What is a good rate of new revenue for every dollar of sales and marketing spend in SaaS? We looked at new revenue divided by sales and marketing spend of SaaS companies at the time they went public (“S&M efficiency”). We then compared that figure to the same calculation the year prior to going public. In other words, if in a given year revenue grew from $100mm to $150mm while S&M spend was $80mm, the ratio would be ($150-$100)/$80mm resulting in $0.63 of new revenue for every $1 in S&M spend that year. Observations and data are below:
No free lunch, but no deterioration either. Of the last 150 SaaS IPOs we looked at, the median S&M efficiency was $0.67 cents and the average was $0.99. In other words, the typical SaaS company on median generated $0.67 of new revenue for every dollar of marketing spend. The year prior to the public filing though, the median was also $0.69 and the average was $0.94. There was practically no movement.
Lack of data. Over time, SaaS companies have stopped reporting 3 full years of financials. For instance, of the first 80 companies in the list, 73 provided 3 years of data so we could do the analysis. Of the next 68 companies, only 19 provided 3 years of data. The list is in order of IPO, and the lack of more recent data hurts the analysis.
The return is good. If every dollar of S&M spend yields $0.67 of new revenue which is 90%+ ARR, so long as you’re retaining that ARR every year and growing it (Net dollar retention is over 100%), the S&M function is working well. Assuming 100% net dollar retention, your payback period is ~1.5 years, which is a great return on any investment where you keep a customer forever and grow them.
Visit us at blossomstreetventures.com and email me directly at email@example.com. All founders and funds welcome! We invest in companies with run rate revenue of $3mm to $30mm, with year over year growth of 20% to 50%+ depending on revenue. We lead or follow in growth rounds and special situations like inside rounds, small rounds, rushed rounds, corralling investors with our term sheet, bridges, inbetweeners, cap table clean up, and extensions. We can commit in 3 weeks and our check is $1mm to $4mm. Also visit https://blossomstreetventures.com/metrics/ for always up-to-date SaaS metrics.