You’ve probably heard it said that a business should allocate roughly 10% of its revenue to marketing. It’s a rule of thumb so often cited, it feels like gospel — but is it? For SaaS companies, this number is usually a lot higher, especially in the startup phase, when you’re not yet known in the market and you’re actively building out your organization and brand. Within the first three years of its lifecycle, a typical SaaS company will actually spend 80-120% of its revenue on marketing, leveling off at about 40-50% by year five. This is drastically different from a traditional business model.
Let’s take a look at why SaaS companies like yours can thrive with such huge marketing spend. Hint: It all works out!
Cost of Goods Sold is Low
This might seem obvious, but it’s worth mentioning here as we discuss budgets that may seem pretty large. SaaS companies, as you know, don’t carry the same cost of goods sold (COGS) that traditional businesses making physical products do. There is no need to manufacture and warehouse a tangible product, no raw materials to source, no supply chains to manage, no inventory to hold. Your cost of goods sold will primarily consist of your server/security infrastructure and your customer support team. These per-unit costs are very low compared to a physical product with all of its materials and distribution costs.
Further, there is much more flexibility in managing your customers and their unique needs with a SaaS company than a product-based business. Think about it like this: if a buyer is not satisfied with, say, the face cream they purchased or the shoes that they bought, you can offer a refund, but you’ve lost a unit of inventory. But if a SaaS customer is unsatisfied, it doesn’t cost you any more to give them an extended trial period, a first-year discount, or even a full refund. Any action you take will not result in lost inventory like it would with a physical product.
Because of all these factors, most SaaS companies’ gross profit (revenue minus cost of goods sold) average around 70-80%. With such a large amount of gross profit to work with, SaaS companies have much more budget available to be able to fuel their sales and marketing engines.
Understanding the Product Takes Marketing Content
Also different from traditional business models is the type of marketing that works to really move the needle on sales. Let’s take a local jewelry store, for example. John’s Jewelry might send out mailers with coupons or post signage in relevant areas with beautiful photos of their wares and a call to action to take advantage of special pricing. It’s fairly straightforward because there’s not much to understand about a tennis bracelet, right? However, with SaaS, most of the work in getting a new subscriber is done in the explaining of the features and benefits of the solution. There are no tangible goods delivered with SaaS products: their benefits exist in much more conceptual areas: how a product will save you money, how a product will boost your career, how a product will improve your life. This naturally takes more explanation than many traditional physical products. That explanation comes in the form of content.
That’s why the most successful SaaS companies use content marketing. Generating leads and educating trial subscribers with blogs, podcasts, webinars, or a weekly video series, for instance, is an extremely effective strategy that helps to convey exactly what your solution does and why your prospect can’t live without it. While there will always be a specific set of people who want to know about the technical details of how a particular solution operates, most users will be drawn in by the marketing content. Spending your budget to plan, create, share and promote clear, easy-to-understand marketing material that helps to convey the product benefits and points the right people to the right features is critical for your SaaS company’s success.
As you hone in on great content marketing, you will see an expense. Expertise in inbound marketing, content creation, social media community building, even pay-per-click advertising requires a good-sized budget. You have to pay highly-skilled contributors to get the quality content it takes to draw in your buyers. But with the low cost of revenue elsewhere in the company, and with the known effectiveness of this type of SaaS marketing, it makes sense to shift the bulk of your budget to this area.
The Most Successful SaaS Companies in the World Budget 40-50% for Marketing
Like we mentioned above, successful SaaS companies spend anywhere from 40% to more than 100% of their annual revenue on marketing. This number depends on the company’s particular situation, and is more aggressive for newer solutions, especially when those new firms are backed by venture capital.
SaaS companies with established customer bases that have done a great job of telling their story and sharing the features and functions of their solution typically spend around 50% of their revenue on marketing. In their fiscal year 2020, for example, SaaS powerhouse Salesforce spent just over 46% of its revenue on sales and marketing, according to their 2020 annual report
HubSpot — our personal favorite SaaS solution — reported $674 million in total revenue for 2019 and $340 million spend on sales and marketing. That’s 50%— a typical spend percentage for an established SaaS brand.
Let’s look at some key financial stats from two other well-known SaaS companies to see what percentage of revenue that they spend on sales and marketing:
ZenDesk 2019 fiscal year stats:
- Total revenue: $816 million
- Cost of Goods Sold / Cost of Revenue (COGS): $234 million (29% of revenue)
- Gross Profit: $582 million (71% of revenue)
- Marketing & Sales Spend: $396 million (48% of revenue)
ServiceNow 2019 key stats:
- Total revenue: $3.46 billion
- Cost of Goods Sold / Cost of Revenue (COGS): $3.25 billion (23% of revenue)
- Gross Profit: $2.66 billion (77% of revenue)
- Marketing & Sales Spend: $1.5 billion (44% of revenue)
Need Help Establishing the Right Budget for Your SaaS Marketing?
As you can see, there is a wide range of typical spend with SaaS marketing. It might feel overwhelming to read a startup should be spending 100% of revenue or more on marketing. But no need to fear! As a marketing solutions provider for several SaaS companies, and with 10 years of experience under our belts, we can help you establish the best budget for your revenue goals and stage of business.
This post was originally published Oct 2020 and has been updated for accuracy and completeness.