What Is the Optimal Sales and Marketing Spend for SaaS Companies?
October 6, 2014
While we are not huge fans of generic benchmarks here at SaaS Capital, it can be helpful to have a general sense of how other SaaS businesses are deploying their capital. In our most recent survey of 200 private SaaS companies, the median rate of investment in sales was 17.5% of revenue, and the median investment rate for marketing was 7.5%.
Surprisingly, this investment rate held constant across all average selling prices: big ticket SaaS vendors invested about the same amount and in the same proportion in sales and marketing as did small ticket vendors.
And while it’s good to know the generalized data, the real question is whether there is a method for determining how much should be spent on your specific business.
In theory, if the cost of capital was zero, SaaS businesses would optimize their value by investing as much as possible in sales and marketing right up to the point where their Customer Acquisition Cost (CAC) equals the Lifetime Value (LTV) of a customer. The LTV is the contribution margin of a customer times their expected life.
Obviously we do not live in a world of free capital, but it is possible to add the cost of capital to the Customer Acquisition Cost and figure out a “fully burdened” number.
If the company spent $1,000 in sales and marketing to acquire a customer, and its incremental cost of capital is say 25% (blend of equity and debt), than the real CAC is $1,250. If a new customer generates incremental profits in excess of $1,250 over their lifetime, then spending $1,250 to acquire that customer was a Net Present Value (NPV) positive event.
It is important to note that incremental profits should be net of all hosting, customer support, and marginal base-line development expenses related to keeping the customer around for their “expected” life.
Interested in learning more about the optimal sales and marketing spends for SaaS companies? Download our Research Brief: Optimizing Sales and Marketing Spending for SaaS Companies to see a discussion for determining the “expected” life of each new customer.
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