How Much Do IPO-Bound Internet Companies Spend On Marketing?

I see blog posts on a daily basis that plot various sales metrics for SaaS companies. This is because the SaaS sector has been able to come up with a set of standardized metrics that work for almost any SaaS business. In consumer internet, it's much more difficult to make sensible comparisons. Still, there are many interesting insights to be gleaned by observing how internet companies go about sales and marketing.

In a previous post, I wrote about the revenue growth rates required to get public. In this post, I'll again look at the years leading up to IPO but focus on sales and marketing spend. In this case we'll be looking at overall sales and marketing spend as a percentage of revenue.      

In Social, Facebook's sales and marketing margin has been quite efficient and stable at 10-15% of revenue. LinkedIn and Twitter on the other hand were well over 20% three years prior to their IPO and have been on the rise ever since. Today, Facebook sits at 15%, while Twitter and LinkedIn are around 40%. This makes sense since the flagging growth at LinkedIn and Twitter have required some propping up by additional sales and marketing. 

Looking at Marketplaces, sales and marketing margin varies dramatically, and each line tells a different story. Etsy spends the least at sub-20% since most of their customer acquisition has been organic. Other bellwether marketplaces such as OpenTable, GrubHub, Just-Eat, TripAdvisor and HomeAway have always had relatively low sales and marketing margin. Looking higher up the y-axis, it's interesting to look at the high marketing costs for businesses like Lending Club, Angie's List, Zillow, Yelp and Care.com three years prior to their IPO. Marketplaces often require a lot of effort to seed and the hope is that marketing costs will go down over time once the network matures. This was clearly the case for some of those companies, Zillow and Lending Club in particular, while others such as Angie's List and Yelp struggled to keep marketing costs low through their IPOs. 

It's worth noting that high sales and marketing spend isn't always a bad thing, so long as the company is getting good "sales efficiency" (a topic for another post). For example, while Zillow has decreasing marketing costs in this chart (to about 40%), they are actually sitting higher today at 48%. Yelp spends roughly that much today, but Zillow was able to grow their revenue 100% in 2015 while Yelp only grew their revenue 25%. Zillow is spending more on marketing because they have a market opportunity and return on sales that allow them to easily justify it. 

The first thing to point out in the Ecommerce chart is Groupon. The company went from nothing to billions of revenue in just a few years, and so they started spending insane amounts on marketing to continue growing at breakneck speeds. Unfortunately, the economics in the business weren't sound and the business ultimately failed to live up to investor expectations. Coupons and RetailMeNot also have high sales and marketing margin because the businesses are reliant on paid user acquisition and they have also had several core business issues. Most other ecommerce companies such as Wayfair, Zalando, GoPro and Fitbit spend a decent amount on sales and marketing, and many are continuing to spend even more. This is a typical trait of many ecommerce businesses since they are very reliant on paid acquisition. This is what I call the "treadmill effect" - as ecommerce companies keep growing top-line revenue, it becomes increasingly difficult to show strong year-over-year growth due to churn. As a result, increased marketing spend is used to fill the void. 

In Media and Gaming, almost all of the companies exhibit an improving sales and marketing margin leading up to IPO. Google and Netflix had their IPOs over a decade ago but today they both have a low 12% sales and marketing margin. Gaming companies such as Zynga, Glu, and King all reach steady state around 20%, which is likely an internal benchmark most mobile gaming companies shoot for. 

As in my last analysis, I broke out travel differently. Instead of showing the years leading up to IPO (since Priceline and Expedia went public in 1999 and TripAdvisor was plotted above with marketplaces), I just showed relative sales and marketing margin from 1999 onwards. The consolidating travel space has long been a battleground for user acquisition. Priceline and Expedia both have huge marketing war chests and have been spending ever-increasing amounts to win back customers. The companies can justify it since the global online travel industry is huge and has winner-take-all dynamics.

Sales and marketing is the main lever used by most businesses to grow revenue, and so understanding how much internet companies spend on it is important. However, sales and marketing margin is just one metric. In a future post, I will dig into sales efficiency and other important sales metrics.

[originally posted at mahesh-vc]

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