Determining the effect of marketing on a SaaS company’s growth is not black and white - it is not as simple as one may think. A lot of factors need to come together in order to create a successful and growing SaaS company. However, no matter how innovative and affordable your SaaS is, without sales and marketing the chances of growth for SaaS companies are slim to none.
This is no secret. In fact it is evident among nearly all SaaS marketers and among those enterprise corporations that spend a huge amount of time and money on their sales and marketing activities. Yet, for many mid-level companies, especially SaaS startups, determining what percentage of revenue they should invest into marketing and sales remains a challenge.
Should it be 10% of revenue? Maybe 20% to really hit the ground running and get your name out there? Is 12.67% the magic number for success? Your team is probably telling yourselves that it is anybody’s guess, so let’s spend a little bit and see if it is enough, and spend more if it is not. If you are among such companies, then today’s post is just for you.
According to a 2014 Gartner Research study, companies spent on average 10.2% of their annual 2014 revenue on overall marketing, with 50% of companies planning to increase to an average of 10.4% in the following year. 10% - this is the magic number that you will probably hear whenever you ask how much of your revenue you should allocate to sales and marketing. However, is that really true for all companies and all industries?
No. The percentage of revenue invested into sales and marketing varies by each individual company and industry. For example, companies in highly competitive industries, such as SaaS, retail, consumer products or pharmaceuticals often spend 20 to 50 percent of their revenue on marketing.
In 2014, Microsoft, Cisco, Quest Diagnostics, Salesforce, LinkedIn, Intel, Constant Contact, Marin Software, Tableau, Twitter and other enormous, well established companies had marketing and sales budgets that were greater than 14% of revenue, some of them spending as much as 50%.
So, while the 10% figure may be right for some companies and industries, it is definitely not a one-size-fits-all figure and here are some examples to prove this point:
Salesforce, Marketo and Constant Contact are providing marketing and sales management software. They believe in what they are selling and they invest a lot in order to promote their products and grow their business. Just take a look at the size of their investments. Salesforce invests 53% of their revenue into sales and marketing. Think about it for a moment - they invest more than half of their revenue on sales and marketing. In 2014, they had over $4.1 billion in revenue, so $2 billion was put aside for sales and marketing activities. What do they get in return for such investment? They get growth, success and fame. In 2014 Salesforce grew by about 35% over the previous year. Moreover, Salesforce has 16% market share in the CRM industry, which is greater than some of the most well known CRM providers, such as Microsoft, SAP and Oracle.
Constant Contact, which is an email marketing company, invests about 38% of their revenue into sales and marketing. In 2014, their revenue was about $330 million, so the investment on sales and marketing was about $125.4 million, which is a huge amount of money. Such an investment resulted in 16% growth over the previous year.
Tableau, which is a younger and a smaller company, went public in 2013. Nowadays, it is one of the faster growing companies in the 55-year history of business analytics software, thanks to the demand for visual analytics and, of course, a large investment in sales and marketing. They are spending nearly 53% of their revenue on sales and marketing, which is their key to success. Sales and marketing expenses are considered to be their largest category of operating expenses.
From these examples, one thing is crystal clear: 10% is not the magic number for such marketing mavens, who target growth and do so very successfully thanks to their investment in the services they sell. So, for your SaaS company as well, it is safe to say that 10% of the revenue is not enough in order to boost sales and attract more customers to your business.
Here are some important things, factors you need to take into account when you are creating your SaaS company’s marketing and sales budget:
Annual contract value
You have probably heard that when it is time for SaaS budgeting, many experts suggest matching the sales and marketing efforts with the first year annual contract value (ACV). This means that SaaS companies can get away with investing a significant amount of money on sales and marketing in the first year of a contract if it means the following years will produce pure profit. However, not everything is that simple. When you spend all of your company’s first year ACV on sales and marketing activities, then a lot of money will be burned upfront. So you need to make sure that you will have enough capital to survive the first year of running your SaaS business.
Of course, before making investments, SaaS companies wonder how much they can expect to receive in return for their marketing investment and how much the increased investment will bring them increased return. Though that is a fair question, there is no easy answer for that. Some marketing tactics, activities require shorter or longer term than others in order to bring effective and reasonable return. For example, a marketing strategy that is focused on branding at some point will need a longer period of time to see results than a lead-generation strategy. As a rule of thumb, most marketing activities begin to snowball as time passes, which means that they deliver an exponentially increasing return if the marketing activities are underway in a coordinated way and if they cover the right audiences with the right messages.
Additional factors that you need to take into account when developing a marketing budget include product/service launches, new market entries, and mergers/acquisitions. The percentage of revenue allocation should be adjusted to account for these factors. For example, SaaS companies on average should spent 20% of their revenue for marketing each time they launch a new product or service.
Another thing to consider is that companies that offer consumer products and services should always spend a higher percentage than business-to-business companies.
Saving money with inbound marketing
Although you need to allocate a huge portion of your SaaS revenue for sales and marketing activities, there is also a bit of good news for saving money while increasing your efficacy. The good news is that most of your SaaS company’s marketing needs can be achieved with low-cost, inbound efforts and lead qualifications, so that you can spend the allocated money for other purposes. Heck, you can even spend on taking the office out for drinks every other Friday night.
According to HubSpot, those companies that mainly use outbound methods, such as advertising, tradeshows and so on, typically spend about $350 per lead, whereas, wait for it, inbound marketers spend on average only $135 per lead. That is over 60% less than investing in outbound methods!
The reason is that with inbound marketing you can make use of social media marketing, where your SaaS company can reach a broader audience in a timely manner, at virtually no cost. Moreover, blogging is also an excellent way of becoming a thought leader in your industry and attracting new customers. Again, according to HubSpot, those companies that blog have 55% more visitors and generate 126% more leads than those who don’t. You may ask yourself why everyone isn’t blogging, and, frankly, we don’t have an answer, but we think it is safe to assume that some companies plainly see a blog as being trivial, when it’s an enormous marketing canon.
Thus, inbound marketing provides SaaS companies with the tools to quickly generate qualified leads, nurture existing customers and to use marketing investments for other important purposes.
Are you spending enough on marketing?
As we mentioned earlier, there is no magic formula of how much a company should spend on sales and marketing. It is unique to each business, its goals and strategy. In order to understand whether you spend enough on sales and marketing, ask yourself these two questions:
1. Are you investing enough in sales and marketing to sustain your growth goals?
2. Are you investing enough in marketing to defend your brand and its market position from your competitors?
As Peter Drucker wrote, “Business has only two functions - marketing and innovation”. This is an ultimate truth and that is why you need to invest heavily in your SaaS sales and marketing.
How much of your revenue are you spending on sales and marketing? Do you have other examples in mind that you’d like to mention? Please share your tips and experience with us in the comments below. We would be happy to hear from you.