How much should my SaaS Business be
investing in Sales and Marketing?
How much should I be investing in Sales and
Marketing for my SaaS Business?
Few companies are satisfied with their return on investment in sales and
marketing. New sales VP’s never perform like you hope, and the new
marketing campaigns seldom deliver the expected revenue pop. That said,
we soldier on knowing products don’t sell themselves, and the next great
sales VP or marketing campaign might be just around the corner.
So of course we all want to
execute sales and marketing
better, but fundamentally what we
need to also ask is: “Are our
investments in sales and
marketing creating value?”
Are they “good enough” to be
increasing our company’s value
more than they are destroying it?
If yes, invest more, if no, stop
digging the hole!
This paper will attempt to shed
light on this important question
from three angles. First, we will examine the relationship between sales
and marketing investments and revenue growth. We will then examine the
impact of revenue growth on a company’s value. How big is the impact?
These two examinations will provide the basis of a high-level sales and
The third perspective will be a closer look at peer benchmarking. How
much are other similar software companies investing in sales and
marketing? How does this differ by size of company, access to capital,
and the current environment? If your company is investing a lot more, or
The goals for the paper are modest. We simply want to arm CEO’s and
their investors with a clear context and understanding of SaaS company
investments in sales and marketing and how they will impact the business
in the current economic climate. Significantly over- or under-spending can
lead to a lot of wasted time and cash, or worse, missed opportunities.
Part 1: Do higher investments in sales and marketing
drive revenue growth?
This question gets debated in board rooms across the country every day,
and the answers are obviously different for each business, but there are
data from the public companies that can help shape our thinking here.
Do higher-growth SaaS businesses invest more in sales and marketing
than slower growing SaaS businesses? The intuition here is not obvious as
successful SaaS companies with a “hot” product could be spending less
on sales and marketing, while weaker business pour money into growth
but can’t seem to move the needle. Both these cases certainly exist,
however, in carefully looking at the data over the last two years, it’s clear
that the high-growth SaaS businesses invest more in sales and marketing
than their slower growing rivals.
The chart at the left compares
the sales and marketing spend
of 13 public SaaS companies
for the first nine months of
2009 to their consensus
expected growth rate for
2010. We use expected
growth because for SaaS
companies it’s usually pretty
accurate (much of next year’s
revenue is known) and it
allows us to look at the most
recent data while also allowing for the inevitable time lag between the
time of the investment and the revenue it generates.
The relationship is clear and surprisingly strong. Also note, no public
company is spending less that 20% on sales and marketing, and more
than half are spending over 40% of revenue despite the fact they are
much larger than typical SaaS businesses. Going back a few years in the
data we find that the high-growth SaaS businesses have consistently
spent more on sales and marketing. It’s part of their business model and
DNA, and reflects the fact that this is a long-term investment proposition.
To be clear, this data shows correlation and not causation. That said,
these are the top tier of all SaaS businesses that have collectively run
hundreds of different marketing programs and many different sales
models. If their high levels of sales and marketing investments were not a
key component of driving their growth, they would have cut back their
spending years ago. The relationship can also be supported by common
sense examples. Firms like Salesforce.com, Omniture, and SuccessFactors
have always been very open about the respective strength of their
marketing and sales capabilities and their consistent investment in those
The companies in this analysis are the same ones as used by Pacific Crest in their weekly
reporting except for Athena Health, which was excluded due to the impact of the Federal
stimulus program. (If you are in a market like they are right now, you aren’t reading this
Does the investment in Sales and Marketing pay off?
Having established the relationship between investing more money in
sales and marketing and generating higher growth, the question remains
as to whether the higher growth leads to higher valuations that more than
offset the ongoing investment.
Part of this question has to do with how effective and efficient your
investment is in driving growth, and part of it has to do with how growth
translates into value.
How efficiently sales and marketing dollars drive growth is very company
specific. Much has been written about customer acquisition costs, CAC
ratios, Magic Numbers and the like, and we won’t dwell on that here. But
just looking at the slope of the line in the chart above gives us a
reasonable estimate of what is achievable based on a wide variety of
recent SaaS company performance.
Based on the data above, it’s certainly reasonable to assume that
increasing sales and marketing from 30% to 40% of revenue can drive
growth (over time) from 15% to 25%. For smaller companies the increase
in growth rate might even be more dramatic given it takes less total new
business to drive the growth rate.
So, what would that kind of change in growth mean to valuation? How
sensitive are SaaS valuations to growth rates? In a word: very.
