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Who Is Going To Buy The Darn Thing?
 

Who Is Going To Buy The Darn Thing?
Invest More In Marketing Than In Engineering To Find Out!

Institute of Electrical and Electronic Engineers (IEEE)
Proceedings of the IEEE Electro International
By Ralph E. Grabowski

 
Table of Contents

   Abstract
1 The evidence is in
2 Who needs Marketing?
3 Exactly how much is "more" Marketing?
4 Avoid the pitfalls of the flaming failures
5 Do what the super successes do
6 Go for it!
7 Implications for technology-based enterprises
8 Summary
9 References
   Figures
   About the author

   PDF reprint -  28 pages, 0.7 MB
   PDF 2-page abstract with summary of the data - 0.3 MB

 

invest more in market research than in engineering
  3 - Exactly how much is "more" Marketing?
Marketing is defined as the up-front process that comes before the product is ready.  (Promoting and selling come after the product is ready.)  "More" marketing is quantified into a recommendation that technology-based enterprises invest more than one dollar in marketing for each dollar invested in engineering.  This new metric is a Marketing/Engineering Investment Ratio™ >1.
 

Nevins identified that investment in marketing and a marketing-focused strategy are hallmarks of successful, high-profit electronics companies.  He went on to show that those with "marketing-focused strategies invest 50% more in sales and marketing than those with technology-based strategies, and 70-100% more than those with low-cost strategies."(14)

However, his data failed to separate marketing, from promoting and selling.  Therefore, his data does not help us to know how to independently budget for marketing.  Did more investment in marketing make the difference?  Or, did a higher investment in promoting or selling make the difference?  Nevins didn't say.

Nevins clearly distinguished among them and emphasized that marketing is the decisive factor, "Successful companies think of marketing as the essence of strategy, rather than as a sales and advertising [promoting] function."

Ehrenfried provided additional clues.  First, he described and championed an iterative, concurrent, marketing and engineering process before the product is ready,  "Product ideas are considered jointly by product development and market development groups and, ... After a favorable evaluation of market needs, the (proposed) product can be placed into research and development.  The related roles of product development and market development [market research] are seldom followed.

"Most technical firms sadly neglect the entire market development phase of new product planning.  Ideas go directly from a technical evaluation into research and development, and then immediately into sales."

Second, Mr. Ehrenfried attempted to quantify fitting investment in marketing and to use some data, "But how much is spent by industrial firms to verify and guide industrial research programs?  The shocking fact is that 7% of sales volume devoted to product development is supported by only 0.09% of sales volume for market development."(15)  Unfortunately, he uses data expressed as a percentage of sales, but startups have no sales.

"With almost 100 times as much spent for product development as for market development, it is apparent that balanced and cooperative planning [iterative, concurrent marketing and engineering before the product is ready] cannot be, and is not, being used by American industry.  Market development is truly the neglected companion of product development and the high rate of failure of new products is felt to be a direct result."(16)

He then went on to recommend a marketing budget that is calculated from the engineering budget.  "An engineering firm, intent upon a strong and growing commercial sales future, can justify spending one-tenth of its research and development allocation on market development [marketing, exclusive of promoting and selling]."(17)

Yet, no proof was presented for the recommended marketing investment level, only data that the then-current broad industrial average was inadequate.  Presumably, Mr. Ehrenfried's recommendation was based on "more is better," rather than direct knowledge of an adequate marketing investment.

The problem is that his recommended increase in marketing investment may have been not bold enough.  As the new evidence in the following survey shows, his advice, while bold for its day, has never been bold enough for success.

 

AEA operating ratios

Let us look to the American Electronics Association for guidance.  AEA annual operating ratio surveys express the sum of marketing, promoting, and selling as a percentage of sales for established companies by industry segment.  The AEA conducts an annual survey of operating companies in electronics, software & information technology to "enable you to compare your company's operations to companies with comparable sales volume and product lines."(18)

Classical guidelines, as derived from American Electronics Association data, define and size the "marketing and sales" budget, for instance, at 25-30% of sales for a system or instrument company.  See Figure 2, AEA operating ratios.

