The right level of Sales & Marketing Spend for SaaS Businesses

At DAN Fund we look to public metrics to better evaluate Series A/B startups’ performance.  Recently we looked at the Sales & Marketing spend of 47 publicly traded SaaS businesses and drew some interesting conclusions regarding the right amount of spend and efficiency of spend which we believe Series A/B startups should strive to achieve.  First the data:

 

                              New Rev Per S&M
      Revenue   Sales & Marketing   Percentage  
Name Ticker   2015 2014 2013   2015 2014 2013   2015 2014 2013   2015 2014
2U, Inc TWOU   $150,194 $110,239 $83,127   $82,911 $65,218 $54,103   55% 59% 65%   $0.48 $0.42
Athenahealth, Inc. ATHN   $924,728 $752,599 $595,003   $229,901 $189,688 $149,488   25% 25% 25%   $0.75 $0.83
Bazaarvoice, Inc. BV   $191,181 $168,145 $146,812   $78,373 $86,482 $73,114   41% 51% 50%   $0.29 $0.25
Benefitfocus, Inc. BNFT   $185,143 $137,420 $104,752   $58,589 $48,467 $36,072   32% 35% 34%   $0.81 $0.67
Box, Inc. BOX   $216,440 $124,192 $58,797   $207,749 $171,188 $99,221   96% 138% 169%   $0.44 $0.38
BroadSoft, Inc.  BSFT   $278,843 $216,857 $178,493   $83,806 $69,471 $56,822   30% 32% 32%   $0.74 $0.55
Castlight Health, Inc.  CSLT   $75,315 $45,605 $12,973   $67,414 $62,065 $33,742   90% 136% 260%   $0.44 $0.53
Cornerstone OnDemand, Inc. CSOD   $339,651 $263,568 $185,129   $207,026 $162,552 $109,737   61% 62% 59%   $0.37 $0.48
Cvent, Inc.  CVT   $187,716 $142,245 $111,136   $77,931 $61,764 $48,405   42% 43% 44%   $0.58 $0.50
Demandware, Inc. DWRE   $237,279 $160,553 $106,614   $100,865 $74,432 $52,384   43% 46% 49%   $0.76 $0.72
Five9, Inc.  FIVN   $128,868 $103,102 $84,132   $42,042 $37,445 $28,065   33% 36% 33%   $0.61 $0.51
Fleetmatics Group PLC FLTX   $284,761 $231,581 $177,350   $96,908 $78,885 $56,589   34% 34% 32%   $0.55 $0.69
Hortonworks, Inc. HDP   $121,944 $46,048 $10,998   $133,052 $70,695 $17,187   109% 154% 156%   $0.57 $0.50
HubSpot, Inc. HUBS   $181,943 $115,876 $77,634   $112,629 $78,809 $53,158   62% 68% 68%   $0.59 $0.49
IntraLinks Holdings, Inc. IL   $276,153 $255,821 $234,496   $124,006 $115,867 $108,428   45% 45% 46%   $0.16 $0.18
Jive Software, Inc. JIVE   $195,793 $178,693 $145,763   $78,684 $90,141 $86,083   40% 50% 59%   $0.22 $0.37
Lifelock LOCK   $587,469 $476,016 $369,658   $273,389 $213,984 $162,363   47% 45% 44%   $0.41 $0.50
LinkedIn Corp. LNKD   $2,990,911 $2,218,767 $1,528,545   $1,048,129 $774,411 $522,100   35% 35% 34%   $0.74 $0.89
LivePerson Inc. LPSN   $239,012 $209,931 $177,805   $94,728 $83,253 $62,488   40% 40% 35%   $0.31 $0.39
LogMeIN, Inc. LOGM   $271,600 $221,956 $166,258   $138,946 $119,508 $88,794   51% 54% 53%   $0.36 $0.47
Marin Software, Inc. MRIN   $108,530 $99,354 $77,315   $45,132 $47,716 $42,799   42% 48% 55%   $0.20 $0.46
Marketo, Inc. MKTO   $209,869 $149,954 $95,918   $129,072 $98,843 $62,769   62% 66% 65%   $0.46 $0.55
Medidata Solutions, Inc. MDSO   $392,506 $335,071 $276,849   $103,153 $83,435 $66,337   26% 25% 24%   $0.56 $0.70
MobileIron, Inc. MOBL   $149,298 $132,295 $105,574   $105,520 $99,870 $68,309   71% 75% 65%   $0.16 $0.27
NetSuite Inc. N   $741,149 $556,284 $414,508   $388,741 $290,961 $210,079   52% 52% 51%   $0.48 $0.49
New Relic, Inc. NEWR   $88,589 $52,394 $24,586   $89,162 $58,156 $28,365   101% 111% 115%   $0.41 $0.48
Proofpoint, Inc. PFPT   $265,397 $195,607 $137,931   $156,156 $102,455 $71,781   59% 52% 52%   $0.45 $0.56
Qualys, Inc. QLYS   $164,284 $133,579 $107,962   $49,569 $48,049 $42,523   30% 36% 39%   $0.62 $0.53
RealPage, Inc. RP   $468,520 $404,551 $377,022   $123,108 $111,563 $95,894   26% 28% 25%   $0.52 $0.25
RingCentral, Inc. RNG   $296,228 $219,887 $160,505   $139,851 $104,827 $72,336   47% 48% 45%   $0.55 $0.57
salesforce.com, Inc.  CRM   $5,373,586 $4,071,003 $3,050,195   $2,757,096 $2,168,132 $1,614,026   51% 53% 53%   $0.47 $0.47
ServiceNow, Inc. NOW   $1,005,480 $682,563 $424,650   $498,439 $341,119 $195,190   50% 50% 46%   $0.65 $0.76
Splunk, Inc. SPLK   $450,875 $302,623 $198,944   $344,471 $215,335 $125,098   76% 71% 63%   $0.43 $0.48
SPS Commerce, Inc. SPSC   $158,518 $127,947 $104,391   $55,374 $46,990 $39,621   35% 37% 38%   $0.55 $0.50
Textura TXTR   $86,729 $62,968 $47,537   $21,013 $20,518 $16,971   24% 33% 36%   $1.13 $0.75
The Ultimate Software Group, Inc. ULTI   $618,081 $505,936 $410,397   $169,664 $117,033 $93,879   27% 23% 23%   $0.66 $0.82
Veeva Systems Inc. VEEV   $313,222 $210,151 $129,548   $56,203 $41,507 $19,490   18% 20% 15%   $1.83 $1.94
Wix.com Ltd. WIX   $203,518 $141,841 $80,473   $120,010 $97,742 $53,776   59% 69% 67%   $0.51 $0.63
WorkDay, Inc. WDAY   $787,860 $468,938 $273,657   $315,840 $197,373 $123,440   40% 42% 45%   $1.01 $0.99
Zendesk, Inc. ZEN   $208,768 $127,049 $72,045   $114,052 $77,875 $37,622   55% 61% 52%   $0.72 $0.71
Secureworks SCWX   $262,130 $205,830 ---   $146,324 $133,878 ---   56% 65% ---   $0.38 ---
Appfolio, Inc. APPF   $74,977 $47,671 $26,542   $26,076 $16,876 $10,337   35% 35% 39%   $1.05 $1.25
Atlassian Corporation TEAM   $319,521 $215,109 $148,512   $67,989 $34,968 $18,795   21% 16% 13%   $1.54 $1.90
Instructure INST   $73,193 $44,352 $26,055   $53,459 $35,390 $20,702   73% 80% 79%   $0.54 $0.52
Mindbody, Inc MB   $101,369 $70,010 $48,687   $46,345 $30,922 $20,957   46% 44% 43%   $0.68 $0.69
Shopify SHOP   $205,233 $105,018 $50,252   $70,374 $45,929 $23,351   34% 44% 46%   $1.42 $1.19
Xactly XTLY   $61,111 $47,220 $36,325   $28,877 $20,532 $15,410   47% 43% 42%   $0.48 $0.53
                                 
