What it means
Every growing business has to look beyond its current customers. Business development is the activity of identifying new sources of revenue, such as a new region, a new customer group or a new strategic partner.
The cost of doing that work is the business development cost. Typical items include the salaries of business development staff, commissions, conference fees, travel, client entertainment, legal work on partnership discussions and feasibility studies.
Some firms also include the cost of preparing tenders and bids. Each of these is spent with no guarantee of a result.
For accounting purposes, most business development costs are expensed as incurred. They are not treated as an asset, because the future benefit is too uncertain to count on.
A small number of costs, such as the cost of securing a specific, enforceable contract, may be treated differently under certain standards. The main management question is whether the spending earns a good return.
Finance teams measure it by dividing the cost by the number of new customers or contracts won, and then comparing that figure with the profit those customers bring. If winning a customer costs more than the customer is worth, the strategy is in trouble.
Timing is a common difficulty. Many deals take months or years to close, so costs appear in one period and revenue in another.
Managers therefore look at a rolling average or a pipeline view and not at a single month. Business development cost overlaps with sales and marketing cost, but is often aimed at larger and longer opportunities, such as partnerships and entry into new markets.
Companies should define the boundary clearly so costs are reported consistently.
In practice
Real-world examples
Example 1
A software firm hires two partnership managers at a combined cost of $300,000 a year. In the first year they sign four reseller partners who bring in $900,000 of sales. The founder compares the cost with the revenue and decides to hire a third manager. She asks for a review after twelve months to confirm the return holds up.
Example 2
A construction company spends $60,000 preparing bids for large public contracts. It wins one contract with a $1,500,000 margin over the life of the project. The cost of the unsuccessful bids is part of the real cost of the win. The bid manager now reviews each tender before work begins, to avoid chasing contracts the company is unlikely to win.
Example 3
A food exporter sends its sales director to three overseas trade fairs at a total cost of $45,000. Two serious buyers emerge, but neither places an order for nine months. The finance team tracks the spending separately so that the delayed return can be judged fairly.
Think of it
Business development cost is what you spend to find and win new business-the investment in growth.
Formula
Calculation
Business development cost per win = Total business development cost / Number of new customers won
Suppose a consulting firm spends $240,000 in a year on business development staff, travel and events. It wins 30 new clients.
Cost per win = 240,000 / 30 = $8,000.
If each new client generates $50,000 of first-year gross profit, the return is 50,000 / 8,000 = 6.25 times the cost of winning the client.Case study
Seen in the real world
Meridian Cloud Services is a fictional software company that wanted to enter the healthcare market. It spent $400,000 over twelve months on market research, a specialist sales hire, conference attendance and legal advice about regulation. None of this created revenue during the first six months.
The finance director set up a separate cost centre for the initiative so that the full cost could be seen. By month ten, the illustrative pipeline included six hospital groups, and two signed contracts worth $350,000 a year each.
At the review, the board compared the $400,000 cost against the combined annual contract value of $700,000 and the expected multi-year life of the contracts. They agreed the investment was sound and approved a further round of spending, with a clear target for cost per win. The finance director also asked that each quarter's report show spending, pipeline value and signed contracts side by side, so that the board could judge progress without waiting for the final results of the whole programme.
Watch out
Common mistakes
- Judging business development spending by one month's revenue. Deals take time, so results should be assessed over a longer period or against the pipeline.
- Hiding the cost inside general overheads. Without a clear label, nobody can tell whether growth spending is paying off.
- Treating it as an asset on the balance sheet. Most such costs are expensed as incurred because the future benefit is uncertain.
Questions
People also ask
Is business development cost the same as marketing cost?
Not quite, because marketing usually creates broad awareness while business development targets specific partners, markets or large deals. In smaller firms the two are often reported together.
How do you know if it is worth it?
Compare the cost of winning a customer or contract with the profit it brings over its life.
Should failed efforts be counted?
Yes, since the cost of unsuccessful attempts is part of the true cost of the successful ones. Leaving them out makes the cost per win look better than it really is.
Watch