Creating a SaaS marketing budget takes time, regardless of whether your company is a brand-new startup or an existing enterprise looking to scale. You may receive many different responses if you ask 100 different SaaS vendors how they calculated a number. Furthermore, if you search online, you’ll discover countless numbers of various computations.
So where should you start?
As you’ll see in this article, creating a SaaS marketing budget involves more than simply numbers. It’s important to comprehend your market, identity, and target audience. You’ll be prepared to determine the appropriate funding for your own business if you combine this with an in-depth understanding of the finest SaaS marketing techniques.
Even though it might sound obvious, many SaaS owners are unsure of which costs go into their marketing budget. A marketing budget is a list of costs that your company anticipates devoting to marketing-related operations.
Normally, such budgets are created annually, but for high-energy, agile SaaS organizations, this is sometimes cut to monthly (or even weekly).
What costs are regarded as being included in the marketing budget? Your expected costs for the following marketing channels and components will be included in your marketing budget:
We define costs as any money spent in these categories. This includes paying for freelancers’ fees, paying advertising and SEO companies, new hire salaries, software tool costs, and other expenses.
Let’s start by defining what your SaaS “marketing strategy budget” should cover.
Include all expenses related to promotions, public relations, marketing, advertising, and any other tactical or strategic investments, such as Google AdWords, social networks, print advertising, sponsorship deals, sales materials, user groups, in-person occasions, and occasionally even sales discounts masquerading as promotions.
Since initial marketing efforts will depend more on the labor you can perform than the media you can buy, you should also include wages. Roar CMO fractional marketing experts bring exceptional industry insights and experience to create Saas marketing strategies and budgets without the expense of a full-time employee. Whether you’re looking to launch your start-up on the right foot, or ready to increase profitability and scale to the next level, get in touch with Roar CMO to build a high-level marketing strategy for your business today.
There are several reasons why creating and maintaining a SaaS marketing budget is essential:
It’s hard to develop a good marketing plan without a sound budget. Managing returns on investment is a crucial component of choosing marketing initiatives (ROI). You run the danger of overpaying and wasting time expanding channels that aren’t profitable if you don’t grasp your unit economics. Just take a look at the stunning collapse of Pets.com in the early 2000s. This VC-backed business lost $300 million in less than nine months by focusing the majority of its marketing resources on ineffective advertisements.
On the other hand, many small SaaS businesses could underinvest, thus leaving revenue on the agenda by being overly frugal with their marketing budgets.
The solution is straightforward but challenging to put into practice: invest in successful channels. While early-stage SaaS companies might not benefit from this advantage, scaled growth companies must study information on revenue growth and increase their marketing spending on successful channels and strategies. This is a common error that many SaaS bootstrappers who are on a tight budget frequently commit.
A typical answer, across all industries, is 10%, however, the percentage is increasing. The average marketing expenditure has increased by 1% over the last three years, according to Gartner Research. Businesses allocated 10% of their yearly budgets, on average, to marketing in 2014. In 2015 and 2016, this figure rose to 11% and 12%, respectively. The vast majority of firms questioned anticipate raising their marketing expenditure in future.
Successful SaaS businesses often spend more than half of their annual recurring revenue (ARR) on marketing and sales expenses, which raises the average significantly. Tomasz Tunguz, a member at Redpoint Ventures, asserts that SaaS startups frequently devote between 80% and 120% of their first three years’ revenue to sales and marketing. From year five on, it then reaches a plateau of about 50%.
How should a B2B SaaS firm budget for marketing? Here, we shall assess a few popular techniques for doing so.
The lifetime value (LTV) and the customer acquisition cost are two “levers” of a SaaS firm that need to be optimized in our second approach (CAC). The ratio demonstrates how much value one customer gives to your business.
Given that we are still focusing on targeted income, our strategy is still revenue-based. However, it considers the amount of value that each client contributes.
According to the ‘golden ratio,’ your LTV-CAC ratio ought to be 3:1. That is, a client acquisition should have a 3X ROI.
Given a goal MRR, or monthly recurring revenue, we could employ this ratio to figure out the optimum marketing spend.
We must first determine a few crucial criteria, including:
Preferred MRR
What do you want MRR to achieve? Your consistent subscription revenue is represented by MRR, which is divided into monthly sums. Most SaaS businesses are aware of their desired MRR. This indicator is automatically calculated by transaction and subscription analytics programs such as Stripe, ChartMogul, and ProfitWell.
How many new customers do you need?
How many additional consumers are required to reach your MRR?
This is extremely simple to determine for SaaS companies:
The number of new customers needed is calculated by extracting the current MRR from the desired MRR and dividing it by the subscription price.
