You’ve probably heard that a company should spend 10% of its revenue on marketing, but is it true? This figure is typically much higher for SaaS companies, particularly during the startup phase. During the first three years of a SAAS company’s lifecycle, it will spend 80-120 percent of its marketing revenues and represent a significant departure from the traditional business model. It means you are still building out your organization and brand and are not yet known in the market.
Let’s look at why SaaS businesses like yours can thrive despite having such large marketing budgets.
As you may be aware, SaaS companies do not have the exact cost of goods sold (COGS) as traditional businesses that manufacture physical products. There is no need to manufacture and warehouse a tangible product, source raw materials, manage supply chains, or keep inventory. These per-unit costs are meager compared to a physical product with all of its materials and distribution costs.
Most SaaS companies’ average gross profit (revenue minus cost of goods sold) is 70-80 percent. It means they have a lot more money to spend on fueling their sales and marketing engines. Now that they have such a large amount of gross profit to work with, they can spend more effectively on marketing and customer service.
When it comes to SaaS, most of the time spent on acquiring a new subscriber explains the solution’s features and benefits. SaaS products do not provide tangible goods; they can find their benefits in much more abstract areas, such as how a product will save you money, advance your career, or improve your life. Of course, this requires more explanation than many traditional physical products. This explanation is manifested in the form of content.
Every SaaS company needs an exceptional sales and marketing team because the company will only get sales if the employees can convince potential customers how the services will save them money and help them grow. As there is no physical product to sell in the SAAS industry, companies must go above and beyond to stand out.
You will incur expenses as you concentrate on great content marketing. Inbound marketing, media creation, social media community building, and pay-per-click advertising require a substantial budget. To obtain the quality content required to attract your buyers, you must pay highly skilled contributors. Given the company’s low cost of revenue elsewhere, shifting the majority of your saas marketing budget to this area makes sense.
SaaS companies are constantly under pressure from investors to increase their recurring revenue. The only way to accomplish this is to invest as much money as possible in marketing. Existing SaaS businesses spend approximately 45 percent of their revenue on marketing. On the other hand, the fastest-growing companies invest more than 100 percent of profits into marketing. So, if you’ve just started a business and want to proliferate, you now know how much money to allocate to your marketing team.
ServiceNow is a well-known SaaS company. Let’s look at their 2019 financials; the company made $3.46 billion in revenue. Their total revenue was $2.66 billion (77 percent of revenue, in line with our numbers earlier). Their sales and marketing spending totaled $1.5 billion, accounting for 44 percent of their revenue. The marketing spending, in this case, is calculated as a percentage of total revenue rather than growth delta. If a large company like ServiceNow spends 44 percent of its revenue on marketing, your percentage must be much higher if you are a startup.
If you are a startup and your spending exceeds 100% of your revenue, you should not be alarmed by the above figure. As previously stated, growth in the SaaS industry will occur only if you spend. Companies that invest in new customers see a massive ROI – companies with larger saas marketing budgets see faster growth rates, which is what every company wants. Reach out to us for additional information, for instance, referencing an assertion or evaluating a starter structure, etc.