Start-up Entrepreneurs' Blog

How Much will Marketing Cost a Startup? Learn How to Set Expectations

April 22, 2010

Many startups want to create a revolutionary product or a disruptive technology. The reality is few of these new products are either. Most new products are evolutionary, variations, or incremental improvements. So how do you know whether the startup and product can be successful? For most startups, the risk of failure is with the marketing and widespread customer acceptance, and setting expectations early for both customers and budget is crucial.

The road for a truly unique first time product is a long one. It takes 4 or 5 years for customer adoption. While it may seem as if revolutionary products suddenly burst onto the market and grab our attention, the reality is they’ve been quietly gaining momentum for years. Most startups develop incremental improvments. Variations of current products are expected to demonstrate customer validation within 18 months. The startup is looking for the ideal balance among what a customer wants and is willing to pay for, what a startup can create in a reasonable amount of time and at what price, and what market share can be captured and is it enough to make a sustainable business.

Setting Expectations for Marketing Expenses

A general rule states most markets consolidate to at most 3 to 5 big players.  What will it take to effectively market a new gizmo in an existing market?  First consider the competitors in the market today. How much market share does each one have? Studies have shown there are only a few cases to consider. If one or two companies have 75% or more of the market share or if one company has more than 40% of the market share, it will be difficult for a startup to compete against these dominant players. In either case, marketing expenses typically need to be 3 times that of the dominant players in order to break into the market. If the market share is otherwise, the market is fragmented and marketing expenses will need to be 1.7 times that of the existing competitors.  Startups have the easiest time penetrating a market where all competitors have 25% or less market share.

Does this mean if the dominant player spends $10 million on marketing that the startup does too? Of course not, but it can be used to determine a benchmark for the startup.  You can often determine the marketing cost per lead and the marketing cost per sale. If it works out to be $350 per lead, does that mean if you spend $350 you’ll get a customer. No, because there is a minimum you need to spend just to reach a large enough pool of customers to be able to calculate statistics. However, it does set realistic expectations and maximum bounds for the startup. If a startup has a marketing budget of $300,000 and the established players have a $300 cost per lead that says a dominant player would expect 1000 leads. With a 1.7 to 3 times dilution factor, a startup should expect 333 to 589 leads for the same budget. One approach is to work backwards from the goal. If a startup wants some number of customers at the end of the first year, what size of budget do they need to have to do so?

When Marketing Fails to Meet Expectations

While marketing is expensive, it can be even more costly when the marketing campaign doesn’t work and the demand for the product doesn’t materialize. How can this happen? After all, the startup just spent 1.7 to 3 times the established players’ budgets. Most companies develop a product and get initial feedback from a set of early customers.  The startup breathes a sigh of relief; they have customer acceptance for the product. And more than likely, the company has not spent much on attracting these early adopters. More euphoria sets in as the startup believes the product may be the first to sell itself.  Now with a customer proven product and the goal to grow quickly, the next step is a big push marketing campaign. The problem is there is a big gap between early adopters and mainstream customers, one that is not easily crossed.  The early adopter, who is paying for the first look at the product,  is a customer who is desperately seeking to solve a problem, is willing to accept a feature limited and not easy-to-use product, and loves the latest and greatest technology. The early adopter, who is getting the product for free, is a casual customer that may or may not even use the product they are getting for free. They are the young puppies eager to try something new and exciting, and curious about new things.  Contrast these customers with the mainstream customer who is practical and down-to-earth. What can the product do for them and is it worth the cost? Is the product features compelling enough for them to change suppliers or to change the way they do things today. They are old dogs who don’t learn new tricks easily, not because they can’t learn them, but because experience has taught them that most new tricks aren’t worth learning.

Under the best case scenario, marketing is costly and startups should be prepared for this to be a major operating expense in order to be successful.

Filed under: Marketing & Sales

Tags: business plan, early adopters, mainstream customers, market strategy, marketing metrics, marketing plan, new products, promotion