The return on S&M spend in SaaS has gotten worse over time. We can see this decline by comparing the efficiency of S&M spend in 2023 to that at the time of IPO for every SaaS company that went public since October 2017. Below is the data.
First let’s start with the data from 2023. Note if you see a “ — -“, that means the business was acquired sometime between 2017 and 2022, so no data is available. In total 62 companies are still public.
As the data shows, on median the typical SaaS company in the data set is currently generating $0.42 of new revenue for every dollar of S&M spend. On average the figure is $0.42. Only 11 of the companies generate $1 or more. The math is simply 2023 revenue minus 2022 revenue all divided by S&M spend in 2023.
So what was the data at the time of IPO? The data below shows on median the typical SaaS company was generating $0.65 of new revenue for every dollar of S&M spend at the time of IPO. On average the figure was even larger at $0.91.
The difference between a median of $0.42 today and $0.65 at the time of IPO for the data set is staggering. SaaS companies have become 35% less efficient at generating new revenue with their S&M spend. Why is this happening?
-Post-COVID Hangover. Many businesses ramped up spending during the pandemic, and now we’re seeing the fallout.
-Market Saturation. The SaaS space may be over-saturated, with limited room for growth in certain markets.
-Economic Uncertainty Fears of a recession at the end of 2022 likely led to more conservative spending for software in 2023.
-Advertising Challenges. Apple’s privacy changes, the decline of third-party cookies, and rising digital ad costs have made online marketing less effective.
-Changing Sales Cycle: Companies are tightening belts, making it harder to justify aggressive S&M spend. It has elongated sales processes, scrutiny is up, there are more constituents in the decision process, and overall software is just harder to sell.
-AI is eating budget. Budget that would otherwise go to software spend is instead going to AI infrastructure and models.
Overall, it’s a sobering picture and in total it means we all need to be more patient with the return on our S&M spend. Good luck to us all.
Thank you for your readership. See more blogs and SaaS data at blossomstreetventures.com. Email the author at sammy@blossomstreetventures.com.