How Much Should You Spend on Marketing and Selling Your Training or E-Learning Offerings?
You thought you were going to be an educator. And then
and then you discovered you were spending way more time on selling and marketing than you were on course development and delivery. More money too, with your sales and marketing groups constantly whining for an ever larger slice of the spending pie.
How much should you give them? It all depends on what sort of training business you're in. So here are some guidelines based on our many years of working with all sorts of training enterprises. .
1. Baseline Assumptions (% Revenue)
Let's begin with some financial assumptions that are relatively consistent across all sorts of successful training and e-learning companies, beginning with a 10% pre-tax margin. To aim any lower is to risk not making a profit at all.
Then let's plug in 14 % (+/- 3%) for general and administrative expenses (G&A) and 6% (+/- 3%) for product research and development (R&D) - a total of 20% in all.
This leaves 70% of revenue available for delivery and for sales & marketing. And here's where things get real different depending upon what sort of training or e-learning business you're in.
(Note: a detailed breakout of what to include under delivery and sales & marketing expense, is contained in the Q&A section toward the end of this E-Visory.)
2. Courseware Licensing Model (% Revenue)
Your business fits this model if you provide off-the-shelf training content to customers and they undertake the delivery effort and expense. It also applies if you are delivering e-learning courseware or software (i.e. course authoring or learning management systems) on cheap-to-manufacture CD-ROMs or digitally over the Net.
Because customers are paying you primarily for your intellectual property, your physical delivery costs are negligible. This frees you up to spend 50 cents on the dollar - even more, on sales and marketing.
However, before you start feeling too complacent, remember that your competition is able to spend equally aggressively to oppose you.
Training licensing model companies are extremely highly leveraged. For every $100 that revenue comes in over plan, they're only out an additional $20 in delivery related expenses - yielding a flow through of $80 in incremental profit.
Unfortunately, in bad times, for every $100 that revenue comes in under plan they only save $20 in delivery-related expenses - so profit goes down almost as much as revenue.
Another issue is that as much as you'd like to be a pure shelfware provider, customers are going to put the squeeze on you for consulting services to help them integrate your offerings and for customization work to help tailor your offerings to their unique business requirements. This will put considerable pressure on your delivery expense and your financial reality will begin to take on some of the characteristics of model No. 4 (see below).
3. Public Seminar Model (% Revenue)
Public seminar companies provide both the training content and the classroom resources to deliver it. So their delivery expenses are typically at least twice what licensing based firms experience. Thus, they are able to afford correspondingly less for sales and marketing.
One exception is among non-profit providers like universities and trade associations. If they are willing to live up to their non profit mandate, this frees up an additional 10% to be used for delivery, sales or marketing. Non profit providers also have the opportunity to make this additional spending go further - by mailing at tax exempt rates and time sharing delivery resources that are subsidized by public education funds.
During bad times public seminar companies can see attendance drop off as much as 50% or more. Unless they are able to rapidly shed site costs and instructor salaries they can wind up with half empty classrooms and a delivery expense that's close to 80% of revenue. Obviously this leads to big time red ink.
Some public seminar firms contract out for instructors and/or training rooms. This gives them more flexibility to scale up or throttle back to address changing demand for their offerings.
Other firms try and contain facility expenses by running sessions at client sites. However, client site business usually entails a price concession that offsets any potential margin savings.
Recently, a number of public seminar firms have experimented with delivering their courses live over the Internet (I'm trying to avoid the term "synchronous e-learning" - ugh!). The idea is to eliminate expensive fixed delivery sites. Another hope is that these "Webinars" will render their public seminar business more recession proof by eliminating the need for participants to travel. To date, results have been mixed, and site cost savings have been more or less nullified by concessions in average realized price.
4. Custom Training Development Model (% of Revenue)
Your business fits this model if you specialize in developing one-off learning experiences, one client at a time. These dynamics also apply to groups that provide training assessment, planning, management and customization services in a sideline way as part of a standard courseware company. Particularly if the mix is material and the effort is substantially incremental.
Custom training and consulting is a labor intensive business, with not much in the way of economies of scale. Even if you bill your people out at 3x what you pay them, it's likely that they aren't billable 20% - 40% of the time -- and that substantial non billable resources are required to support them.
The good news is that in landing training projects, the individuals responsible for managing the delivery typically are also instrumental in the selling and configuration process. So you don't need much in the way of standalone selling resources. Also, the focus is on dealing with customers one opportunity at a time. So there's less requirement for headquarters marketing people and budgets.
Another benefit for "pure" custom shops is that R&D is baked into each project. Which means you may have more than 70% overall to apply to delivery and selling.
Of course, no custom shop or consulting firm wants to undertake every project from scratch. A major priority is to identify how content and methodology that were developed for one client may be tweaked and "resold" to another. While these "repeatable solutions" are elusive, they can go a long way in helping to contain project delivery expense.
Finally, custom training groups can be a clever complement to shelfware firms, offering them an opportunity to develop new products on the client's nickel. And the odds for a successful new product launch are substantially better when one client has already signed up than when the new product is a pure headquarters pipedream.
5. Blended Training Model
If your training company is an amalgamation of the above models, then just combine them to come up with the proper sales and marketing budget.
For instance if half of your business is licensed courseware (50% available for selling and marketing) and the other half is consulting and custom development (10% available for selling and marketing) then your overall sales and marketing spending requirement would be 30% of revenue.
