Marketing Spend: % of Revenue or % of Profit?

Would you be more comfortable spending three percent of revenue on marketing, or 33 percent of profits on marketing?

Daniel Brzezinski, GetResponse COO, has a seemingly breath-taking bit of advice for small and medium-sized business spending levels on marketing spend. 

The levels depend on where an SMB is in its lifecycle. A well-established company focused on retention rather than new customer acquisition “can spend around two thirds or only one third of your income on marketing and advertising,” Brzezinski says. 

We can assume he does not mean that percentage of gross revenue, but most likely percentages of profit. 

Newer companies “could spend up to three fourths of your profit on marketing,” he says. 

That sounds like an impossibly-high allocation, but compares reasonably closely to the perhaps more common metric of spending as a percentage of revenue. 

Firm Revenue	5,000,000	10,000,000	15,000,000
Profit %	0.11	0.11	0.11
Profit	550000	1100000	1650000
3% of Rev.	150000	300000	450000
7% of Rev.	350000	700000	1050000
33% of Profit	181500	363000	544500
66% of Profit	363000	726000	1089000

Source: IP Carrier

Rules of thumb that suggest marketing spend levels for small businesses generating less than $5 million annually be set at seven to eight percent of gross revenue. That includes both marketing and advertising, for firms  with a net profit margin, after all expenses, in the 10 percent to 12 percent range.

That, at least is the recommendation from the U.S. Small Business Administration.

More common rules of thumb call for spending two percent to three percent of revenue on marketing and advertising, but as much as 20 percent if a firm is in a competitive industry. 

As it turns out, at an 11-percent profit margin, spending three percent of revenue or 33 percent of profit winds up being relatively-similar commitments.

It's Summer, so a Bit of Gold Rush History...

Recorded history is a recent thing for much of the American West, although inhabited for perhaps 12,000 to 14,000 years by indigenous peoples.

As was the case for other areas such as California, the discovery of gold triggered an in-migration of new settlers. The earliest report of gold in what would become the Denver metro area happened in 1850, at Ralston Creek, at its confluence with Clear Creek, which drops out of the Rocky Mountains. 

Lewis Ralston, a Georgia prospector headed for the California gold fields, found about a quarter  ounce (6 grams) of gold at what became Ralson Creek. Ralston's companions named the stream Ralston's Creek in his honor, but they all left the next morning for the California gold fields. 

Here is that spot today. 

source: Wikimedia

The founding of Denver, Boulder and other towns did not happen until after 1857, though. 

“A May 1857 discovery of gold-dust by George Simpson in Cherry Creek near its confluence with the South Platte River and the discovery of gold nuggets near the future site of Denver by Fall Leaf, a Delaware Indian working as a U.S. Army scout, sparked Midwestern and Eastern interest in the western fringe of Kansas Territory,” according to the Colorado Encyclopedia. 

In 1858 the Russell brothers—William, Oliver, and Levi, along with John Beck and a party of Cherokees and whites from Georgia--reached Ralston Creek where they found a little gold. 

They then headed upstream (south) along the South Platte, past Cherry Creek and on to Little Dry Creek in present-day Englewood, where they found paying quantities of placer gold. 

The towns of Auraria, Denver, Boulder and Golden were founded over the next several years. 

Here is a view of downtown Denver, looking east, at the confluence of Cherry Creek and the South Platte river, where gold was discovered in 1857.  Below is it is the same area, as painted about 1858, looking west. Northern Arapahoes in the foreground, I think. 

source: Lonely Planet

Here is the same confluence, during the 1930s, when people continued to pan for gold. It was the discovery of gold in Cherry Creek--at about the confluence--about 1857 in this area that lead to the founding of Denver. 

source: Reddit

Casual, manual gold panning still is possible in the metro Denver area, so long as landowner permission is given, often by the local park and recreation districts or the water companies.

What New Technology Offers Most Promise for Channel Partners?

CompTIA’s Emerging Technology Community believes internet of things is the single most likely new technology to generate immediate opportunities for channel partners. Artificial intelligence is ranked second, 5G third of the top 10 emerging technologies. 

The top-10 emerging technologies are IoT, AI, 5G, serverless computing, blockchain, robotics, biometrics, 3-D printing, virtual reality/augmented reality (VR/AR) and drones.

If some of us had to guess, channel partners might agree that IoT is the biggest opportunity, but that AI is not. 5G would probably then rank as the second-biggest immediate opportunity. 

source: CompTIA

source: CompTIA

Data Caps Not a Problem for Stadia, Google Exec Says

Some critics of telcos and cable companies, Facebook, Google and many other large companies might attribute to those actors an unusual amount of nefarious intent, beyond the “normal” profit-maximizing behavior any economic actor (worker or employer) is expected to exhibit. 

Over the past couple of decades, some, for example, have criticized internet service providers for customer-injurious practices such as data caps. One reason some of us do not tend to worry much about such possible abuses is that, given reasonable competition levels, actors are not able to extract unusual profits from their customers. 

So it is that Phil Harrison, Google VP, does not believe data caps will prove harmful to Stadia, Google’s new video game streaming service. 

"The ISPs have a strong history of staying ahead of consumer trend and if you look at the history of data caps in those small number of markets--and it’s actually a relatively small number of markets that have [data caps]--the trend over time, when music streaming and download became popular, especially in the early days when it was not necessarily legitimate, data caps moved up,” says Harrison. “Then with the evolution of TV and film streaming, data caps moved up, and we expect that will continue to be the case."

