In SaaS, $1 of sales & marketing spend is worth $5 in revenue

One of the most important metrics for any business is determining the amount of revenue that $1 of sales & marketing spend will yield.  In other words, does $1 of sales & marketing result in $0.50 of new revenue, $1, or much more.  The table below shows that the median SaaS business generates $0.54 of new revenue per $1 of sales & marketing spend in the first year. 

 

    Revenue Revenue Revenue   Growth Growth   S&M S&M S&M   2016 2015
    2016 2015 2014   2016 2015   2016 2015 2014   Efficiency Efficiency
Hortonworks, Inc. HDP $184,461 $121,944 $46,048   51% 165%   $183,542 $133,052 $70,695   $0.34 $0.57
Wix.com Ltd. WIX $290,103 $203,158 $141,841   43% 43%   $97,742 $120,010 $156,512   $0.89 $0.51
Splunk, Inc. SPLK $949,955 $668,435 $450,875   42% 48%   $653,524 $505,348 $344,471   $0.43 $0.43
New Relic, Inc. NEWR $263,479 $181,309 $110,391   45% 64%   $168,163 $129,677 $89,162   $0.49 $0.55
Box, Inc. BOX $398,605 $302,704 $216,440   32% 40%   $253,020 $242,184 $207,749   $0.38 $0.36
Blackline BL $123,123 $83,607 $51,677   47% 62%   $77,810 $56,546 $31,837   $0.51 $0.56
Instructure INST $110,880 $73,193 $44,352   51% 65%   $69,991 $53,459 $35,390   $0.54 $0.54
MobileIron, Inc. MOBL $163,926 $149,298 $132,295   10% 13%   $101,757 $105,520 $99,870   $0.14 $0.16
HubSpot, Inc. HUBS $270,967 $181,943 $115,876   49% 57%   $162,647 $112,629 $78,809   $0.55 $0.59
Castlight Health, Inc.  CSLT $101,700 $75,315 $45,605   35% 65%   $58,800 $67,414 $62,065   $0.45 $0.44
Proofpoint, Inc. PFPT $375,496 $265,397 $195,607   41% 36%   $201,204 $148,414 $98,333   $0.55 $0.47
Zendesk, Inc. ZEN $311,999 $208,768 $127,049   49% 64%   $166,987 $114,052 $77,875   $0.62 $0.72
Cornerstone OnDemand, Inc. CSOD $423,124 $339,651 $263,568   25% 29%   $225,631 $207,026 $162,552   $0.37 $0.37
2U TWOU $205,864 $150,194 $110,239   37% 36%   $106,610 $82,911 $65,218   $0.52 $0.48
Coupa Software COUP $133,775 $83,678 $50,845   60% 65%   $68,562 $54,713 $33,724   $0.73 $0.60
RingCentral, Inc. RNG $379,724 $296,228 $219,887   28% 35%   $192,497 $139,851 $104,827   $0.43 $0.55
ServiceNow, Inc. NOW $1,390,513 $1,005,480 $682,563   38% 47%   $700,464 $498,439 $341,119   $0.55 $0.65
LogMeIN, Inc. LOGM $336,068 $271,600 $221,956   24% 22%   $162,811 $138,946 $119,508   $0.40 $0.36
Apptio APTI $160,569 $129,251 $106,615   24% 21%   $75,856 $71,337 $60,775   $0.41 $0.32
salesforce.com, Inc.  CRM $8,391,984 $6,667,216 $5,373,586   26% 24%   $3,918,027 $3,239,824 $2,757,096   $0.44 $0.40
Lifelock LOCK $587,469 $476,016 $369,658   23% 29%   $273,389 $213,984 $162,363   $0.41 $0.50
IntraLinks Holdings, Inc. IL $276,153 $255,821 $234,496   8% 9%   $124,006 $115,867 $108,428   $0.16 $0.18
Xactly XTLY $95,461 $75,974 $61,111   26% 24%   $40,187 $34,836 $28,877   $0.48 $0.43
Mindbody, Inc MB $139,021 $101,369 $70,010   37% 45%   $56,460 $46,345 $30,922   $0.67 $0.68
LivePerson Inc. LPSN $222,779 $239,012 $209,931   -7% 14%   $89,529 $94,728 $83,253   -$0.18 $0.31
WorkDay, Inc. WDAY $1,569,407 $1,162,346 $787,860   35% 48%   $583,874 $434,056 $315,840   $0.70 $0.86
Jive Software, Inc. JIVE $204,094 $195,793 $178,693   4% 10%   $74,654 $78,684 $90,141   $0.11 $0.22
Bazaarvoice, Inc. BV $199,766 $191,181 $168,145   4% 14%   $69,808 $78,373 $86,482   $0.12 $0.29
Shopify SHOP $205,233 $105,018 $50,252   95% 109%   $70,374 $45,929 $23,351   $1.42 $1.19
SPS Commerce, Inc. SPSC $193,295 $158,518 $127,947   22% 24%   $65,886 $55,374 $46,990   $0.53 $0.55
Marin Software, Inc. MRIN $99,878 $108,530 $99,354   -8% 9%   $32,889 $45,132 $47,716   -$0.26 $0.20
Five9, Inc.  FIVN $162,090 $128,868 $103,102   26% 25%   $52,748 $42,042 $37,445   $0.63 $0.61
BroadSoft, Inc.  BSFT $340,962 $278,843 $216,857   22% 29%   $107,142 $83,806 $69,471   $0.58 $0.74
Qualys, Inc. QLYS $197,925 $164,284 $133,579   20% 23%   $57,970 $49,569 $48,049   $0.58 $0.62
Secureworks SCWX $429,502 $339,522 $262,130   27% 30%   $124,950 $111,978 $85,046   $0.72 $0.69
The Ultimate Software Group, Inc. ULTI $781,291 $618,081 $505,936   26% 22%   $224,416 $169,664 $117,033   $0.73 $0.66
Appfolio, Inc. APPF $105,586 $74,977 $47,671   41% 57%   $28,827 $26,076 $16,876   $1.06 $1.05
RealPage, Inc. RP $568,128 $468,520 $404,551   21% 16%   $135,213 $123,108 $111,563   $0.74 $0.52
Benefitfocus, Inc. BNFT $233,335 $185,143 $137,420   26% 35%   $55,488 $58,589 $48,467   $0.87 $0.81
Athenahealth, Inc. ATHN $1,082,900 $924,700 $752,600   17% 23%   $256,600 $237,300 $196,800   $0.62 $0.73
Medidata Solutions, Inc. MDSO $463,381 $392,506 $335,071   18% 17%   $109,290 $103,153 $83,435   $0.65 $0.56
Twilio TWLO $277,335 $166,919 $88,846   66% 88%   $65,267 $49,308 $33,322   $1.69 $1.58
Veeva Systems Inc. VEEV $544,043 $409,221 $313,222   33% 31%   $116,803 $80,984 $56,203   $1.15 $1.19
Atlassian Corporation TEAM $457,058 $319,521 $215,109   43% 49%   $93,391 $67,989 $34,968   $1.47 $1.54
                             
