Determining the effect of marketing on a SaaS company’s growth is not black and white – it is not acas 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.
Before we start, let’s have a quick look at what main expenditure you should plan to achieve your end SaaS goals in a more effective way.
SaaS expense ratios: Research & Development vs Sales & Marketing
If you look at separate cases, you will notice that there’s no one R&D or S&M spending principle all companies follow. Minimum or maximum amount doesn’t exist either: all we can calculate is the average number. But since you insist on asking how much should be allocated to R&D as a percentage of revenue, SaaS experts will have to ask you a few questions:
1) Are you a small, medium or large enterprise?
- 2) Are you a product-driven or sales-driven company?
- 3) Are you planning to work on your software improvement or increasing sales in the near future?
In general, the smaller your SaaS business, the more percentage of your revenue should be allocated to research and development. It includes updates, testing, innovation. Startups in early stages tend to grow faster, their growth rate is higher than that of established companies’. Therefore, investments in R&D are affordable and can help make even a better product and grow even faster.
Regarding the second question, you probably have already decided – what’s your mission in the SaaS industry. If your aim is the quantity of customers, then you need to spend more on sales and marketing.
And finally, your end goal again can be to become a multi-millionaire through your SaaS. But if at some point you feel like improving your software features (because competitors are performing great), your expenses for R&D should be at a reasonable amount.
How much exactly?
That number is usually between 10-50%. Yes, the difference is quite big. But don’t forget that large amounts are spent on R&D by younger businesses while more mature ones spend around 20%.
While arriving at a final conclusion, don’t focus on numbers you read on other blogs. Because you don’t know everything about other SaaS companies. Consider your objectives, competition in the market, your company size. Thus you will have a better understanding of how much investment your current situation requires. Maybe 15% is totally great or maybe 44% is the right number that can take your SaaS to new heights.
Marketing budget for SaaS companies: 4 steps to a successsful decision
Analyze your previous campaigns – Experience is the best teacher. If you have previously launched ad campaigns, influencer or affiliate marketing campaigns, look back and fairly evaluate. Did you reach higher ROI? If the best best copywriter and designer worked on your ad banner but you have just lost money, it’s time to invest in more rewarding channels.
Let the market inspire you – “A smart person learns from his mistakes, but a truly wise person learns from the mistakes of others.” Who are “others”? Of course, your SaaS competitors or marketing consultants who have worked with SaaS companies.
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They have already invested money, have tried strategies and know what is worth spending, what not. You deserve a gold medal if you discover exactly how many US dollar is your competitor’s marketing budget. But that’s really hard if not impossible to reveal.
Your second option is to contact a marketing agency who has partnered with SaaS companies and knows the industry inside out. Depending on factors like are you B2C or B2B, are your plans low-price or high-price, how much revenue you expect, your agency’s growth specialists will tell you where to invest.
Then, you can implement your marketing agency’s strategy on your own or let them bring your customers to your door.
Invest in channels with long-term visibility – It’s not a secret that paid ads on Google or other search engines are rewarding. It’s not a secret that they have powerful targeting and bid optimization options so you find the right people and don’t lose money. But it’s also not a secret that your PPC ads aren’t lifetime. You paid for them, you are visible. You stopped paying, nobody finds you with keywords.
That’s where content marketing takes the stage. You wrote a super guide, you can promote it as much as you can. From social media to online communities. And if you keep on producing high-quality pages at a regular interval, you will have big chances of ranking on search engines. Your competitors and keyword tools will tell you which phrases to target.
Define your goal (awareness or sales?) – Don’t be surprised, but that’s what you want the most. Reputation or money (that’s what world countries want the most too).
In a certain stage, the number of your brand advocates, social media followers, engagement rate matter more than cash. This usually happens when you are new to the market and want to gain popularity and when you are already too famous to worry about users. And want something else.
In the other – sales stage what matters the most is the revenue you generate. It can be in the form of repeat sales, upsells, new deals. Depending on what you offer, you should figure out which channels will help you reach your goal. For engagement and higher brand awareness, social media is second to none.
With an SMM strategy that includes contests, stories, short posts you can engage users who love entertaining content.
For more sales, you should focus on how to design a better referral program, how to write emails to upsell your current users, etc.
Time to budget your marketing investments!
This is no secret. In fact it is evident among nearly all SaaS marketers and enterprises that spend huge resources on their sales/marketing. Yet, for many SaaS startups, determining what percentage of revenue to invest into marketing/sales remains a challenge.
What percentage of revenue should be allocated to marketing? 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 Gartner CMO Spend Survey 2018-19, companies spend 11.2% of their revenue on marketing services. And more than 60% of them are going to increase their marketing budget in 2019. 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 (SaaS, retail, pharmaceuticals) often spend 20 to 50% of their revenue on marketing.
In 2016-2017, Mindbody (40%), Salesforce (49%), Tableau (58%), Bottomline Technologies (24,5%), Microsoft (17%) 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% may be right for some companies/industries, it is definitely not a one-size-fits-all figure.
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 49% of their revenue into sales and marketing.
Think about it for a moment – they invest about half of their revenue on sales and marketing. What do they get in return for such investment? They get growth, success and fame. In 2016 Salesforce grew by about 24% over the previous year. Moreover, Salesforce has 19,7% 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. It’s thanks to the demand for visual analytics and, of course, a large investment in sales and marketing. In 2018, Tableau spent almost 60% of its 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. So, for your SaaS company as well, it is safe to say that 10% of the revenue is not enough.
Here are some important things, factors you need to take into account when you are creating your SaaS company’s marketing and sales budget.
What to consider before planning your SaaS marketing 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/marketing, 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 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. That means 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.
Customer lifetime value
That’s a metric SaaS founders and marketers often disregard.
They don’t calculate how profitable their every customer is, what’s the average period users stick around and continue subscription. They don’t acknowledge the power of referral and free marketing (the more of your users refer to their friends, the higher your customer’s LTV will be). And being short of this kind of essential information can hold any SaaS business back from rewarding decisions.
The essence of LTV is the following. You know that your users stay with your company for 1 year and say, on average you charge $69 monthly. Your CLTV is $828. What conclusion should you arrive at? If every customer’s average profitability is $828, you can easily and precisely predict how much you actually can invest in marketing.
You won’t say “$12 is my max amount for customer acquisition”. You say “I can even afford $20 per customer”. Because you know that after a year you will recover your expense with high ROI.
Additional factors that you need to take into account when developing a SaaS 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: 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. And 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.