The chart below shows the relationship between expected 2010 revenue
growth and the revenue multiple
for public SaaS businesses. The
faster you are growing, the
more your business is worth.
High-growth SaaS business
command a 6x to 7x trailing
revenue multiple, low-growth
SaaS business trade at 1x to 3x.
The difference is quite
The other variable on the chart
is the size of the business (size of the dot). Larger business are more
stable and predictable and earn higher multiples for their given level of
growth. Also, the larger businesses’ are still growing fairly rapidly, but
their growth rate tends to be slow simply based on their size.
So what about profitability? Surely the profitable businesses are valued
higher? Actually: no. The profitable SaaS businesses trade at a small .6x
revenue premium to the unprofitable companies, and that entire
difference can be attributed to Salesforce.com. Currently, there is little to
no correlation between profitability and valuation. Over time, there
certainly will be a relationship, but right now public investors are
comfortable with the notion that a SaaS business can generate profits
(almost whenever they want), and investing in growth now will payoff in
larger companies with larger profits later on.
So is growth an important factor in valuation? Of course. The key take
away here is that growth is the most important valuation factor by
several orders of magnitude. All other factors are essentially “noise” at
But why is growth such a huge value driver in SaaS businesses? The
answer is straightforward. For many types of companies, growth in one
year might be lost in the next year. Big deals come and go as do hot
products. For quality SaaS companies, however, 90% of the new revenue
you brought in this year sticks around next year, and the next year…etc.
The simple ROI on the payback when customers stick around for 5 years
or more is huge. Everyone in the SaaS business has recognized this for
years, but now the public capital markets are reflecting that value as well.
So what’s the payback? If your incremental marketing spend drives new
revenue, your business grows in value two ways. More revenue equals
higher value AND it drives a higher growth rate that equals higher
valuation multiple for all your revenue. A quick example:
Lets say a $5 million in revenue SaaS company doubled sales and
marketing from $1 million to $2 million and was able to drive an
incremental $500,000 in annual recurring revenue from their previous
level of $750,000 in new revenue the year before. This would take the
business from a marketing spend of 25% of revenue to 40% of revenue
and from a 15% growth rate to a 25% growth rate. These are all
reasonable assumptions given the relationship between spending and
growth outlined in the first chart.
The two-fold payback is: the new revenue, $500,000, times the
appropriate revenue multiple, plus, ALL the existing revenue times a new
higher revenue multiple based on the higher growth rate.
Just based on the data above, the higher growth would push the revenue
multiple from around 3.5X to a 7X. Since this is a small private company,
lets say that move is from just 3X to 4.5X. Even cutting the public growth
premium by more than half, the company still grows in value from $17
million to $28 million. An 11x return on the incremental $1 million
Low Investment High Investment
Base Revenue $5,000,000 $5,000,000
Normal Growth 750,000 750,000
Incremental Growth 0 500,000
Total Revenue 5,750,000 6,250,000
Growth Rate 15% 25%
Valuation Multiple 3.0X 4.5X
Enterprise Value $17,250,000 $28,125,000
If you can make your sales and marketing investment work even modestly
well, the resulting impact on growth will drive significant value in your
This analysis is based on public company data that gets massaged,
manipulated and extrapolated. Do these relationship hold for private
companies and their valuations? The short answer is yes. While less
efficient and fluid then the public markets, VC’s and PE investors
consistently pay a premium for growth over efficiency. At the extremes:
a zero growth but profitable SaaS business is unlikely to raise equity at
any price in the current environment, while an unprofitable but high-
growth SaaS business (30% to 50%) growth will attract significant
Part 3: How much are other (non-public) SaaS business
spending on Sales and Marketing? What are the trends?
According to the leading software benchmarking firm, OPEXEngine, SaaS
businesses across all stages are spending about 47% of their recognized
revenue on sales and marketing. Breaking that down further, they spent
31% of revenue on sales, and 16% of revenue on marketing in 2008.
OPEXEngine’s trend data for 2009 for all types of software companies
(SaaS and non-SaaS) shows a modest decline in overall sales and
marketing spending in the first 6 months of 2009 as would be expected.
However, the marketing component of that was actually up 27% from
12.1% to 15.4%, while the sales spend was down 18% from 29.1% to
For those of us in the business, that’s not a surprise. SaaS businesses are
still in the early stages of understanding and leveraging marketing
automation solutions and web 2.0 techniques. As those solutions mature,
marketing will play an ever-increasing role in demand generation. Another
supporting data point is that in 2008, SaaS businesses spent about 16%
of revenue on marketing while pure perpetual license business spent
about 8%. Confirmation that companies selling SaaS, and those most
receptive to buying it, embrace the web to conduct much of the
OPEXEngine also captures data by the size of the software business,
which they break into five different size categories. I can’t share all their
data here, but it does generally show that sales and marketing
investments do scale over time and over large changes in revenue levels.
