First-time technology entrepreneurs repeatedly make a common mistake: they don’t budget enough for customer acquisition relative to software development/engineering costs. Over the past five years I’ve talked to plenty of entrepreneurs that raised angel money ($100k – $1m), spent 90% of the money building the product of their dreams, and realized too late that it costs serious money to acquire customers. Unfortunately, they weren’t able to show enough traction to raise more money and shut down the startup. It happens more than you think.
There’s a distinct 3:1 ratio for customer acquisition (sales salaries, sales commissions, marketing salaries, and marketing expense) costs relative to engineering (software development, architecture, quality assurance, etc) costs. A typically software company budget might look like the following:
- 60% – customer acquisition (sales and marketing)
- 20% – software development/engineering
- 20% – general and administrative
Yes, some rare products have a self-service model resulting in the percent of budget to customer acquisition swapping with engineering but the majority of B2B software companies follow the 3:1 customer acquisition to engineering ratio. My recommendation is for entrepreneurs to pay close attention to these ratios when planning and building their company.
What else? How you seen this 3:1 customer acquisition to engineering ratio in your experience?