How much should SaaS companies invest into sales and marketing?
There is not a clear-cut answer that will apply and fit to every single SaaS business out there. Each business has it’s own unique problems and nuances. However, by looking at data and behaviour of other SaaS companies, we can derive to some interesting insights.
After working with companies finishing their MVP and needing a growth strategy, established companies experiencing sales decline, or even clients close to $100m in ARR, I noticed that the attitude and sales strategies vastly differ (we’ll highlight some outliers later in the article).
What companies will we talk about?
I will focus on segmenting companies by their growth and investment stage – all the way from ideation to Series A.
The impact of sales & marketing spending on growth
Perhaps as expected, greater investment into sales and marketing leads to greater growth.
Looking at the 2017 SaaS survey conducted by KBCM Technology Group (excluding companies below $5mm in ARR), we see that the companies who spend the highest percentage amount of their revenue grow the fastest.
Does this apply to you, at all times? Probably not.
Let’s look at different stages of early companies, and where you fit in.
Stage 1: Building your MVP / Pre-seed funding
How much should you spend on sales and marketing at this stage? It’s likely that you don’t even have a functioning MVP and many crucial questions related to your product and market are not answered yet.
My answer is as little as possible – close to $0.
Focus on leveraging your network, building your product, networking with investors, and gathering initial market feedback from potential customers, network and advisors.
The pre-seed capital should be used to achieve the keys milestones to push your product forward, such as hiring new new technical talent.
Stage 2: Seed funding
It’s likely that at this stage you have a functioning MVP which you can show to your friends, family or early stage investors to back up your pitch slides. The size of a seed fund deal can range from few thousand dollars to approximately $1.5mm.
Companies at this stage try to find their product-market fit and align their product with their ideal customer profiles, and to create a scalable, repeatable and predictable sales process. The amount of capital raised at this stage will also play a significant role in your sales strategy, just as the complexity, iterations and investment required for product development.
However, once you recognize the signs of product-market fit, such as:
- Shorter sales cycles
- Increased direct traffic
- Predictable and growing sales
- High net promoter score
It’s time to shift from founder sales, to professional sales.
Once you understand how to serve your customers and you know they want your product, it’s time to invest into a “real” sales process. You need to invest into in-house sales reps (1-3 reps) or temporarily outsource sales and lead generation to accelerate growth. It’s time to shift away founder sales and relying on network and referrals.
The data from 2012 to the current SaaS 2017 report indicates that greater investment (as a percentage of revenue) into sales and marketing does contribute to higher growth.
Therefore once you identify your primary acquisition channel, and establish your channel-product fit, being resourceful and not overly conservative (10-50% of revenue invested back to sales) is likely to contribute to greater growth.
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Stage 3: Series A
At this stage, product-market fit should be achieved. Your customer base, sales force and ARR are showing clear signs of growth.
The primary channel is unlikely to be enough to fuel the growth however, and new sales approaches, strategies and talent needs to be used. As the chart from earlier suggests, greater sales and marketing investment leads to higher growth rate. The study found that the median percentage of revenue spent on sales and marketing was 37%, but the fastest growing companies invested 50% to 51%.
If we look at the industry leaders, we can clearly see that the biggest players also lead the way in their investment into sales. Just how much they spend on sales and marketing?
Salesforce – 53% of their sales revenue
Marketo – 66% of their sales revenue
Constant Contact – 38% of their sales revenue
Bonus: Modeling sales and marketing investment
Tom Tunguz shared very interesting data on sales investment of publicly traded software companies.
(sales and marketing spend as a percentage of revenue of companies with different sales volume, white lines represent medians)
For instance a publicly traded company with revenue between $5m and $10m spends around 90% of their revenue on sales and marketing, whereas companies with sales up to $5m, around 180%. Take a note of some of the outliers however, some companies at the $100m mark still spend about 160% of their revenue on sales.
Tom also created and shared a simple model to forecast your own sales investment, you can access it here.