Stephan Schmidt

Dear CTO - This is Why Marketing is Getting All the Money

Technology as a profit center

Why does Marketing get all the money? And you have problems getting the budget for more developers? The first reason is probably that your founder thinks this is a tech company but doesn’t act like a tech CEO. They want to be Google but don’t act like Google - except pushing senseless OKRs on you.

The second reason is your CEO thinks marketing is a profit center and tech is a cost center.

A profit center is a department, where you put in $1 and get out $2. A cost center is where you put in $1 and get no money in return. When they spend money on marketing, they get new customers and more money back. When they spend money on tech, they don’t get more money back. So they spend on product & tech only the smallest amount they need to while lavishing marketing with money in the hope of doubling it.

What CTOs need to change, is to position product & tech as a profit center. This is called framing. In the current frame, tech is a cost center (Read “Don’t Think Of An Elephant!”, the most important book for CTOs.) With this frame in place, whatever you do, you will hardly get more money. You need to shift the frame to “Tech is a profit center” and then getting more money is easy.

Directly tie product to revenue. One way to do this is revenue attribution. In most companies, revenue and revenue growth is tied to marketing or sales. Making the point that product provided the thing to sell and the features that draw in customers is difficult to make. Product, in this regard, looks passive, and marketing or sales are actively doing something. It is easier to attribute recurring revenue to product because it prevents churn and increases upsells and add-on products.

One model would be looks like this. The first six months of customer value are 100% attributed to marketing and/or sales, the next six months are 50% attributed to marketing and/or sales, and 50% are attributed to product & tech. After twelve months, revenue is 100% attributed to product & tech because they prevent churn and keep customers engaged. All upsell and add-on products revenue is attributed to product & tech from day one.

Product & tech understands customers by source, segment, etc. and in this way deeply understands churn and feature usage. To make this work, you need to measure all usage of all features, have a dashboard and metrics, like X% of customers are using 80% of features in their first month. Customers who only use Y% of features will churn. Customers who use feature f1, f2 and f3 will upgrade. Having this in place and discussing this with the CEO will make your argument work that product & tech is responsible for revenue. And you are directly responsible to drive revenue. With this alignment, the company will make more money.

It is then clear, who is responsible for what revenue. With revenue attributed to product & tech it is clear, product & tech is a profit center. I put $1 in product & tech, and I get back $2. Now let the CEO gamble on you.

To optimize being a profit center, move everything except development, like laptop provision etc. outside development, e.g. to the CFO. Move all license costs (even GitHub) if possible to the CFOs budget, but at least don’t have marketing licensing costs in your budget like Hubspot, or internal costs like Linear or Notion (you do budgeting, don’t you?). Activate software development as capital to further increase your usefulness in dollars. Think about patents to tie more income to product & tech.

One final point for companies to understand, is that developers add more money as a percentage of revenue, while marketing and sales add a constant amount of money. When a developer adds an upsell feature (costing $1 of developer time), and the company has 5 customers, they might get 1 customer to upsell. When the company has 5 million customers, that one developer might get 1 million customers to upsell. More developers are more beneficial when there already are more customers. When marketing spends $1 on marketing, they get 1 new customer. Independently of how much revenue the company already has.

Make sure the CEO is aware of this too.

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