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FAQ:  Forecasting the Cost of Sales   


An insight into predicting sales behavior for the embedded systems market

by Ron Fredericks, last updated October, 2007

ECI offers a community-based marketing service to companies that make or sell components and tools to the OEM device manufacturer and their related engineering support teams. Read on to learn some of the theory behind ECI's marketing techniques. Read ECI's marketing solutions-based article to learn more about increasing sales performance using ECI's marketing techniques.

Estimates of future sales depend on the demand for the firm's products, and the strength of the competition. Sales estimates would come from the marketing department. Top management would provide goals, targets, requirements, and plans. Production would estimate product capacities and schedules. Accounting would provide financial statements and accounting conventions. The finance department would gather all the information from these departments and create the sales forecast. From this brief introduction to forecasting, a common question is "how much should our company spend on sales and marketing?"

Every marketing-mix strategy will lead to a certain level of sales revenue. See tables 1 through 3 below for a practical example. The revenue data from three public companies that develop operating systems, development tools, run-time products, and services have a wide range in budgets (sales/marketing and as a percent of total revenue). The bottom line is that companies using a traditional direct sales approach can spend an average of 40% of their total revenue executing their sales and marketing strategy targeting the operating system market.

ECI offers a modern-day solution to this high cost of sales...

 

Table #1: Wind River's sales and marketing expense as a percentage of total revenue

Wind River
Public financial records (ref: Edgar's)
Audit Period
2007

Audit Period 2006

Total revenue (net in 1000's)
$285,298
$266,323
Sales and marketing expenses (in 1000's)
$112,302
$95,301
Cost of sales in percent
39%
36%

 

Table #2: Red Hat's sales and marketing expense as a percentage of total revenue

Red Hat
Public financial records (ref: Edgar's)
Audit Period 2007 Audit Period 2006
Total revenue
$400,624
$278,330
Sales and marketing expenses
$145,562
$84,723
Cost of sales in percent
36%
30%

 

Table #3: Microsoft's sales and marketing expense as a percentage of total revenue

Microsoft
Public financial records (ref: Edgar's)
Audit Period
2007

Audit Period 2006

Total revenue (in million's)
$51,122
$44,282
Sales and marketing expenses (in million's)
$11,455
$9.818
Cost of sales in percent
22%
22%

Note: Figures taken from corporate 10-K public filings, see Edgar's for more details.

In the three tables above, note how Wind River has the highest cost of sales. Red Hat has a lower cost and Microsoft has an even lower cost [of sales and marketing as a percent of total revenue]. There are several reasons for the differing levels of efficiency:

  • Efficiency in marketing based on total revenue
  • Efficiency in overlapping product mix between development tools and run-time components for desktop and embedded device platforms
  • Efficiency in both marketing and sales as the result of an expanded online community corresponding to less direct marketing and sales

Embedded Components is dedicated to researching new ways to optimize profit margins for our clients. Optimizing the marketing and sales expenses needed to achieve a desired revenue target is one the business development services we offer.

The goal of optimizing profits can be summarized mathematically as follows (ref: Kotler):

 

Refer to the two equations listed above. It is interesting to note that in equation #2, the forecasted number of units sold Q, can be estimated using elasticity constants which exponentially affect list price P, advertisement budget A, and sales promotion budget S. Each target market will tend to have different values for these elasticity constants but typical values might look like -2 for the list price constant p, 0.15 for the advertisement budget constant a, and 0.25 for the promotion budget constant s. Embedded Components offers unique and cost effective ways to leverage more value from pricing tactics, advertisement strategies, and promotion campaigns.

Embedded Components also offers an engineering counseling service which can help reduce a firm's variable costs (equation #1, variable c) related to software development and hardware manufacturing. Our company is unique because we have learned how to bridge the knowledge gap between engineering professionals and their business management counterparts. This often boils down to accelerating team maturity and leveraging a component-oriented architecture. Our company audit of your team might lead to suggested changes to your distributed test plans across multiple hardware platforms, increased value through documenting interfaces, or realized cost savings through cooperative partner relationships.

Contact us to request more information on how Embedded Components, Inc. can contribute to improving your profit margins while lower your risks now...


References:

Edgar's SEC filings
http://www.sec.gov/edgar.shtml

FAQ by ECI's Ron Fredericks
FAQ Sales Performance Through Marketing

FAQ by ECI's Ron Fredericks
FAQ How to Approach a Gorilla Partnership

ECI's embedded components and tools marketplace, a distance learning initiative for users, makers, and enablers of embedded components
Learn how to use embedded components and tools

Marketing Management: Analysis, Planning, Implementation, and Control by Philip Kotler, published by Prentice Hall, Upper Saddle River, New Jersey


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