                             
Average   $554,600 $431,797 $331,383   31% 40%   $239,882 $197,005 $158,196   $0.58 $0.60
Median   $273,560 $199,476 $154,993   27% 33%   $106,876 $98,941 $81,031   $0.54 $0.55

 

We’re calling this $0.54 the sales & marketing “efficiency”.  To measure it, we looked at the dollar growth in revenue from 2015 to 2016 divided by marketing spend in 2016.  A an example, if I spent $100 on sales & marketing, and my revenue grew from $450 in 2015 to $500 in 2016, then my sales & marketing efficiency is $0.50 ($500-$450 / $100). 

 

So is $0.54 good for a SaaS business? Actually it’s fantastic, given that the typical SaaS company retains 99% of its revenue from the prior year according to a net retention analysis we did.   See the table below for net retention of SaaS companies that report the metric. 

 

    2013 2014 2015 2016
Name Ticker Retention Retention Retention Retention
Marketo, Inc. MKTO 100% 109% 105% acquired
Cvent, Inc.  CVT --- 100% 100% acquired
Demandware, Inc. DWRE 100% 100% 100% acquired
Veeva Systems Inc. VEEV --- 138% 125% 127%
New Relic, Inc. NEWR --- 110% 130% 125%
2U TWOU 144% 112% 120% 123%
Blackline BL --- 118% 120% 116%
Box, Inc. BOX 144% 126% 117% 115%
Zendesk, Inc. ZEN --- --- 123% 115%
Instructure INST 100% 100% 100% 100%
Five9, Inc.  FIVN 100% 96% 96% 100%
Xactly XTLY --- 104% 105% 99%
RingCentral, Inc. RNG --- 99% 99% 99%
HubSpot, Inc. HUBS 83% 93% 99% 99%
SecureWorks SCWX 99% 96% 108% 98%
Apptio APTI --- --- 100% 98%
Cornerstone OnDemand, Inc. CSOD 95% 94% 95% 95%
Benefitfocus, Inc. BNFT 95% 95% 95% 95%
Castlight Health, Inc.  CSLT --- 103% 116% 94%
Proofpoint, Inc. PFPT 90% 90% 90% 90%
           
           
MEDIAN   100% 100% 103% 99%
AVERAGE   105% 105% 107% 105%

 

Retaining 99% of revenue means the $0.54 of new revenue turns into $0.53 the next year, 51 cents by the 5th year, and $0.49 cents in year 10.   If we add up all the years into perpetuity assuming a 99% retention rate forever, then that $1 of marketing spend given a $0.54 efficiency will ultimately be worth about $53!  Discounting those cash flows for the time value of money – because receiving $0.49 in year 10 is far less valuable than receiving $0.49 today – each dollar of sales & marketing spend is worth about $4 to $5 right now.  The table below shows the math.  

 

Efficiency Discount Rate Value Right Now
$0.54 0% $52.88
$0.54 5% $9.45
$0.54 8% $6.48
$0.54 10% $5.40
$0.54 12% $4.65
$0.54 15% $3.88

 

The point of all this math is that a good SaaS business should absolutely focus on sales & marketing efficiency.  Indeed if you can keep it near $0.54 per $1 of marketing spend and maintain 99% net dollar retention, you’ll be on your way to going public, just like the companies presented above. 

 

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