The new rule of thumb in SaaS margins

The general rule of thumb for spending in SaaS is 40/40/20. In other words, 40% of operating expense should be on R&D, 40% should be on sales and marketing, and 20% should be on G&A. 19 SaaS companies have gone public in 2018 and 2019, so we wanted to see what their ratios are. Perhaps the rule of thumb should be 30/50/20. The data is below.


30/50/20. On median and average, 29% of opex is R&D, 48% is on sales and marketing, and 22% is on G&A. Overall, it’s pretty close to the 40/40/20 rule, but really 30/50/20 may be more accurate.

There are outliers. Rules of thumb are just general guidelines, and sure enough there are significant outliers. 45% of Dropbox’s spend was on R&D while only 13% of Zoom’s spend is on R&D. Similarly, 73% of Zoom’s spend was on sales & marketing while Dropbox spent only 37% on S&M (note that the S&M low was Sendgrid at 32%).

Don’t let G&A be the outlier. Obviously you should minimize spend on G&A. Building product and selling it should be the priorities. Cloudflare and Sendgrid, I’m looking at you (they spend 36% and 34% of opex on G&A).

COGS isn’t 20%. The other rule of thumb is that COGS should be 20% of revenue. As you can see though, the median and averages are 23% and 27% respectively.

Where is the profitability? We put together simplified EBITDA calculations based on the data (Revenue — COGS — R&D — S&M -G&A). Only two out of the 19 companies have positive EBITDA. Not only that, but the median and average EBITDA margins are an anemic -28% and -26%. Indeed, software is forgiving: so long as you’re growing fast and cash efficiently, you’re allowed to burn cash as recurring revenue that doesn’t churn is an annuity with tremendous value.

Overall we found the data to be really compelling: 30/50/20 is the new 40/40/20 for more established SaaS businesses, unprofitability is ok so long as your business economics are solid and you’re growing, and COGS is allowed to be slightly higher than 20% of revenue.

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