“LinkedIn grows and so does a nagging concern about marketing and sales spend”

May 10, 2012 - PRLog -- Further questions have been raised about the ever-increasing proportion of LinkedIn’s revenues that are being spent on sales and marketing.  This week the marketing industry’s financial publication Marketing Services Financial Intelligence expressed concern about the disproportionate growth in sales and marketing expenses relative to revenues (visit http://www.fintellect.com/msfi for details).

“While there’s no particular reason why anyone should complain about sales and marketing expenses of a demonstrably growing business increasing in absolute terms, surely over time those costs should gradually represent a smaller – not bigger – proportion of total revenues?” commented editor Bob Willott.  

LinkedIn has just reported a further leap in the percentage of revenues absorbed by sales and marketing costs.  In the first quarter of 2012 the figure rose to 35%, compared with 31.5% for the whole of 2011 and 15.5% in 2007.

Last month LinkedIn justified the increased costs in the following terms:  “We plan to continue to invest heavily in sales and marketing to expand our global footprint, grow our current customer accounts and continue building brand awareness. In the near term and consistent with our investment philosophy for 2012, we expect sales and marketing expenses to increase and be our largest expense on an absolute basis.”

But Willott argues that the cost of winning business in new markets would have been expected to absorb the highest percentage of revenues in the very early years, when cash was being invested in sales staff and marketing activities before any material revenue could be expected to have been generated.

“As each year passes and markets get more established, it would be normal to expect the spend on developing sales in new markets to become a gradually smaller proportion of total marketing and sales spend, while the payback on spend in established markets to be greater”, Willott said.  “In overall terms the marketing and sales cost per dollar of revenue should settle down at a fairly standard percentage notwithstanding the continuing need to expand into new markets.”

Willott reckons that, to justify spending an increasing percentage of current revenue on sales and marketing each year, either (a) LinkedIn’s expansion into new markets would have to be growing at an ever increasing rate relative to the scale of its existing markets, or (b) each new market entrance, or expansion of an existing market, would have to be significantly more difficult and/or more expensive than was previously the case.  

“More worrying would be the possibility that LinkedIn is having to pay more per dollar of revenue by way of sales personnel costs, commissions and other incentives to win sales in its established markets”, Willott said.

According to LinkedIn, the sales and marketing cost increase was “primarily attributable to an increase in headcount related expenses of $26.1 million as we expanded our field sales organization”.

“It’s about time investors were given a fuller explanation of why sales and marketing costs are absorbing an ever-increasing slice of revenues”, Willott said.

- ENDS –