Sales & Marketing

Sales and marketing spending sits inside SG&A (selling, general and administrative expenses) on the income statement, and like R&D, it's a line item that rewards a nuanced read rather than a simple "more is better" or "less is better" rule. How much a company needs to spend getting customers in the door says almost as much about the strength of its business as how much it earns once they're there.

The Same Damned-If-You-Do, Damned-If-You-Don't Dynamic

Sales and marketing puts a business in much the same bind that R&D does. If a company doesn't need to spend heavily to win and keep customers, that's close to a free lunch — every dollar it doesn't have to spend chasing sales drops straight to operating margin instead. But if a company operates in a market where customers have to be actively won over and retained — where switching to a competitor is easy and top-of-mind awareness has to be constantly maintained — then sales and marketing spending isn't optional, and skimping on it just to flatter this year's margin can cost the company market share and customer relationships that take years to rebuild. The best businesses aren't necessarily the ones that spend the least on sales and marketing; they're the ones that don't have to spend much and still win anyway, because the business itself is structured so that customers show up without being chased.

When a Business Doesn't Need to Market at All

Some businesses barely need a sales or marketing budget because of the structural position they occupy, not because of any particular marketing cleverness. Verisign, which operates the registry behind the .com and .net domain extensions, is a good example of what's sometimes called a "toll booth" business: anyone who wants a .com or .net domain has to go through the registrar system that ultimately routes back to Verisign's registry, under an exclusive, long-running agreement, regardless of which registrar the customer actually buys from. Verisign doesn't need to run brand campaigns or chase individual domain buyers, because the demand is structural — businesses and individuals who want a .com address have essentially one place that demand can ultimately be satisfied, and it renews automatically, year after year, largely without any sales effort on Verisign's part. That kind of business can run with sales and marketing spending as a tiny fraction of revenue, and nearly the entire savings shows up as a wider operating margin than a company selling a comparable product that actually has to compete for every customer.

Reading It in Context

A useful practice is comparing sales and marketing spending as a share of revenue against direct competitors, the same way it's worth doing with R&D: a company spending noticeably less than its rivals and still growing just as fast is showing real evidence of a moat, whether that's a strong brand, high switching costs, or — as with Verisign — a structural position that makes marketing largely unnecessary. A company spending noticeably less and growing more slowly, on the other hand, may simply be underinvesting in a business that genuinely needs the spending to compete, trading tomorrow's growth for a better-looking income statement today.