Recently, my co-founder and I have been going through the 10-Ks for companies with products and/or business models similar to LineRate Systems and have been boggling over how many of these companies are spending so much on cost-of-sales. Our advisors have been telling us that cost-of-sales tend to be very high but no one has been able to provide a clear description of what those funds are used for.
Looking at Red Hat's 10K for the period ending February 28, 2007
Revenue: $ 400.6 MM
S&MB: $ 145.6 MM (36.3%)
Juniper Networks
Revenue: $ 2836.1 MM
S&M: $ 666.7 MM (23.5%)
Sourcefire
Revenue: $ 55.9MM
S&M: $ 25.9MM (46.3% - WTF?)
And then I ran across a blog post that made it crystal clear what was happening.
IT Staff: I'd like a quote for X
Sales Drone: would you like to attend our conference? open bar?
ITS: quote
SD: ok, lets talk about the details of the product
ITS: quote
SD: uh ok, when can I come to your office?
...
Similar situation with a different company...
SD: We'd like to talk to you about our great new product Y, can we interest you in a free steak lunch?
ITS: just send me the info
In essence the standard tactic of Sales Drones these days is to bribe IT Staff with perks they cannot get out of their bosses to convince their bosses to purchase the company's hideously overprice products. The moral hazard here is incredible - IT Staff gets *stuff* that is then billed back to their own company in the high cost of the products.
The Best-of-Breed battle that vendors are currently waging based on delivering functionality beyond the need of companies and therefore ruining the value/cost ratio has forced them to hire sales drones to bribe people into purchasing their products.
This business model is just wasteful.