Analysis of CAC and LTV
Customer lifetime value (CLV or LTV) can be calculated in different ways. For example:
CAC can be calculated as:
If you’re aiming for an LTV/CAC ratio of 3:1 then we can calculate that as:
To use a churn rate, we would also have to express MRR in per account (or per customer) form. You’d need to replace MRR with APRA (Average Revenue for Account):
And that equation gives us the Marketing Sales Budget:
Consider a business, for instance, with a $5,000 MRR now and wants a $10,000 MRR. Their monthly subscription fee is $50, and their turnover rate is 30%.
First off, how many clients are required to make $5,000? 5000/50 = 100. 10,000/150=200/3 is the APRA.
This information may be used to determine the optimum marketing budget:
alt: example of a marketing budget calculation
The churn rate is the proportion of consumers who eventually stop using a service or purchasing a product. A high percentage of client turnover may indicate that a business is having problems keeping customers. It is computed by dividing the total number of subscribers at the beginning of a particular month by the number of clients who canceled their subscriptions during that month.
Finding your monthly average churn rate shouldn’t be that difficult using only a product analytics tool. For the Customer Lifetime Value (LTV) calculation, we will require this information.
Of course, there are other considerations in addition to the overall marketing budget. Choosing marketing channels to spend in is also crucial. Why? It is evident that various marketing strategies provide various returns on investment (ROI).
As per First Page Sage, email marketing is a successful marketing strategy, with a 201% return on investment. Once you’ve scaled visitor acquisition and need to concentrate on turning them into subscribers, email marketing is fantastic. The extraordinarily cheap cost of campaigns for email marketing is largely responsible for the ROI. PPC advertising has the lowest ROI (return on investment), returning only 46%.
If you don’t have a network you can use, think about cold outreach and encouraging word-of-mouth development through social media brand building, affiliate marketing, customer loyalty-based discounts, and other means. ConvertKit changed from a failed company to an email marketing giant with far more than $30 million in ARR once CEO Nathan Barry identified his target market.
The time obligations of various marketing channels must also be taken into account. For instance, SEO might take between two to four years. Some businesses continue to choose PPC web advertising since, if done correctly, results should be seen in as little as three months.
alt: a man calculating his average marketing budget for his saas company
It partly has to do with the cutthroat market. Because clients have so many alternatives, businesses must double their efforts to differentiate themselves. Another drawback of SaaS businesses is that they are frequently abstract services with subtle changes in their features. Additionally, there aren’t any physical stores or goods to offer additional localized or visual marketing strategies.
The investment model is partially to blame for the high expenses. Agile Payments’ staff explains it in more detail on their blog: “SaaS companies are constantly under intense pressure to increase recurring revenues. The corporation wants to recover the cost of the purchase before churn overtakes it.
Fortunately, there are benefits for SaaS businesses as well. SaaS companies don’t need to reproduce their product for every new customer, unlike other sectors with substantial production expenses. Your marketing budget will go further if your product’s production expenses are cheaper. Look at how effective SaaS companies manage their marketing initiatives.
Depending on what you really have to invest and how you intend to expand, you can determine your marketing and sales budget. Successful SaaS entrepreneur and venture capitalist Jason Lemkin suggests that younger businesses allocate up to 40% of their increased delta on marketing. In other words, your increased delta would be $2 million if your existing ARR is $1 million and you wish to increase it to $3 million. As a result, your marketing budget will be around $800,000, or 40% of the growth delta.
Lemkin provides a practical method for calculating your marketing budget by forecasting the normal cost per sale, which you can do based on his sales compensation model. He does, however, give a warning: “No matter what the model says, you should always and everywhere spend $1 in marketing to create $1 in ACV [Annual Contract Value]. Perhaps even a great deal more than that.
There is no obvious formula for calculating a SaaS marketing budget that would work for every business. This is due to the wide range of variances within the business.
Most importantly, knowing what’s at risk can assist you in determining the appropriate number for your firm. You can navigate the financial environment and get the greatest value for your money by setting clear goals for the business and combining them with real marketing experience.
Contact Roar CMO right away if you need advice about how to allocate your marketing budget. Our team of passionate marketing experts is here to boost your SaaS marketing plan.
A company without marketing is a company destined to fail. To generate strong leads, increase revenue, and maximize profits, SaaS (Software as a Service) providers, especially, need a marketing strategy that works. Too often, SaaS founders, owners, and executives are overwhelmed. They’re burdened with operational responsibilities and struggle to scale up.
To be an effective business leader, there are many hats you have to wear. So, where do you begin if you want to attain success in the start-up or scale-up phase? Every business is unique. There’s no one-size-fits-all approach. And yet, in today’s business world, companies often treat marketing as a commodity. These businesses are missing out on the enormous potential of their marketing to affect the bottom line.
Growing a business is challenging in any industry, but growing a software as a service (SaaS) firm is particularly challenging. Even publicly traded SaaS firms struggle to turn a profit and the majority of SaaS businesses fail to deliver consistent revenue growth.
