SaaS Marketing Budget: How Much do SaaS Companies Spend on Marketing?

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Building a marketing budget for subscription-based products is daunting. The traditional rule of allocating 10% of annual revenue to marketing doesn’t apply to on-demand businesses. 

For one, SaaS products are intangible, and marketing them requires more convincing than products with inherent value, for instance, a refreshing drink in the summer.

So, with the rule of 10% out of the window, how can SaaS marketers develop a realistic budget?

Read on to find out how much you should be spending on marketing. We will define a SaaS marketing budget, take a sneak peek at what successful SaaS companies spend on marketing efforts and discuss why having a budget is crucial. Finally, we will share two popular ways to calculate your budget.

What is a SaaS Marketing Budget?

The answer seems obvious. A SaaS marketing budget is a schedule of expenses your business plans to spend on marketing-related activities. What’s not apparent is which costs are considered part of the SaaS marketing budget or how often you should generate these numbers.

Most businesses generate budgets on an annual basis. However, some agile software businesses may need to create budgets quarterly.

Typical marketing expenses for web-hosted products/services include social media marketing, PPC (pay-per-click) advertising, affiliate outreach, SEO, labor, and marketing automation tools, including lead capture and analytics.

The chart below shows the average spend of equity-backed and bootstrapped B2B companies as a percentage of ARR (annual recurring revenue).

Private B2B SaaS brands spend between 24 to 37% of ARR on sales and marketing.

It may seem like a lot, but it all works out in the end. The average cost of goods sold is low. After product development, the unit cost drops dramatically. 

The cost of goods sold is limited to IT infrastructure and customer support. As a result, SaaS companies tend to have fewer costs than traditional businesses and can afford to spend more on sales and marketing.

Importance of Creating a SaaS Marketing Budget

You can’t create a successful SaaS marketing plan without a budget. How will you know if you’re spending too much or too little? Or which marketing channels are effective, and which ones are black holes? 

If you spend too much, you eat into profits and other crucial business expenses like customer success. If you spend too little, you miss out on growth opportunities. And if you fail to grow, it becomes harder to beat the rule of 40, which may limit your ability to attract investors.

A sound marketing budget strikes the perfect balance in between.

Marketing ROI is an important component of marketing strategies. It measures the performance of a campaign to determine its contribution to the bottom line. To calculate the ROI of your marketing campaigns, you need a marketing budget.

Other benefits of developing a budget are: it helps with tracking spending to ensure profitable ROI, identifying effective marketing channels for future campaigns, and prioritizing marketing activities with the most impact.

How much do SaaS Companies Spend on Marketing?

Earlier, we mentioned that many subscription-based businesses allocate 14 to 40% of their revenue to marketing. Some companies spend much more, even over 100% of their income, depending on their situation and growth plan. 

For example, startup firms that need to be aggressive to get their foot into the door (or industry in this case) can spend a bigger percentage of their revenue on sales and marketing than established brands.

Let’s look at the financial statistics of some SaaS companies and see what percentage of revenue goes to marketing.

Salesforce

Salesforce is a software company we’re all familiar with. They offer customer relationship management (CRM) solutions for sales, customer service, marketing, and IT teams. Below is their 2020 operations report.

Salesforce generated $17.1 billion in revenue and spent almost $8 billion (46%) on marketing and sales-related activities. Pretty crazy, right? 

The expenses included salaries, commissions, stocked-based compensation, payment to partners, and marketing campaigns. 

Hubspot

HubSpot is another CRM software that needs no introduction. Here’s a peek at their operations costs from the 2020 Annual Report.

HubSpot’s total revenue was about $883 million. They spent 51% of that revenue on marketing and sales-related activities (almost $452 million). These included salaries, commissions, stock-based compensation, overhead costs, and marketing programs like their annual inbound conference.

Atlassian

Atlassian is a project management solution for software development teams. Below is a snapshot of their 2020 operations reports.

Atlassian generated $1.6 billion, spending about $300 million – 18% of revenue – on the marketing team’s salaries. Atlassian keeps its marketing costs low by relying on word-of-mouth marketing.

But what about SEO? Forget about the overall marketing budget; how much do SaaS companies spend on SEO? Well, companies like Monday.com and RingCentral spend between $ 50K and $150k per month on SEO campaigns.

That may sound like a lot, but it makes sense, since SEO is a profitable, albeit long-term, marketing technique that can reduce customer acquisition costs over time. 

