The great M/E ratio lie?

As I’ve mentioned in my previous posts I’ve become interested in the role of marketing in software companies. One area that crops up is something termed the M/E ratio (Marketing/Engineering Investment Ratio). Essentially the premise is that your company is more successful if you have more investment in marketing than in Engineering. OK, maybe that is true…maybe. However, whenever I dig a little deeper I seem to uncover some "interesting" points;
1) The "proof" seems to involve surveying companies that have succeeded and failed or as the reports state, the ‘super successes’ and the ‘flaming failures’. I’m not sure I buy this proof. Lets take a look at a couple of well known names in these reported flaming failures; Xerox, Wang and Lotus. For me the suggestion that these companies failed because of their M/E ratio is be taken with a large handful of salt. I can certainly remember Lotus (of 1-2-3 fame) and their marketing was pretty slick, indeed at the time I was employed to investigate and implement a new office system for small database company. I chose Microsoft Office over the Lotus offering because of my technology investigation not their lack of marketing. I was invited to their offices for a demonstration of the products. Simply put the Microsoft offerings (mainly because of the close ties to the Windows OS) were easier to use (if only that were still true) and were quicker to utilize new OS features. So was it a marketing failure that caused Lotus to fail? I don’t believe so because the feature set was almost, and maybe even 100%, identical. It was the implementation of those features that made me choose MS and it was probably the same story elsewhere. It’s also interesting to read the number of excuses that Microsoft win because of their marketing muscle. It’s equally interesting to read a number of articles debunking this as simply an excuse, indeed a number of cases point to Microsoft having poor marketing.
2) With terms like flaming failures and super successes, who is it that popularize this theory? Oh yes it’s marketing companies. No surprise there but I certainly don’t blame them.
3) ‘Lies damn lies and statistics’. Statistics are a fun area. I was unfortunate enough to have to do ‘further statistics’ course and hated every second it, why, because I soon realised that you could pretty much put any spin on a topic by carefully ignoring salient points. I realise that marketing isn’t sales but the ability to apply spin is a shared talent. Unfortunately I don’t have access to any of the data in these reports but I’m pretty sure there are some important issues that have been ignored. For example, it is simplistic to say that the top x software companies have a high m:e ratio because the statistic ignores the scale of the company both in terms of number of heads and the Return on Investment (ROI), i.e. a small company can make a relatively large profit with a tiny m:e but they’ll never break into newspapers top 100 company list.
4) Staff type thresholds – I don’t have *any* research to back my next claim but it seems logical to me that a successful software company needs a number of people developing software, I don’t like the term R&D it’s too woolly for me. I also believe that as a company grows there becomes a critical mass of developers where adding more developers isn’t a good ROI, in-fact it encourages the command and conquer model and removes some of the best developers from developing. So lets take another look at some the poster software companies. The IBMs, Oracle and Microsoft’s of the world require a huge army different staff types to produce and sell their products. (It has been noted that a number of people that leave Microsoft to form start-up’s fail because they underestimate the "behind the scenes" support staff that are needed). A proportion of staff will be developers and a proportion will be in marketing (or at least the proportion of the costs if not head count). With my theory of a critical mass of developers then I would expect that in these large companies the number of developers will have plateaued but the ever expanding world wide customer base will require more and more marketing effort. So by examining these companies m:e then you would see a large m to e, again statistics can tell whatever story you want if you ignore the whole picture.

So back to the heading of this post, is M/E a lie? You’ve heard my opinion, I don’t have a great deal of research or a diploma from Harvard Business School but I hope my little investigation and logical thought will be enough to at least make the reader question the "truth" of these M/E reports.

One thought on “The great M/E ratio lie?

  1. bulletbibop April 2, 2013 / 1:42 pm

    First, this ratrio deals with up-front marketing more than promotional marketing or sales related expenses. The “marketing” part of this ratio is really focused on market analysis, business model building and customer acquisition strategy. Then, this ratio obviously evolves during the lifespan of a company. It would be better to assess this ratio for each project within a company. To conclude, this ratio does not really match with every kind of innovation or project. In my opinion, it only gives a good assessement of potential successes for projects based on disruptive innovation. So, I wouldn’t focus too much on this ratio for other types of projects.

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