A SaaS marketing budget is a schedule of expenses your business plans to spend on marketing-related activities. 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.
Most businesses generate budgets on an annual basis. However, some agile software businesses may need to create budgets quarterly.
Why Do You Need a SaaS Marketing Budget?
A SaaS marketing budget is used to plan marketing activities. It underpins your SaaS marketing plan. Companies generally create an annual budget, which is reviewed and adapted based on the Return On Investment (ROI) from your marketing activities.
Marketing ROI is a measure of the returns from a campaign. Most marketing departments will track returns. They will then increase or decrease spending based on the results. For example, you’d naturally increase spending on paid ads if monthly revenue from this channel was increasing. This helps you hit your revenue goals.
How Much Do SaaS Companies Spend on Marketing?
SaaS businesses allocate an average of 7%-15% of their annual budget to marketing activities. Some companies spend more, and others less. The figure varies depending on the growth plan and accounting methods used to track spending. That can make comparing SaaS marketing budgets difficult.
The chart below provides a nice overview of the average budget breakdown of equity-backed and bootstrapped B2B companies as a percentage of ARR (annual recurring revenue).
You can see sales and marketing activities account for 17% of the budget for bootstrapped businesses and 30% of the expenses for equity-backed companies. Of that combined total, the marketing budget accounts for 7% of bootstrapped businesses and 10% of equity-backed companies.
That’s the median SaaS marketing budget allocation.
High-growth B2B SaaS and B2C companies spend a higher portion of their overall budget than low-growth companies. The graph below nicely illustrates the difference.
Bootstrapped companies that have above the median growth increase the budget allocation to sales rather than marketing activities. Equity-backed companies allocate 15% of their budget to marketing activities. That’s a 5% jump or a 50% increase over the average.
You can check out this article on SaaS Capital, where the data was gathered, for additional insights.
The figures SaaS Capital gathered are broadly in line with other industry data. A survey by Content Marketing Institute published in 2017 found 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%.
How Much Do SaaS Companies Spend on 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. At least this is our experience as a SaaS SEO agency.
With that out of the way, here are financial statistics of some SaaS companies that will show nicely illustrate what percentage of revenue goes to marketing.
How Much Salesforce Spends on Marketing
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. They’ve combined the SaaS sales and marketing activities here as one line item.
Still, pretty crazy, right?
The expenses included salaries, commissions, stocked-based compensation, payment to partners, and marketing campaigns.
How Much Hubspot Spends on Marketing
HubSpot is a B2B SaaS that needs no introduction. Here’s a peek at their operating 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, one of the most popular SaaS Conferences out there.
How Much Atlassian Spends on Marketing
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. The marketing budget allocation is a bit higher than the figures from the graph I shared earlier. As a market leader, they’re allocating the equivalent of a high-growth SaaS brand on marketing their marketing budget.
How to Determine Your Available Budget
As previously mentioned, SaaS companies spend between 7%-15% on marketing activities. Most SaaS companies use one of two strategies to determine how much they can spend; the goals-driven method and the revenue-based approach.
Let’s look at two common ways of determining how much you can spend on marketing activities.
1. Revenue Based Budgeting
With revenue based budgeting you assign a percentage of revenue to marketing activities.
There are two revenue-based methods you can use. On the one hand, you can budget by Annual Recurring Revenue (ARR). This is the total revenue generated from active subscriptions in a given year. You can predict future earnings based on active subscriptions.
To calculate ARR, you first need to calculate your Monthly Recurring Revenue (MRR). Simply 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 monthly revenue is $11,250.
Multiply MRR by 12 to get your ARR. So, $11,250 x12 = $135,000 ARR. Then, set a percentage for your budget. For example, 15% of $135,000 is $20,250.
Alternatively, you might budget your marketing spend based on gross income. For example, imagine your total income is $1 million. If you wanted to set aside 35% of annual revenue on marketing, the budget would be $350,000.
The advantage of budgeting by revenue percentage is you won’t get into debt (pretty important if you’re not taking on money from venture capitalists). You set a realistic budget based on the performance of your company. It helps you to achieve sustainable growth.
Tracking your numbers is critical with this approach. Monitor metrics like LTV (customer lifetime value) to CAC ratio(customer acquisition cost). 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. Goals Based Budgeting
Goals based budgeting is where you set your marketing budget based on growth goals. This is the approach traditional businesses with VC funding take. It’s a great way to grow company size and quickly scale your market share.
Monday.com is a great example of a company that rapidly scaled through the different phases of growth utilizing a goals-based approach to marketing.