 

 

 Components

 

 15-20%

 

 

 Systems

 

 25-30%

 

 Software

 40-60%

 

 

 

    Figure 2, AEA operating ratios
    Marketing+Promoting+Selling as a percentage of sales for established companies, by segment

 

The author finds four problems:

  1. Guidelines expressed as a percentage of sales are of no use whatsoever for startups, since startups have no sales! 

    Startups have no operations.  While the AEA does survey "developmental stage companies," these are operating companies with significant sales, not startups, and AEA ratios are expressed as a percentage of sales.  For the established company; new products, new markets, and new fields also have the flavor of startups; no sales.

  2. Lumping the functions together diverts management attention and investment commitment away from the marketing portion. 

    Since promoting and selling budgets are normally larger, marketing can disappear from view.

  3. Time is not in the guideline.

    When should we invest in marketing?  A simple sum does not reveal the time-shape of investment, to correspond to the product development process and to the product life cycle.

  4. The AEA data is, by definition, mediocrity;

    averaging the winners, losers, and the middle performers into a flawed guide.  What do the winners do?  The AEA does publish data for the top quartile, the 25% fastest growing companies. Recently, they also collect data for the most profitable 25% of the operating companies.  However, there is no way of knowing which in the AEA survey are the super successes, which the failures, and which are the "living dead."  For example, the top 25% in one segment could all be mediocre.  Likewise, the worst 25% in another segment are not necessarily all failures.

 

A new metric and a recommendation; the Marketing/Engineering Investment Ratio™, a minimum of 1

This author developed a new metric(19) to solve these issues, the Marketing/Engineering Investment Ratio™ (M/E Ratio™), for the 1992 MIT Enterprise Forum Spring Workshop, "How To Create a Successful New Business."(20)  This new model separates marketing from the functions of promotion and selling.  Formulating a ratio of marketing to engineering installs marketing concurrently with engineering, and sizes the marketing budget with a readily identified number (engineering investment).(21)

See Figure 3 for the Marketing/Engineering Investment Ratio™; a minimum of 1, and concurrent with engineering investment.

 

 

 Invest-
 ment
 ratio

 Period of
 developing
 the product

 Period of
 ramping up
 purchase orders

Marketing

1

 

Engineering

1

 

Promoting
+ Selling

 

3

 

 

     

 

5

 

───────────  time  ───────────►

product life cycle

    Figure 3, the Marketing/Engineering Investment Ratio™ (M/E Ratio™)

 

With this new metric, the Marketing/Engineering Investment Ratio™, comes a recommendation that technology-based startups, and new businesses inside established companies:

  • Apportion the marketing investment relative to the engineering investment.

    Marketing is an investment, just as engineering is an investment. Startups and new businesses do not have a sales stream to divide for an estimate of marketing, but they normally have a well-estimated engineering investment.

    You can allocate the promoting and selling investment relative to the engineering investment as well.  Combined, promoting and selling can be triple the engineering budget.  However, this study will focus only on the Marketing portion in order to direct management attention and investment commitment to the upstream marketing process.

  • The Marketing/Engineering Investment Ratio™ should be a minimum of 1.

    Invest at least one dollar in marketing for each dollar invested in engineering.  The magnitude of the challenge simply requires it.  Invest more in marketing than in engineering to find out who is going to buy the darn thing!

  • Invest those marketing dollars either before, or simultaneously with the engineering dollars.

    This becomes one definition of marketing, and a means to distinguish marketing from promoting and selling.  Marketing occurs at a special time during product development.  Marketing is the process that comes before the product is ready.
 

This paper, one of four related talks, is intended to convey the fundamental import of marketing with evidence that successful technology-based enterprises invest more in marketing than in engineering.

Now that we have a metric to budget for marketing, and have evidence that the marketing budget is serious and should exceed the engineering investment, we might ask, "What are the functions and methods of marketing?"  The three companion papers in this Electro/95 sequence are designed to teach three specific tools: market segmentation, understanding customer needs, and primary market research to guide engineering.(22)

For additional information, detailed checklists of marketing tasks are available from the National Science Foundation's SBIR Conference.(23)  The IEEE Electro/88 Conference brought another outline of marketing,(24) and a series of Tutorials and Sessions imparting marketing methods, functionality, and tools.(25)  The IEEE Entrepreneurs' Network, Boston Chapter, teaches marketing as part of their yearlong entrepreneurial sequence.  The reader is also encouraged to take advantage of the marketing segment(26) of MIT's annual entrepreneurship course, sponsored by the MIT Enterprise Forum.(27)

 

 
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