For a SaaS business to grow and thrive, strong marketing is essential. Here is a look at how to break down your budget.
October 18, 2019
As Chris Herd, a SaaS developer puts it, “you don’t need a better product, you need a more compelling story.” Without an innovative marketing team and a motivated sales staff, customers aren’t going to know how great your service is.
The problem is; most companies, especially startups get it wrong when it comes to allocating marketing budget for SaaS. Exactly how much should you spend on marketing?
Unfortunately, there is no black-and-white solution that fits all SaaS companies. However, knowing what other SaaS companies are doing can give you insights into where to put a cap on your marketing budget.
How Much Should Your Marketing Budget Be?
The average is 10% across all industries, but the number is rising. Gartner’s research shows a 1% rise in marketing budget over the past 3 years.
According to the report, companies spent an average of 10% on marketing in 2014. In 2015, the number increased to 11%, which further grew to 12% in 2016. However, the average is pretty high for the SaaS industry, with the top SaaS companies spending over 50% on marketing. But exactly how high should your SaaS marketing budget be?
Experts Suggest You Start at 40%
According to SaaScribe, SaaS marketing budget varies greatly depending on the company size and stage of growth and will range anywhere from 10% to 40% of your estimated annual recurring revenue (ARR).
This correlates with Jason Lemkin, a reputable SaaS developer, remarks on the ideal SaaS marketing budget. According to Jason, SaaS startups should invest 40% of their growth delta to the marketing budget.
Simply put, if your ARR is $2 million and your goal is to reach $3m, your growth delta would be 1 million. With such growth projection, your SaaS marketing budget would be $400,000 (i.e. 40% of your growth delta). For more information, this article (on SaaS marketing budget) should give you more insights into how to determine your SaaS marketing budget based on your monthly or annual recurring revenue (ARR).
Or, 80 – 120% in the First 3 Years
The first 3 years are the most important for any SaaS business as this is the stage where the business establishes its footing in the industry. As such, it makes sense to overinvest in marketing during the first 3 years.
Tomasz Tunguz, a venture capitalist at Redpoint, has pointed out that leading SaaS companies allocate 80% – 120% of their revenue to marketing. This is backed by research that shows that public SaaS companies spend over 50% of their revenue on research in the first 3 years. By year 5, the amount falls to around 50% where it remains for the life of the business.
What About Big SaaS Companies?
The SaaS industry is dominated by giants such as Salesforce, Tableau, and Mindbody. These companies are evident that successful companies don’t tighten their marketing belt.
Take Salesforce, for example. The company invests 46% of their revenue in marketing. Yes! You heard that right. 46% of their revenue. That’s nearly half of the $10.5 billion revenue generated in 2018.
Growth. And not just a marginal one, but a tremendous growth. The company increased their subscription base by 25% in 2018. Today, Salesforce has 19.6% of the market share in the CRM industry, surpassing established CRM providers such as Oracle.