In a sense, the goals-based approach is the reverse of the revenue-based one. You start by setting out what you want to achieve, you then outline the marketing tactics and make assumptions about the unit costs you need to achieve to hit your revenue goals.
Tomasz Tunguz, a venture capitalist, conducted an interesting study in 2013 looking at successful companies that utilized this approach to budgeting. He analyzed 34 publically traded companies to try to understand marketing spend at different stages of growth.
The graphic below summarizes his findings.
You can see in the first three years of growth the companies he reviewed spent between 80-120% of revenue on sales and marketing activities. This level of funding helped companies succeed during the aggressive growth phase so they could dominate competitive markets.
Over time budget allocation for the sales team and marketing team reduce to those industry benchmarks I mentioned earlier. This is an effective business model, assuming you can hit those ambitious growth targets. The danger is you fail to hit revenue goals, which will cause issues when you go public or go through a funding round.
Framework for Making a SaaS Marketing Budget
Once you know how much money you can spend, it’s time to look at how much you should spend. This is critical as departments have a habit of spending as much money as they are allocated. There’s a straightforward six-step process you should follow to determine your optimal marketing budget.
Here’s an exercise your team should go through to determine your marketing budget:
- Define your goals: What do you want to achieve with your marketing efforts? Do you want to increase brand awareness, generate leads, or drive sales? Your goals need to be SMART (Specific, Measurable, Achievable, Relevant, and Time-Bound).
- Identify your target audience and conduct competitor analysis: You need to define your target audience and get to know your potential customer. It’s also critical you understand the competitive landscape and are clear on your Unique Selling Point (USP). This will help you come up with messaging that will resonate with your audience.
- Research marketing channels: Your competitor analysis should help you identify the best marketing channels to invest in. You want to double down on the most obvious channels, even if they are competitive. Test different marketing tactics. Staying focused on a few core channels will invariably generate better results than trying to do everything.
- Estimate your average costs: Take the time to research how much it would cost to be active on each target marketing channel. You can determine a minimum marketing budget per channel based on an assumed average cost (for example, the PPC cost of acquisition if you want to get 1,000 new customers).
- Set your marketing budget: Once you have determined your objectives, identified your target audience, selected your marketing channels, and assessed the associated expenses, you can set your annual marketing budget. Add some flexibility to your budget adaptability to accommodate unexpected costs.
- Track your budget: Track your marketing budget against your SMART goals. The budget should be flexible. Increase spending on channels that generate a return and decrease or cut spending on the channels that don’t.
Setting a realistic marketing budget should be straightforward. The critical thing is ensuring you’re generating a return on your expenses, which is why tracking your budget is critical.
Where Does SEO Fit Into Your Budget
SEO is a critical marketing channel for B2C and B2B SaaS companies. 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). In fact, content marketing is one of the items that differentiate SaaS Marketing from other types of marketing.
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.
Through our SaaS link-building services, we’ve helped fast-growing SaaS companies like Aura turn web traffic into the primary customer acquisition channel. We also provide full-service SaaS SEO services where we help develop your SEO strategy, conduct audits and competitor analysis, secure backlinks, and create your content. For example, we helped Right Inbox scale to 500,000+ monthly visitors with this approach.
SaaS Marketing Budget FAQ
SaaS businesses allocate an average of 7%-15% of their annual budget to marketing activities. Bootstrapped companies tend to spend less, averaging 7%-11%, while equity-backed companies spend an average of 10%-15%.
It’s difficult to assess a typical marketing budget because many companies combine sales and marketing activities as a single line item within the annual budget. SaaS companies allocate between 17%-39% on sales and marketing activities. In some cases, it can be closer to 50%.
In Closing
SaaS companies spend an average of 7%-15% of their annual budget on marketing activities. That aligns with the 10% rule of marketing budgets. If you’re combining Sales and marketing activities, you should be allocating approximately 30% of your ARR to sales and marketing activities.
In general, the more you spend on sales and marketing see higher returns and faster revenue growth.
However, throwing cash indiscriminately at marketing programs doesn’t translate to more sales. You need to be strategic about where you’re investing funds. That’s why you need a SaaS marketing budget.
This article covered 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. With the right metrics and key benchmarks, you can drive growth rates by investing in marketing channels that produce excellent results.
Nico is the founder of Crunch Marketing, a SaaS marketing agency. He works with enterprise SaaS clients like Writer, Right Inbox, and Surfer SEO, helping them scale lead generation globally across EMEA, APAC, and other regions.
