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How much do SaaS companies spend on marketing? The average SaaS company spends between 15% and 25% of its revenue on marketing. Considering that most of the SaaS companies spend a large portion of their revenue on marketing, companies that spend less than that are at a disadvantage compared to their peers.
Spending money on marketing does not necessarily translate into sales growth. There are other things to consider before committing to a budget.
What is a marketing budget?
According to a 2016 survey, the average SaaS company spends between 15 and 25% of their revenue on marketing activities. However, this is only a guideline, as the actual amount may vary. Companies that spend more on marketing are more likely to experience higher growth rates.
Spending more money does not guarantee higher sales, so companies should consult experts before setting their marketing budgets. Listed below are some suggestions for how to calculate a marketing budget for a SaaS company.
First, the marketing budget for SaaS companies depends on the growth delta of the company. According to Jason Lemkin, a new SaaS company should invest forty percent of the growth delta in its marketing budget.
For example, if a company has an ARR of $1 million, a marketing budget of $800,000 is equivalent to 40% of the growth delta. Once these goals have been set, it will be easier to determine a realistic marketing budget.
Content marketing is a great way to increase revenue and ROI. Blogging and content marketing are also good ways to boost brand awareness and attract more customers.
But in order to reap the full benefits of content marketing, it is important to create valuable, relevant content on a regular basis.
If you do, it will compound itself over time and become a valuable asset for your business. Inbound marketing requires little up-front investment and yields high returns over time.
What is CAC and LTV in marketing
When marketing a SaaS company, CAC and LTV are critical metrics. The LTV/CAC ratio is a crucial indicator of profitability, as it determines the lifetime value of each customer.
Typically, the ratio should be three to one, but it is important to consider your product and industry context when determining the right ratio. Below, we'll discuss the difference between CAC and LTV, and explain why they're so important.
CAC is a measure of the average cost per new customer. While LTV is much more complex, CAC is more straightforward. To calculate CAC, you need to know your total sales and marketing costs during a specific period.
Next, you need to know how many new customers you acquired. For this measure to be accurate, you must consider the advertising spend and employee payroll for all revenue-generating roles.
Customer lifetime value is often overlooked, but this is not the case. By understanding the LTV/CAC ratio, you can assess how long your customers are likely to stay with your product.
If they stay for a long time, the revenue they generate is more than worth the cost of acquiring new customers. Using the LTV/CAC ratio can provide a clearer picture of your company's health and growth.
Why CAC and LTV matter in marketing
In the digital economy, LTV and CAC are becoming more relevant than ever. As SaaS companies become more profitable and dominate their markets, conversations about CAC and LTV will increase.
Finance leaders are becoming strategic data-driven decision-makers, so they can better use LTV and CAC metrics to make smarter business decisions.
Your finance team should start paying attention to CAC and LTV metrics and share them with the rest of your company.
Customer acquisition costs, also known as CAC, are a vital component of SaaS business models. A high CAC ratio can eat up cash and EBITDA margins.
It's often compared to debt, since churning customers do not disappear, but the money invested in CAC is shifted to the next customer acquisition. Keeping CAC ratios low will increase revenue growth and lower customer acquisition costs.
Customer retention is important for marketing effectiveness. Customer retention yields higher revenue because customers stay with the company longer.
In addition, CACs are typically higher for new customers than for existing ones.
Hence, a company should focus on customer retention to keep CACs low. Analyze your customer churn rate and consider enticing them to stay.
Average marketing budget for SMB
Marketing spend for SaaS companies needs to be more than just awareness-building. It has to include recurring revenue. Most SaaS companies are under intense pressure to grow their recurring revenue to offset acquisition costs.
If they aren't spending enough, they will soon fall behind and the churn will catch up. Agile Payments estimates that SaaS companies should spend between 10 and 40% of their annual recurring revenue on marketing.
To make sure the money is well spent, SaaS companies should consider spending between 15 and 25% of their annual revenue on marketing. This is based on a survey that was conducted in 2016.
However, if your company is spending less than 15% of its annual revenue, you will be at a disadvantage compared to most SaaS companies. Spending less money on marketing can be effective, but it won't guarantee you results.
A reasonable marketing budget for SaaS companies is based on the company's revenue growth delta. If your company expects to grow by 80%, your marketing budget should be around $1 million. This is a realistic figure if you're already profitable.
If you're not yet profitable, you should increase your marketing budget until you reach $1 million in AAR. This will ensure that your marketing budget remains within a reasonable range and keep your growth momentum high.
How is monthly churn factored into marketing
Monthly churn rates vary widely, depending on the period studied. However, one consistent trend is that churn rates are higher for venture-backed SaaS companies.
According to Lincoln Murphy, a customer success consultant at HubSpot, churn rates should be at least 10%, if not 15%, higher.
To determine the correct churn rate for your SaaS business, you should divide your number of churning customers by your total number of paying customers.
While it isn't possible to stop all churn, you can control the rate for a set period of time. You can offer discounts and promotions to churn-prone customers, but if you ignore the issue and do not address it, you will end up spending too much money acquiring new users.
To combat this issue, you can implement the ProfitWell pricing strategy, which is backed by Price Intelligently.
The monthly churn rate for SaaS companies varies depending on their target market. Small startups, for example, are more likely to see higher churn rates than mature SaaS companies.
This is because they cater to smaller budgets and may face more volatile cash flows. Meanwhile, mature SaaS companies can build rapport with their current base and pursue high-value clients to increase revenue retention.
As with other marketing tactics, monthly churn rates will vary depending on the company's target market. One study conducted by Recurly looked at churn rates of over 1500 businesses.
How much do SaaS companies spend on marketing?
The question often asked is, how much do SaaS companies spend on marketing?
In fact, the most successful companies spend between 80% and 120% of their annual revenue on marketing. During the first three years, this is the case.
However, Tomasz Tunguz, a Venture Capitalist at Redpoint, says that this number can be slashed to 50% by year five. In other words, the early marketing efforts paid off.
For companies that are not quite there yet, it is important to consider how much revenue a SaaS company should be generating. As a rule of thumb, SaaS companies that make $1 million to $10 million per year should spend anywhere from $10,000 to $15,000.
However, if the LTV-to-CAC ratio is low, the company may want to invest more in marketing. Here are some examples of what SaaS companies spend their money on:
Inbound marketing. By using inbound marketing, companies can establish themselves as an industry thought leader and expert. Blogging generates 60% more traffic and twice as many leads than other types of content.
It is not surprising that most leading SaaS companies have blogs. The proof of knowledge gives customers a higher trust in a company. For this reason, inbound marketing is the best option for SaaS companies.
Questions from SaaS marketing departments.
How is a SaaS marketing budget determined?
Typically, on the CAC/LTV ratio and potential forecast of the marketing efforts. These efforts are typically measured in leads or sales.
What is annual contract value?
Annual contract value or ACV is the total revenue that comes from a single customer for a fiscal year.
Do sales and marketing efforts scale together?
Typically, yes. Although sales teams are usually larger than marketing teams. Although, their budgets can be similar depending on the type of SaaS business.
For example, a transactional SaaS model will have more sales people associated with it than a freemium or free trial SaaS model.