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Why Square Isn’t Afraid to Make Big Marketing Investments

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Square maintains stable payback on marketing expenditure

To drive growth in a highly competitive industry, companies typically spend a big chunk of their revenue on sales and marketing activities. But how do you ensure that you’re not just throwing money down the drain? Square (SQ) has developed a mechanism to measure the effectiveness of its marketing efforts, and the management says it is pleased with the results so far.

According to its latest investor briefing document, Square says that it has maintained a stable seller payback period of three to four quarters on marketing expenditure. The payback period is the duration it takes before revenue generated from a group of new merchant clients exceeds the amount of money that Square spent on marketing during the quarter in which those customers were acquired. In this case, the shorter the payback period the better, and Square says its three to four quarter payback period shows that it continues to acquire new merchant clients efficiently.

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Nearly 13% of revenue spent on marketing

Square spent $119 million on marketing in the fourth quarter ended December, representing 12.8% of total revenue. Marketing spending accounted for 9.5% of revenue at PayPal (PYPL) and 6.8% of revenue at Amazon (AMZN) in the December quarter. Fiserv (FISV) and First Data (FDC) spent 18.8% and 27.5% of their revenues on expenses related to marketing and administrative operations in the December quarter, respectively. Fiserv and First Data are seeking to merge to better compete with PayPal and Square.

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