Why Does Slack Spend So Much on Sales and Marketing?

Word-of-mouth advertising isn't supposed to be this expensive.

Evan Niu
Evan Niu, CFA
Jun 22, 2019 at 1:00PM
Technology and Telecom

"Our growth is largely due to word-of-mouth recommendations," Slack (NYSE:WORK) writes in its prospectus. Word-of-mouth referrals are widely considered the best type of advertising for two reasons: Those types of referrals are extremely compelling because they come from friends and peers instead of a paid salesperson, and that means the company doesn't need to spend as much on its salesforce.

Companies that benefit from word-of-mouth referrals tend to also enjoy increased efficiency in terms of sales and marketing expenses. Slack doesn't.

Cal Henderson, Allen Shim, and Stewart Butterfield standing in front of the NYSE

From left to right: Co-founder and CTO Cal Henderson, CFO Allen Shim, and co-founder and CEO Stewart Butterfield. Image source: Slack.

Slack spends over half of revenue on sales and marketing

To illustrate this point, let's compare Slack's sales and marketing spending to other enterprise software companies that similarly rely heavily on word-of-mouth recommendations: Dropbox (NASDAQ:DBX) and Atlassian (NASDAQ:TEAM).

"We acquire users efficiently and at relatively low costs through word-of-mouth referrals, direct in-product referrals, and sharing of content," Dropbox wrote in its prospectus when it went public last year. "We rely on word-of-mouth and low-touch demand generation to drive trial, adoption and expansion of our products within customers," Atlassian said in its own prospectus when it made its public debut back in 2015.

However, the numbers paint a different picture in terms of spending efficiency. As a percentage of revenue, Slack spends far more than either Dropbox or Atlassian.

Income Statement Metric (TTM)

Slack

Dropbox

Atlassian

Revenue

$454.5 million

$1.5 billion

$1.1 billion

Sales and marketing

$257.9 million

$384 million

$240.8 million

Sales and marketing as a percentage of revenue

56.7%

26.3%

21.5%

Data source: SEC filings. TTM = trailing 12 months.

The discrepancy is stark. While Slack is smaller than Dropbox and Atlassian in terms of revenue, all three companies still have similar marketing models where adoption tends to be driven from the bottom up within an organization after users rave about the product.

Slack is already seeing growth decelerate, in which case investing more in sales and marketing is warranted. The company does plan on continuing to invest heavily in its direct salesforce: "We plan to increase the dollar amount of our investment in sales and marketing for the foreseeable future, primarily for increased headcount for our direct sales organization and investment in brand and product marketing efforts."

In fact, Slack better resembles Box (NYSE:BOX), one of Dropbox's primary competitors. Box is smaller than Dropbox ($630.9 million in trailing-12-month revenue) and also relies less on word-of-mouth, instead preferring to leverage a direct salesforce. The smaller cloud storage provider has spent $314 million on sales and marketing over the past year -- 49.8% of revenue.

There's no doubt that Slack is incredibly popular in the world of enterprise messaging. But it seems the company can't rely on word-of-mouth recommendations as much as it purports, and is spending heavily to compensate.