In aggressive industries such as SaaS, strong marketing efforts are essential to grow and thrive. As SaaS developer Chris Herd put it, “You don’t need a better product, you need a more powerful story.” Companies with more visible and trusted brands win out over their competitors which means taking a gamble on higher marketing spending, but just how high should you go? Here’s how much your should invest in your SaaS marketing budget, according to experts.
What percentage of your revenue should you invest in sales and marketing?
Across all industries, a common answer is 10%, but the number is rising. Gartner Research shows a 1% increase in the average marketing budget over the past three years. In 2014, companies spent on average 10% of their annual budget on marketing, which grew to 11% in 2015, and 12% in 2016. The majority of businesses surveyed expect to increase their marketing budget again next year.
The average is much higher for successful SaaS companies where many spend more than half their annual recurring revenue (ARR) on sales and marketing costs. According to Tomasz Tunguz, a partner at Redpoint Ventures, during their first three years, SaaS companies often spend anywhere from 80% and 120% of their revenue on sales and marketing. It then plateaus around 50% from year five on.
How to Determine Your Saas Marketing Budget, According to Experts
Determining your sales and marketing budget depends on what you actually have to spend and how you plan to grow. Jason Lemkin, a successful SaaS founder and venture capitalist, advises newer companies to invest as much as 40% of their growth delta into their marketing budget. In other words, if your current ARR is $1 million and you want to get to $3 million, your growth delta would be $2 million and your marketing budget would be around $800,000 (that’s 40% of your growth delta).
Lemkin offers a helpful strategy for figuring out your marketing budget by predicting the typical cost per sale — a figure you can predict based on his sales comp plan. However, he offers a caveat: “No matter what the model says … you should spend $1 in marketing to make $1 in ACV [Annual Contract Value] wherever and whenever you can. And maybe even a lot more than that.”
Why are marketing costs so much higher for SaaS companies?
In part, it goes back to the competitive market. With so many options available for customers, companies have to work twice as hard to set themselves apart. SaaS companies also have the disadvantage of often being abstract services with hard-to-understand feature differences. Plus,there aren’t storefronts or tangible products to provide other forms of local or visual marketing.
The high costs are also due to the investment model. As the folks at Agile Payments explain it on their blog, “SaaS companies are always under extreme pressure to grow recurring revenues. The company’s goal is to pay itself back for the cost of acquisition, and before churn catches up.”
Thankfully, there’s advantages for SaaS companies, as well. Unlike other industries with high manufacturing costs or personnel hours per customer, within the SaaS industry, you don’t have to recreate your product for each new user. With lower costs to create your product, your marketing dollars go further. Take a look at how successful saas companies run their marketing campaigns.
Companies who invest more in marketing also grow faster
Companies that invest more in sales and marketing not only have higher ARRs, they also grow faster. Kyle Poyar, the Director of Market Strategy for the venture capital firm OpenView has found that fast-growing SaaS companies are extremely efficient at acquiring new customers. They do this by making large investments in their sales and marketing efforts. “Going all-in helps you reach scale quickly,” Kyle explains, “and become a market leader in your category, able to fend off threats from new entrants that might try to copy your success.”
According to OpenView’s 2017 Benchmarks report, on average, companies spend 30-35% of their ARR on sales and marketing before they reach $2 million in revenue. The number peaks at 45% around this benchmark, and then drops to 40% where it stays for the life of the company. Those first few years — however long it takes you to reach $2 million — most companies spend significantly more in research and development.
That may be the average, but according to Kyle, the fastest growing SaaS companies—with over 100% growth year-over-year— invest over 50% of their ARR into sales and marketing.
“The fastest growing companies spend an average of 58 percent of their ARR on sales and marketing, versus only 34 percent for slower growers. If you’re in the fastest growing bucket, evaluate whether you’re actually spending enough money on sales and marketing. You may want to pull forward your next fundraise so you have the cash to fully capitalize on your market opportunity,” Kyle said.
KBCM’s 2017 Private SaaS Company Survey shows similar trends. They found that the majority of companies whose ARR surpassed the median growth rate of 37% in 2016 spent over 40% of their revenue on sales and marketing.
Examples from SaaS market leaders
To show this growth in action, let’s take a look at industry-setting SaaS companies with over 20% growth in revenue. Each spends over half of their total revenue on sales and marketing efforts.