Mean     $452,202 $338,179 $249,171   $203,365 $156,220 $110,613   48% 54% 56%   $0.61 $0.64
Median     $216,440 $168,145 $120,342   $103,153 $83,253 $56,706   45% 46% 46%   $0.55 $0.53

 

-Of the 47 SaaS businesses we note that the median revenue for the past three years was $216mm, $168mm, and $120mm (Salesforce and LinkedIn really skew the averages with their size).  The growth rate in 2015 and 2014 was 29% and 40% respectively.  These growth rates are for large, lumbering companies that are quite mature, so as a SaaS Series A or B business, you need to be well exceeding annual growth of 29% (70%+ in our view) to command a multiple that’s on par or better than the multiples public companies attract

 

-Median Sales & Marketing spend for the past three years was $103mm, $83mm, and $56mm.  That’s a growth rate of 24% and 47% respectively so revenue growth has been growing in line with sales spend at the public level.  Rising levels of Sales & Marketing spend indicate a healthy but competitive market for SaaS businesses, meaning differentiation is as important as ever

 

-For the past three years Sales & Marketing has averaged 45%, 46%, and 46% of revenue, so the typical SaaS company is spending half its revenue on Sales & Marketing.  Note the max S&M spend as a percent of revenue is 109% (HortonWorks) and the minimum is 18% (Veeva Systems).  As a SaaS business at the Series A/B level, we would argue budgeting at least half of revenue for S&M spend, and so long as the ROI stays attractive, budget even more.   

 

-The most interesting category we looked at was New Revenue Per Dollar of S&M Spend (abbreviated in the table as New Rev Per S&M).  Although it’s a rough approximation, we’re attempting to get a sense for S&M spend efficiency so we can answer the question “how much new revenue should our Sales & Marketing spend generate?” The data shows that for each dollar of S&M spend, the 47 SaaS businesses on median generate $0.55 cents of new revenue per year and on average generate $0.61 of new revenue year.  Given that this is recurring revenue, those are good returns on S&M spend.  Consider that these businesses have net retention of 103% on median (customers upgrades and additions by existing customers outpace customers leaving the business) and gross retention that is generally 80%+, $0.55 of new revenue per year on a dollar of spend should translate into an LTV/CAC of at least 2.50x to 5.50x+.   These ratios are strong and indicative of large mature businesses with well-defined sales processes. As a Series A/B company, strive for generating $0.55+ of new revenue for each dollar of S&M spend. 

 

In the comments section, feel free to add any personal observations and your own experiences regarding S&M spend.  

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