Originally appeared in SaaScribe. See it here.
You started with a great idea, launched beta testing, evolved the idea into a minimum-viable product and now have some consistent monthly recurring revenue. Finally, it’s time to go for real scale! What is it going to take to punch through the noise and drive new customer acquisition? We’re often asked this question, usually in the form of “What tactics should I use?” or “What should my budget be?”
How to Calculate a SaaS Marketing & Sales Budget
Of course marketing budgets will vary greatly, ranging anywhere from 10 to 40 percent of your forecast annual recurring revenue (ARR). However, one great method to understand the necessary investment more accurately—taken from Jason Lemkin of Storm Ventures (and discussed in more detail in this video)—is to frame marketing investments as a percentage of your revenue-growth goal. The benchmark Lemkin provides is to use 40 percent of your revenue-growth delta as a reasonable marketing spend. To put this in context, a company with $1.5 million in ARR that wants to get to $4 million in ARR would be looking at a growth delta of $2.5 million. Forty percent of this would mean a marketing budget of $1 million. It’s also said that when assessing customer acquisition cost, companies should aim for a 1:1 ratio of dollars invested in marketing and sales (CAC) for every $1 of recurring revenue generated over the first 12 months of that customer’s lifetime. This is certainly another important benchmark to keep in mind when assessing your marketing and sales spend as a whole compared to your growth goals.
To better understand these models, we decided to compare them to the data presented by the Pacific Crest Survey and conduct an in-house analysis of publicly available data. Here’s what we learned.
Correlations to the Pacific Crest Survey
When compared to the latest results of the Pacific Crest Survey, we can see that a large percentage of companies are indeed investing a large amount in marketing and sales, with a median of 28 percent of their projected growth rate. Those that are investing 35 percent or more are experiencing not only higher growth rates, but also diminishing returns when investing above this mark. source
Analysis of Public SaaS Companies
There are many other fields of thought when it comes to determining how much your company should invest in marketing and sales. For example, Tom Tunguz has discussed that successful SaaS companies invest between 80 and 120 percent of their revenue in sales and marketing.
To confirm the model suggested by Lemkin and understand whether this investment created revenue growth across each of these companies, we took the same data from 34 public companies and applied Lemkin’s logic of the revenue-growth delta.
We began by taking the percentage of revenue invested in marketing and sales and correlated that with the percentage of revenue growth for the following year, expecting that an increased investment in marketing and sales should lead to greater revenue growth.
In the figure we see that this indicator is distinctly positive at 0.54. A linear regression finds a leading coefficient of 0.82, meaning that each dollar spent on marketing and sales generated $0.82 the following year in revenue growth—a lasting, positive investment.
Looking further into the future, to the two-year return, we find the same level of correlation.
Additionally, the increase in revenue growth has more than paid off, with the leading coefficient on the linear fit at 2.2. The math is the same: each dollar spent on marketing and sales generated $2.20 in two years.
Apply This to Your Business
These benchmarks provide a great starting point to define what you need to spend in marketing and sales to meet your business goals.
Of course, a blanket investment number is not enough, and you should be building a marketing plan that is based upon very specific goals that assess results from tactics, channels, cost per lead/customer and sales efficiency to determine the most profitable and efficient acquisition channels for your business. Work up the funnel from the number of new customers, opportunities, and MQLs you need all the way back to visitors. By doing this, you can build amarketing and sales structure and investment profile that attracts and converts at the rates necessary to meet your goals.
Special thanks to Andy Reagan for completing the data analysis and visualization for this post, with more to come as he finishes his Ph.D. at the University of Vermont.
We acknowledge the strong “survivorship bias” present in this data, although we can only expect the correlation to increase with data that better spans the spectrum of growth.
by Matthew Buckley @mmbuckley