Perhaps the biggest decisions C-level executives make is resource allocation:
- Should I double down on hiring more Account Executives?
- Should we invest in hiring more top-tier PMs to guide product development?
- What are the cost implications of migrating our backend to H-Base/AWS?
- Does sales really need $350k for SPIFFs next quarter?
Therefore, let's create some guide wires with the data that's publicly available to understand how Sales & Marketing costs typically compare to Research & Development costs:
Notice the spike in the S&M-R&D ratio in year two: this is usually the result of the founding pair hiring some sales muscle once they've established product fit, sometimes prematurely. You can use this chart to benchmark your levels of relative investment over time.
But publicly-available 10-Ks and S-1s have a misleading quality to them: they bundle very big things into bigger things. Therefore, I've injected six line items in blue to help you isolate the following costs relative to median revenue:
- S&M Investment
- Sales-Only Investment
- R&D Investment
Based on the data, marketing is typically 19-22% of revenue, so I've unbundled the above numbers to show just the 'S' in S&M. The critical achievement here really starts in year 3-4 when the successful companies start to focus on driving sales efficiency per rep thereby eventually reducing Sales:Revenue from ~50% to 30-35% in year 7-8.