 23% 22%
Ansys $246,376,000 $218,907,000 $936,021,000 $861,260,000 26% 25% 26%
        Medians 31% 32%  

Sales and Marketing Analysis

That said, let’s see what the Sales and Marketing B53 have to tell us about the state of the software industry. The first thing you’ll note is that size is a tremendous advantage in terms of how much a company must spend on S&M. Three of the big four have monopoly positions in their respective markets or, in the case of Apple, revenue dominance in the mobile industry. In such circumstances, the market knows who you are and often has no alternate but to buy your product or service. Your need to market and sell is lowered sharply.

This state of affairs can change, obviously. The best example of this is Microsoft’s lock on the PC desktop, established in 1995 after Redmond crushed OS/2. For over twenty years the company has benefited from this monopoly, but since the launch and failure of Windows 8, the company’s OS monopoly has begun to become irrelevant. While Microsoft still controls the market for PCs and desktops, it lost the battle for smartphones and tablets. Microsoft’s defeat in the smartphone market marks the first time the company has been driven out of a segment in which it had a dominant position (in 2007, Microsoft’s mobile OS was a top three contender; today it enjoys perhaps a 2% market share) since the company was founded in 1975. This accounts for the fact that the company’s S&M are relatively high compared to its peers; Microsoft is being forced to spend money to compete in new markets that it does not control, such as in Cloud services.

When we look at the categories, we see that SaaS Sales and Marketing stands out in S&M percentages. This is a market dominated by new companies, all fighting over fresh turf (and all believing in the power of marketing). We believe the slugfest in this category will continue for the next several years. SaaS Enterprise is another category in which several mid-sized chimps are seeking to become gorillas, which accounts for its high S&M numbers.

When looking at individual companies, a high S&M is often a sign of a company under stress. Take a quick look at Angie’s List’s 57%. That’s fairly high for a $300M company, but the online recommendation firm is under tremendous pressure from free alternatives and has been spending heavily on expensive TV advertising to keep driving its growth.

Likewise Wix, a company that wants to become the everyman of online website creators. Facing competition from Weebly, various WordPress MSPs, Sharepoint houses and others, the company needs to market relentlessly to build marketshare. Yelp, also a millennial favorite, must spend frantically to build mind share and fend off a myriad of competitors who can easily enter their space.

In the case of Medl, in wild and wooly Mobile B2B, their 196% represents a death ride. Either the company breaks through to glory or does a “Thelma and Louise” crash and burn. That type of spending is not sustainable for any length of time.

On Premise also reveals signs of companies under stress as the market continues to shift away from desktop and server based systems. Autodesk is an example of this. The company has been the number one player in CAD for decades, with only Bentley systems as a distant second place competitors. For a firm in this position, a ratio of 37% is high. This number reflects the rapid changes taking place in the CAD market and the expenses that must be incurred as the company yields to the pressure to at least provide a Cloud-based alternative to their traditional on-premise offerings.

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