The $250 million and above software companies were spending below the
average levels referenced above, while the less than $10 million in
revenue companies were spending considerably more.
Despite some recent gyrations in the capital markets and a conservative
bent to almost all new investing activities, the SaaS model clearly rewards
those companies who can generate growth. SaaS is inherently stable by
its very nature, so if you can get it to grow quickly and become large, it is
even more valuable. It’s good news for SaaS companies that the capital
markets now recognize this.
However, if your SaaS Company is not investing in growth, (as in 30% to
50% of revenue) the data shows the growth is not likely to happen on its
own. The bar has been raised and there are multiple SaaS offerings in each
vertical and horizontal segment. Customers will not beat a path to your
door because you are SaaS. Quiet SaaS companies can grow and be
profitable, but they do not create value like those who invest in growth
and become leaders.
Remember, however, the goals of this paper were modest. Investing more
in sales and marketing might be a bad idea for many SaaS companies: a
weak market, or product, or execution team can render the investment
useless. And for other firms, the required capital is unavailable at any
For many firms, however, the data presented in this paper should be fully
incorporated into the overall set of considerations. Growth is an extremely
powerful lever for SaaS companies, much more so than other business
models. Increasing growth significantly increases value and liquidity
Marc Benioff, Josh James, and Lars Dalgaard did not drive their respective
SaaS companies to $15 million in revenue and then cut back on sales and
marketing and stay up all night worrying about profitability or weak CAC
ratio. SaaS businesses do scale, it is a sound business model, and even
aggressive and somewhat inefficient sales and marketing investments
deliver positive ROI’s if you have the courage and capacity to sustain the
short-term losses. The reward at the end of the rainbow is a very valuable
Post Script: The CAC ratio and when not to spend.
A higher level of sales and marketing spend will drive down your CAC
ratio. (Some less enlightened investors won’t like this.) The business will
become less efficient at customer acquisition on the margin as it tries to
attract customers from an ever broader pool of prospects. In addition,
the time lag between the investment and revenue is substantial and hard
to predict or even track.
It’s OK to become less efficient with sales and marketing with each new
marginal customer as long as it still delivers a positive ROI. That ROI
should be determined by changes in the company’s enterprise value as we
did above, but it also needs to be reviewed on a per customer basis.
If, for example, higher spending brings in new customers, but they don’t
stay very long, or your product does not deliver much incremental
contribution margin, you might be driving top line growth but you might
be taking an actual economic loss on each new customer. And while
overall corporate profitability might not be critical during these ramp-up
years, unit economics are. Growing a business with bad unit economics
just destroys value faster. Generally speaking, compare your average
customer acquisition cost to your average lifetime contribution margin.
In practice, very few SaaS business have bad unit economics, and the
ones that do tend to flame out very early. The firms that need to watch
this metric most closely are those with a below 75% gross profit margin,
or those experiencing turnover above 15% per year.
Data Table for Public SaaS Companies as of 3/1/2010
Sales and Marketing
Revenue 2010 Equity
Company Multiple Growth Value 2009 2008
CNQR 6.8 18% 2,000 31% 30%
KNXA 1.1 4% 236 22% 20%
LOGM 4.3 24% 434 49% 67%
RNOW 3.0 18% 545 43% 50%
CRM 6.3 15% 8,616 46% 50%
TLEO 3.0 14% 809 34% 32%
ULTI 3.8 18% 766 27% 27%
VOCS 2.2 9% 293 48% 45%
SFSF 6.8 21% 1,331 54% 88%
SLRY 0.7 8% 40 49% 68%
CTCT 3.4 33% 551 64% 48%
DMAN 1.8 6% 186 27% 27%
N 4.4 11% 831 46% 52%
Mean 3.8 16% 1,249 40% 44%
Median 3.4 15% 635 45% 47%
SaaS Capital Advisors is a strategic financial services advisor to software
companies in the areas of M&A, partnerships, capital raises, pricing and
valuations. We can be found on the web at saas-capital.com.
OPEXengine is the leading benchmarking provider to the software industry
and can be found on the web at OPEXEngine.com to participate in their
surveys or purchase their reports.