6. Customer Education Model
If you're in the business of training your firm's customers, you have two unique dynamics that shape your delivery and sales & marketing costs.
Put both of these factors together, and you could be looking at a unit P&L like this:
Note: this scenario reflects a customer education business mix of 75% public seminars, 15% licensed training and e-learning and 10% customization - which is pretty typical these days.
Another opportunity to increase your line of business yield would be to get course development funded by employee training. This would give you another 10 margin points to turn over to your company. (On the other hand, you might be asked to fund course development for both customer and employee education -- in which case you will have to give the 10 points back, plus maybe another 5 points besides.)
In fact, few customer education organizations return 45 margin points to their corporations. Why?
Questions You May Have:
Q: We're different. Why should any of the above education industry financial models apply to us?
A: So long as you're generating a 10% pre tax margin or better and growing market share, you're entitled to be a renegade. If you're losing money, be careful you're not turning your back on sound business practices in order to justify inflated budgets and business inefficiencies.
Q: Our delivery costs are quite a bit higher than your benchmark. Can't we make up for this by spending less on selling & marketing?
A: If you're not all that efficient at delivery, chances are you won't be all that efficient at selling and marketing. You'll have to be -- because you'll be competing with firms that are outspending you.
Q: We're a startup, and trying to establish a "first mover" advantage to preempt our field. Is it ok if we spend 90% of revenue on sales and marketing?
A: Feel free to lose all of the money you can afford. Just be sure you have an end state model in mind and a timetable for achieving it. If you wind up missing your profitability mileposts more than two quarters in a row, it's probably time to rein in spending consistent with your revenue.
Q: What should we count in determining our sales and marketing expenses?
A: For sales, count all of your salespeople, their managers, sales support staff, sales locations, sales automation, salaries, benefits, incentives, the works! For marketing, count the cost of all promotion programs including trade shows, collateral, advertising, direct mail and Website development and maintenance. Also count the salaries and benefits of all marketing personnel with the possible exception of product managers who are hands on involved in leading the development of new products and services (count them at least partially under R&D).
On a public training or e-learning company P&L, most sales & marketing expenses can be found under the "Selling, General and Administrative Expenses" line - although this line obviously also includes G&A expenses, which for the purposes of our analysis, we have included under "Baseline Assumptions." If you want to back out G&A, try subtracting 11 - 17% or so.
Q: What should we count as delivery expenses?
A: Delivery has to do with all of the cost items associated with providing the learning experience including:
On a public training or e-learning company P&L, most delivery expenses can be found under the "Cost of Sales" or "Cost of Revenue" lines - although this line may also include some back office expenses not specifically related to delivery. It may also include product royalty expenses, which, for the purpose of this analysis, we would apply to product R&D.
Q: Your delivery expense assumptions are way too low. How do you expect us to maintain a quality reputation with that?
A: Training is an idea business, and your clients will value your intellectual property and proprietary methodology way more than any physical delivery properties. So forget about leather bound training manuals. Think twice about serving gourmet lunches during public seminar events. Drive delivery efficiencies to the max. You'd be better off investing a few more margin points in R&D.
Q: We're a small company and our top executives frequently make sales calls and deliver courses. Should we count them under G&A, sales & marketing or delivery?
A: If your firm numbers fewer than 20 employees, breaking down costs by function is difficult since many people must wear many hats. In this case we suggest you run your analysis based on the percentage of time people report spending in different roles. It won't be exact -- but it's a good start.
Q: We use both field account managers and telesellers. How should we divide up our selling budget between them?
A: Telesellers work best with smaller transactions -- and when solutions are tightly defined and consistently configured. However, they can also be used effectively in tandem with field people in managing large, complex accounts. I suggest you set up several controlled experiments to see what mix works best for you. We'll say more about this in a future E-Visory.
Q: Your benchmarks combine both sales and marketing. How do we figure out how much to spend on which?
A: Probably between 5% and 15% of your overall sales and marketing budget should be devoted to marketing. This is a broad range because there are a number of interpretations of what counts as "marketing" - and because it's less important how much you spend on marketing and more important on how well your budget is spent. A few comments:
Q: If we keep increasing our sales and marketing spending and we're smart about it, will revenue more or less keep up?
A: Only to a point. Once you close every customer who is naturally drawn to your offerings (low hanging fruit), additional customers will require more effort for less yield. Eventually you will need to spend more on sales and marketing than the incremental revenue justifies. At this point, your only recourse is to add to your product and service capabilities.
A parting thought.
Given the current hype about the benefits of "blended learning", it would seem that training and e-learning companies would be well advised to combine all three delivery models (courseware licensing, public seminar, custom development) under the same roof. Unfortunately, this frequently results in culture clashes that defeat any effort to bring a blended solution to the table.
Courseware licensing units tend to breed "sales bullies" that clash with the more stand-offish styles of the folks who sell in custom solutions and eat marketing folks for breakfast. Meanwhile, the hard core direct marketing types who rule many public seminar companies see field salespeople as little more than "sleazes."
This dysfunctional family problem is exacerbated by CFO's who won't take the trouble to install adequate cost accounting and management reporting systems so each business model can be managed to its own benchmarks. By insisting on a one-size-fits-all business model, they doom their firms to a one dimensional solution.