Of course, you may not be on the same level as some of these companies to spend that much every month on SEO. However, in our experience as a SaaS SEO agency, SaaS brands that spend at least $5000 per month on SEO achieve better results within a reasonable timeframe.

How to Decide Your Marketing Budget

SaaS companies use different strategies to develop marketing budgets. For example, the goals-driven method uses revenue goals to set the marketing budget, and the revenue-based approach, where revenue determines the budget.

Let’s look at two common ways of determining marketing spending.

1. Budget by Monthly Recurring Revenue

Monthly recurring revenue (MRR) is the total revenue generated from active subscriptions in a given month. It allows you to predict future earnings based on active subscriptions.

To calculate MRR, multiply the number of monthly subscribers by the average revenue per user (ARPU). For example, if you have 150 users on a $ 75-per-month plan, the MRR is $11,250.

Multiply MRR by 12 to get ARR. So, $11,250 x12 = $135,000 ARR. Whatever marketing percentage you decide on gives you your budget. 40% of $135,000 is $54,000.

Simple, right?

Not quite. MRR can change drastically; new subscribers increase MRR, and canceled subscriptions decrease MRR. Upgrades, downgrades, and offer discounts complicate the situation further. 

Subscription analytics software like Baremetrics and ProfitWell help you automatically track subscriber activity and predict revenue based on past and current data.

MRR gives you an accurate picture of monthly financial performance. By analyzing your active subscriptions, you can predict next month’s revenue and make appropriate marketing decisions. 

MRR also helps you identify areas for focused attention. For instance, if subscription cancellations are increasing, you can invest more resources in email marketing strategies to win back those customers.

In addition, MRR allows you to calculate the LTV (lifetime value) to CAC (customer acquisition cost) ratio. This metric gives insight into how much money to spend to acquire one customer. The golden ratio is 3:1. You should net $3 for every marketing dollar.

2. Budget by Revenue Percentage

Budgeting by revenue percentage accounts for all money coming in from recurring and non-recurring revenue. 

Let’s say your accounting solution offers tax preparation services and accounting courses in addition to monthly subscriptions; the income from all these activities contributes to the total revenue.

To calculate total revenue, simply add all your revenue streams. Whatever marketing percentage you decide on gives you your budget. For example, if your total income is $1M and you allocate 35% to marketing, your budget is $350,000.

Budgeting by revenue percentage gives you a complete picture of your financial performance and more money to spend on marketing.

Save Money with Inbound Marketing

Once you’ve determined your budget, the next step is to allocate funds for specific activities. A lot of the lead generation and conversion in SaaS marketing comes down to explaining the features, benefits, and overall value of the software. 

You can’t do that effectively in a billboard ad or other traditional marketing channels. That’s why many SaaS marketers turn to content or inbound marketing.

Inbound marketing is the creation of customized content for your target market, pulling them into your marketing funnel or flywheel. It includes blog posts, videos, infographics, eBooks, webinars, and more. The goal is to educate leads on how your solution solves their problems and saves them money.

Creating unique and relevant content helps improve your online presence (which is vital for web-based companies). It also establishes your brand as an industry authority. With an SEO-driven content marketing strategy, you can improve your ranking on the search engine results page, drive more traffic to your website, and, hopefully, increase sales.

Another advantage inbound marketing has over outbound marketing is cost.

The above graph shows that the average cost per lead is 60% less in inbound marketing ($134 per lead) than in outbound marketing ($332 per lead). So you simply cannot afford to ignore content marketing.

How much should you spend on content marketing?

According to a Content Marketing Institute survey, B2B businesses spend an average of 26% of their revenue on sales and marketing, with poor performers spending 14% and the top-performing companies spending 40%. 

So, it really comes down to how much you are willing to spend to scale your company’s growth.

In Closing

The SaaS marketplace is very competitive, and the 10% rule of marketing budgets is just not enough to reach your audience effectively. You need at least 30% of your ARR to be a serious contender in the digital solution big leagues. The payoff is big, too. SaaS companies that spend more on sales and marketing see higher returns and faster revenue growth.

However, throwing cash indiscriminately at marketing programs won’t necessarily translate to more sales. You need to be strategic about where you’re investing funds and how much. That’s why you need a SaaS marketing budget.

In this article, you learned the benefits of developing a budget for your software brand and two ways to calculate it. We shared examples of sales and marketing costs of companies like Salesforce and HubSpot and the activities they spend on.

Coming up with SaaS marketing budgets can be intimidating and overwhelming. However, with the right metrics and key benchmarks, you can drive growth rates by investing in marketing channels that produce excellent results.

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