Salesforce is the poster child for SaaS growth. In 2015, they captured 19.7% of the CRM market, the largest percentage of any company. In 2016, Salesforce saw a 24% growth in revenue and spent 49% ($3.2 billion) of their total revenue ($6.6 billion)) on marketing and sales, according to the Salesforce 2016 Annual Report.
Having established itself as the market leader, Salesforce is able to lower the percentage of revenue spent on marketing costs each year (trimming 2% off in 2014 and 2015) and maintain growth. Still, nearly half their budget goes to sales and marketing. Salesforce CMO Simon Mulcahy explains the continued importance of branding as the company grows and evolves.
“Salesforce has always been guerrilla, fun, customer centric. Yet over time, we have tightened up our top button, put a tie on, got a nice suit and it’s been reflected in our brand,” Mulcahy explained. “It reached a point where if you took the Salesforce logo off our brand look and feel, it could be anyone. We needed to get back to who we are and that differentiation.”
Tableau Software, which provides business analytics solutions, was ranked one of the fastest-growing private companies in 2011 and continues to grow. In 2016, Tableau saw a 27% growth in revenue and spent 57.6% of their total revenue ($476.5 million) on marketing and sales).
In a market dominated by enterprise solutions with robust backends like IBM and Oracle, Tableau’s success has to do with simplifying analytics and making them understandable to anyone. But even with a great product, they’re still contending with fierce competition and do so with a massive marketing budget. Unlike Salesforce, Tableau is steadily increasing their sales and marketing budget. In 2015, they spent 54.6%, up from 52.5% in 2014 according to the Tableau 2016 Annual Report.
Atlassian, with a 43% revenue growth in 2016, is the industry’s wildcard with only 20.4% ($94.4 million) of their total revenue ($457.1 million) devoted to sales and marketing according to the Atlassian 2016 Annual Report.
In their petition to go public in 2015, the organization stated:
“Unlike traditional enterprise software vendors, who rely on direct sales methodologies and face long sales cycles, complex customer requirements and substantial upfront sales costs, we utilize a viral marketing model to target new customers. Through this word-of-mouth marketing, we have been able to build our brand with relatively low sales and marketing costs.”
For years, Atlassian didn’t have a sales team at all and relied heavily on word of mouth and robust documentation on their website to secure sales. They used their savings to invest more heavily in product development.
Many, including Tunguz, don’t believe their low sales strategy is replicable and has more to do with when and where they started (in Australia in 2002 before the cloud craze). Those attempting to replicate the lean sales strategy has to contend with a larger number of competitors than Atlassian did when they were building their core customer base.
The cost of quality sales and marketing should pay for itself. Peter Levine, a partner at the venture firm Andreessen Horowitz, explains, “When you add a sales organization, revenue accelerates far greater than the cost of that organization.”
Stretching your dollars with a strategic SaaS marketing plan
No matter what size your budget is, within the unique and competitive SaaS market, the goal is to turn leads into long-term customers. After figuring out your total sales and marketing budget, the next step is to deciding what that budget should be used for. When it comes to the best uses for your marketing dollars, the most successful companies invest heavily in content marketing solutions, such as e-newsletters, blog posts, videos, and related social media campaigns.
According to the Content Marketing Institute’s 2018 annual marketing survey of B2B businesses, while the average percentage of total marketing budget spent on content marketing is 26%, the most successful companies spend 40%. The least successful spend only 14%. Ignoring content marketing is a huge SaaS marketing mistake.
CMI also found that as a company’s content marketing efforts mature, so does the budget.
Organizations that considered their content marketing sophisticated or mature, allocated 33% of their marketing budget toward it, whereas younger content marketing plans tend to spend around 19%. Over a third of all respondents expect their budget to increase over the next 12 months.
So what’s next for you SaaS company?
Because of the competitive nature and the funding models of the SaaS industry, sales and marketing budgets tend to be higher than average: anywhere from 40% to over 100% of their revenue for the first few years. However, there’s a huge ROI for companies that invest heavily in new customers. There are plenty of tools for SaaS companies that will help your company make informed sales and marketing decisions.
Companies with bigger sales and marketing budgets see higher ARRs and faster growth rates. Once you’ve figured out what you can spend, make sure to invest wisely in inbound marketing solutions.