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How Much of Your Revenue Should You Spend on SaaS Marketing?

How Much Of Your Revenue Should You Spend On SaaS Marketing

Developing a proper SaaS marketing plan is a formidable task. Running a successful marketing campaign that generates sales and leads for your business requires funding. 

Some SaaS industry claims that a marketing budget should be 10% of business revenue. However, there is no straightforward rule or principle to determine the SaaS marketing budget. SaaS Companies in the infant stage invest 40-50% of their revenue on marketing and sales.

Determining the impact of each dollar spent on marketing is not as simple as you might think. A successful SaaS company should consider a plethora of factors. 

No matter how affordable and cost-competitive your product is, if you are not investing sufficient money in marketing, you are unlikely to experience noticeable growth.

When Should You Determine Your SaaS Marketing Budget?

Many SaaS business owners are baffled with the question, “how much of their revenue should they invest in marketing?” 

There are many guidelines people usually follow, ranging from the percentage of annual recurring revenue and allocating budgets for some tasks such as developing a website. 

Best Practices for Determining SaaS Marketing Budget?

  1. Don’t Start What You Can’t Afford for Too Long

SaaS marketing requires a concerted effort. You need to develop a strong foundation for stable growth and create an ongoing engine on top of that. When you develop a new website for your SaaS business promotion, never forget to keep updating it.

Furthermore, avoid launching webinars, podcasts, or blogs unless you can sustain them for too long.

  1. Only Outsource the Task You are Good at.

Don’t spend money on anything that you are not familiar with or can’t manage independently. For instance, avoid spending money on paid advertising if you cannot afford the person who can manage this task. 

Furthermore, you should never consider spending on a marketing technique that you can’t track or monitor effortlessly.

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  1. Look Bigger Than Your Actual Size.

Don’t sacrifice quality just to do a little bit more than your actual capacity. As a newbie in the SaaS industry, you might want to look bigger than your real size. To accomplish this task, you need to have credibility and consistency

  1. Don’t Cut Corners

Don’t just start investing in content marketing unless you have a proper system to track the results. Additionally, before starting any marketing campaign, make sure to perform beta testing. 

Furthermore, do not invest your time and money in promoting content that is not good enough to grab your potential audience’s traction. Apart from that, do not hire a young and energetic marketing team unless you are crystal clear on what they are supposed to do.

  1. How Fast You Expect to Grow

Some budget guidelines that use a percentage of annual recurring revenue as a revenue specifies different ranges. A few say 6% to 20% of ARR should be spent on marketing.  The difference in marketing budget in these guidelines is that some startups have to capture a substantial market share because only then they can raise money for their business.

Other startups can cross a certain revenue milestone as soon as possible. Thus, the percentage of your ARR spent on marketing depends on how fast you want to expand your SaaS business. 

Balancing Speed and ROI

Even though most SaaS business owners convince their investors to use the J-curve exponential model, this growth model is contrary to reality.

In an exponential or J-curve growth model, the amount of money entering into your business or expansion of customer base keeps growing uniformly. It doesn’t consider your net revenue, existing market size or your targeted customers’ spending ability.

Therefore, it makes you grow astronomically fast as your budget and resources grow correspondingly.

Infinite Potential for Growth

Hypothetically speaking, SaaS Companies can grow infinitely while ensuring their retention rate remains intact. Let’s say you buy a quality lead on a marketplace like Software Advice to keep that in perspective. Assume that only 15% of all the leads are quality for ICP.

Assume a reasonable churn rate of 8.3%, and your customers stick with you for at least ten years. Moreover, the cost to service clients is only 10% of ARPU with an expansion of 5%. 

YearCostARPUCost to ServiceLTV
1-$1000-$1000
2$5,000$500$3500
3$5,250$525$8,225
4$5,512.5$551.25$13,186.25
5$5,787.6$578.76$18,394.25
6$6,076.98$607.698$23,863.532
7$6,380.829$638.0829$29,606.2781
8$6699$669.987045$35,636
9$7,033.95$703.395$41,966.555
10$7,385.6475$738.56475$48,613.63775

Therefore, with an investment of $1000, you get a staggering return of 4,861%.

The numbers depicted in the above table solely relies on the SaaS growth drivers. For this purpose, SaaS business is deemed as a lucrative investment opportunity. 

Keep Your SaaS Marketing Budget at a Sustainable Level

Simply speaking, the population can grow exponentially for some time and is then constrained by the availability of the resources.

While creating your SaaS marketing budget, you should consider the limited inventory of paid search clicks, your targeted audience attention span, and the number of customers who want your service.

With an aid of a logistic growth model, a SaaS business owner can conceptualize potential growth and investment required for that. 

The logistic growth model refers to the growth created by each dollar of investment and that gets smaller and smaller as your SaaS business approached the maximum limit of your target market. Industry experts call this phenomenon carrying capacity. Simply speaking, it refers to the total number of customers available in your target market at any given time.

For a SaaS business, your carrying capacity is heavily influenced by certain factors such as your competitor imitating your product. 

In exponential growth, a J-shaped curve is created whereas, in logistic growth, an S-shaped curve is created.

SaaS Marketing

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SaaS Marketing

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Steps to Craft a Successful SaaS Marketing Budget

Analyze Previous Campaigns

As a SaaS entrepreneur, you learn too much from your experience. If you have launched targeted or affiliate marketing campaigns, evaluate your past performance.

Did your marketing tactic bring the desired outcome? If you have hired the best designer and copywriter to create an eye-catching ad banner, but all your efforts have gone in vain. If that is the case, consider exploring alternate marketing strategies.