Eventually, we also will undoubtedly see that network neutrality rules were, in fact, not necessary or helpful.

What is "Voice?"

Our understanding of words in the communications sometimes changes. “Broadband” used to be formally defined as any data rate of 1.5 Mbps or higher. These days, speeds up to 25 Mbps often are considered narrowband, as voice, at 64 kbps, once was defined as narrowband. 

“Voice” has meant “people talking to people.” At some point in the future, it might more often mean “people talking to computers.” 

By the end of 2018, according to research firm Voicebot.ai, 66.4 million U.S. adults owned smart speakers, up 40 percent from 2017. In 2018, according to PwC’s Global Entertainment & Media Outlook, 88 million smart speakers were in use in 20 key markets. 

That number is expected to rise at a 38.1 percent compound annual growth rate,  through 2023, when 440 million units are expected to be installed in those markets. 

source: PwC

In 2018 there were 942 million fixed network telephone lines in use globally. In 2023 there might be 440 million smart speakers in use in 20 countries, according to Voicebot. 

source: ITU

And that does not include the routine use of voice commands by users on smartphones. 

source: Adobe Analytics

It will not take long, with growth rates as high as 40 percent annually, for voice interface usage to overtake the number of voice lines in service. 

source: Pew Research

Service Providers Might Gain $77 Billion in New Revenue, Lose Just a Bit Less Than That, to 2023

According to Technavio Research, video entertainment, music, voice and messaging revenues for service providers will grow about $77 billion--roughly 13 percent on a compound annual basis--between 2019 and 2023. It is not actually very clear what all that means, if a correct forecast.

Other credible forecasts suggest total industry revenue will grow by perhaps one percent a year to 2022. All of which suggests net growth will be low, losses balanced almost exactly by losses.

source: Technavio

The way we can understand the different forecasts is to understand that one forecast looks at revenue growth from new products, without considering losses in legacy product lines, while the other is a look at net changes in revenue, including both gains and losses.

Beyond that observation, projected shifts in consumer spending on communications and entertainment products have to be evaluated against actual past behavior. 

Consumer spending does not change too much from year to year. Nor does the percentage of income spent on various categories change too much. 

source: IDC

In Myanmar, a new mobile market, spending per household might be as high as eight percent of total spending. In Australia, communications spending (devices and services) might be just 1.5 percent of household spending.  

In South Africa, households spend 3.4 percent of income is spent on communications (devices, software and connectivity). In Vietnam, communications spending is about 1.5 percent of total consumer spending.

In the United States, all communications spending (fixed and mobile, devices, software and connectivity, for all household residents) is perhaps 2.7 percent of total household spending. U.S. household spending on communications might be as low as one percent of household spending, for example. 

Even spending on video streaming, which is climbing, might not have affected aggregate video subscription revenues too much. What has changed is the allocation of spending between linear and over the top services. 

Also, prices for connectivity services are dropping. From 2000 to 2018, mobile and fixed line charges in Europe and other developed markets have dropped by as much as 59 percent, while fixed network services dipping by as much as 48 percent. 

source: Frontier Economics

So even if usage climbs, and new products are added, unit prices are under pressure. The point is that we have to distinguish between product line growth or decline, total market growth and decline and differences between firms and markets.  

Yes, consumer demand has shifted, and is shifting. But consumer spending for communications, audio and video arguably has changed very little, in terms of aggregate spending. 

Has any Telco Demonstrated Major Success as a Platform?

One hears quite a lot of talk about how connectivity providers can become platforms. Telefonica, for example, has for some time deliberately tried to recast itself as a digital enabler or platform, not a connectivity supplier, and its experience illustrates just how hard that transition might be. 

So what is a platform? Electricity, one might argue, is a platform. But that probably shows the weak version of “platform.” Electricity enables lots of other use cases and businesses, without any direct business relationship between the electricity provider and businesses built on the use of electricity. 

In that sense, the old “dumb pipe” analogy continues to hold, even for a so-called platform. 

Other analogies make more sense. Android is a better example of a platform because a business relationship actually exists, and the owner of Android gains business value from each business relationship, as did Microsoft and Apple before it. That is the latest version of the notion of platform Telefonica and others seek. 

Other logical examples exist. As Amazon and Alibaba are platforms for commerce and Netflix arguably is a platform for content, the key point is that a viable platform involves a business relationship between the platform and its enabled services or products. And that business relationship generates revenue for the platform. 

The digital era will place greater expectations on telecom operators as customers turn to digital service providers to support a broader range of services and use cases, says Steve Vachon, TBRI analyst. But will they? 

Connectivity providers now operate in an ecosystem including content suppliers, web-scale application providers, device and computing services entities. So the hope is that Telefonica--and other connectivity suppliers--can create more value for partners using their network.

source: Gartner

That has been true for Akamai’s content delivery network, and other CDNs, clearly. But substantial revenues from “platform” capabilities are hard to find, compared to other approaches such as moving into adjacent parts of the ecosystem. 

Comcast bought NBCUniversal and became a content owner and movie studio, theme park operator and content network provider. AT&T bought TimeWarner and similarly became an owner and producer of content, provider of content networks and operator of theme parks. 

If mobile edge computing (sometimes called infrastructure edge computing) succeeds, mobile operators will generate platform revenues from enterprises that buy edge computing services. But that is some ways off, it appears. 

In the meantime, it remains hard to pinpoint significant revenues from “platform” operations.