Let the Market Inspire You

“Smart businessmen learn from their mistakes, but smart businessmen learn from others mistakes.” To stay relevant in the market and optimise your marketing expenses, you need to know your competitors’ marketing strategies. You need to know how much other SaaS entrepreneurs invest in marketing and sales.

Invest in Channels with High Visibility

As we all know that paid ads on Google are advantageous for businesses. Google has the data of billions of people so that you can reach out to the correct audience via google ads. 

It is worth mentioning here that PPC campaigns aren’t a lifetime. You are only visible to your prospect until you pay for that. Once you stop paying for a PPC campaign, you will no longer be visible to your targeted customers. 

This is where the content marketing strategy comes into the picture. If you keep producing high-quality content regularly, you can promote your SaaS business on all the leading search engines.  Your keyword tools assist you in hunting keywords.

Specify Your Goal

In most cases, the number of loyal customers, social media followers, and engagement rate are more important than the cash. It usually happens when your business is in the growth stage and aims to garner popularity in the market.

In the sales stage, what matters most for your business is the revenue you generate, whether in the form of new deals, upsells, or repeated sales. Depending on your offer, you should figure out which channel best suits your goal.

You cannot merely rely on social media campaigns for customer engagement and brand awareness. Leveraging the power of SMM strategy that includes brand stories or short posts, you can interact with users who love reading appealing content. 

To maximise your SaaS business sales, you should learn how to design an attractive referral program and write emails to upsell your existing customers. 

Now the time has come, you should budget your marketing expense. For almost all SaaS startups, determining what percentage of business revenue to spend on SaaS marketing is a bit cumbersome.

What would be an ideal marketing budget? Should it be 10%, 20%, or 30% of revenue? Your team might give you different suggestions for marketing expenditure. However, we strongly recommend you don’t just blindly follow their advice. 

Spend the allocated marketing budget at first and then monitor whether your investment yields the desired outcome.

According to the survey conducted by Gartner, a vast majority of SaaS Companies spend 12% of their revenue on marketing. More than 60% of them are likely to increase their marketing budget in the foreseeable future.

However, while creating your marketing budget, bear in mind that the percentage of revenue spent on sales and marketing varies significantly by industry and customer. For instance, SaaS Companies working in the high-competitive niche are more inclined to invest heavily in marketing.

What to Consider While Planning SaaS Marketing Budget?

Annual Contract Value

You might be confused about when to start developing a marketing budget? In this regard, some SaaS industry experts strongly recommend your sales and marketing budget should be at par with the first year annual contract value (ACV).

It implies SaaS Companies should stop investing a hefty amount on sales and marketing if the probability of revenue growth is minimal. 

Because if you spend too much money on sales and marketing in the first year of business, you’ll end up burning too much cash. Consequently, you won’t have adequate money to finance SaaS business’s operating and running expenses.

Expected Return

Before making any investment decision, SaaS companies should predict how much return they can expect on their marketing investment? So they need to be crystal clear on each unit increase in investment. How much will the return increase?

Although this question sounds very simple, it’s not easy to figure out the answer to this question. It is tempting to know that some SaaS marketing tactics might take more time than generating reasonable returns.

For instance, a marketing strategy that specifically targets branding will take longer to bring outcomes than a simple lead generation strategy. 

Thus, all the marketing tactics tend to give exponential returns but only if the marketing campaigns are run well-coordinated. 

Customer Lifetime Value

Furthermore, selecting the right audience and the right marketplace is imperative to experience an expected return from the marketing tactics.

This is the most important SaaS metric every SaaS business owner should care about. Generally, all the SaaS Company fails to track how profitable their every customer is and for how long they will stick with the product.

Additionally, they do not harness the potential of referrals and free marketing tactics. The more your customers recommend your product to their friends and family members, the more their lifetime value. 

Being deprived of this essential information stops any SaaS Company from making wise decisions. To widen your understanding of LTV, let me give you a real-life example.

Suppose that your customer sticks with your product for one year and purchases one monthly subscription plan of $100. In this case, CLTV will be $1200. What conclusion can you drive from this example?

If each average customer profitability is $1200, you can easily predict how much you should invest in marketing. 

Other Key Considerations

Another consideration that should be considered while creating a SaaS marketing budget is the new launches in the market and the most recent merger acquisitions. The percentage of net revenue allocated to marketing should be adjusted according to these factors. 

For instance, most SaaS Companies invest 20% of their revenue on marketing when they are in the growth phase.

Another factor to consider is that companies working in the B2C market should always spend more on marketing than companies working in the B2B market.

How Much Money the Most Successful SaaS Companies in the World Spend on Marketing? 

As we have already discussed, the most successful SaaS around 40% to 100% of their total revenue on marketing. Companies aiming to raise money from venture capital firms tend to spend more on marketing than others.

SaaS Companies with an established customer base that have done marvels in their industry typically spend around 50% to 60% of their total revenue on marketing. For instance, in the fiscal year 2020, a leading SaaS company, Salesforce, spent 46% of the company’s revenue on marketing. 

Likewise, another SaaS industry conglomerate earned $674 million in revenue in 2019, and they spent $340 million on sales and marketing. That means they were spending 50% of their net revenue on marketing.

Conclusion

As we have already discussed, what percentage of a SaaS Company’s total revenue should be spent on marketing?. Decisions regarding the marketing budget should rely on the company’s business model, long-term goals, and expansion plans.

To evaluate whether you are spending enough on marketing, here are two important indicators:

  1. Are you investing adequate money in marketing to sustain your company’s growth?
  2. Is your marketing budget sufficient enough to retain your market share?

A well-known SaaS industry expert, Peter Drucker, strongly believes “No business in this world can survive with marketing and innovation.” For this purpose, you need to invest a decent percentage of your revenue in marketing and innovation.   

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