How to Determine a SaaS Marketing Budget
Determining a marketing budget for a SaaS or Software company can be a challenging exercise. Often there is no one right answer for everyone but there are ways to help you attack the problem.
Below, read our expanded article and watch our video with Andy Halko as he shares some helpful tips on how to create a budget for next year's marketing as well as pitfalls to avoid. Also, check out our marketing budget calculator to help you calculate your marketing budget based on many of the factors discussed here.
Planning a marketing budget is not an easy thing - most of the businesses I meet with, regardless of the size, know that it’s a complex process. Companies should spend between 5 and 10 percent of their revenue on marketing alone, and if you’re including a sales team, you’re looking at a total of 13 to 15 percent at a minimum.
Here are some examples of other company's budgets:
- Salesforce – 46% of revenue invested in sales and marketing, 25% revenue growth year-over-year
- Tableau – 51% of revenue invested in sales and marketing, 32% revenue growth year-over-year
- Microsoft – 16% of revenue invested in sales and marketing, 14% revenue growth year-over-year
- Google – 11.9% of revenue invested in sales and marketing, 23.4% revenue growth year-over-year
- Apple – 6.3% of sales invested in selling, general and administrative, 15.8% sales growth year-over-year
That probably seems like a really large chunk of your revenue, but you have to think about what your business objectives are. If you’re looking to grow significantly, 10% to 25% or more, but only willing to put in .5% or 1% into your marketing budget, then you’re going to struggle to achieve the leads and brand awareness necessary. Determining a budget is a really tough aspect of marketing - it starts by looking at your goals as a company, what you have available to spend, and what do effort do you want to put into it to achieve your goals. Often, we prefer to work backward with clients.
- We are at 5 Million now and want to grow 30%.
- That means we need to sell an additional 1.5 Million and our average deal is 25k.
- We need 60 sales.
- With a 20% close rate we need 300 quality leads; and 600 leads assuming 50% may not be the quality required.
- If we convert 1% of visitors, we need to drive 60,000 visitors.
This is just for our 30% growth and not what is necessary to replenish the 5M we currently have in sales. Here are some key factors to consider when determining a marketing budget:
Are you looking for customers in your local area, city, state, country or all over the world?
An important factor that impacts your budget is the distance that you want to market. Tactics and ad budgets shift enormously between local and international marketing. If you are a smaller business but want to have customers across a country or the world, you will have to prioritize your regions as not to dilute your efforts. As you calculate the budget, the more regions that you want to reach will increase the percentage of your revenue that will need to be attributed to marketing.
Are You A First Mover?
If your product or service is unknown, there may need to be part of your budget attributed to education.
Anytime you are offering something that is not familiar in the marketplace, there has to be some education of consumers. Think about ride sharing - even if you could compare it to taxies, many audiences needed to understand what it meant to ride in a random person's car and only pay a flat fee. If you are selling a product or service that is extremely bleeding edge, then even more money needs to be put into marketing. Partially it is to educate but also first movers often have lower conversion rates.
Related to regional focus and new mover, if you are looking to break into new regions it will take more effort.
If you currently have a strong presence in a market such as your city or state but want to expand into new markets, it requires a higher budget.
Brand Awareness is shown to impact digital conversions. A person is more likely to click an organic search engine link further down the page if they recognize the name. This also is shown for advertising.
In new markets you often will have no brand awareness, word-of-mouth, search rank, or validation messaging that matches the market.
As you go from existing to new markets and offerings, your marketing budget requires more investment.
The type of business, products or services you offer impact your marketing budget significantly.
Every business is different and needs to customize their budget to their products and services or even business model but there are some common trends that can be used as a starting place.
You can see from the average budgets featured on The Wall Street Journal of various industries:
Consumer Packaged Goods: 24%
Consumer Services: 15%
Tech Software / Biotech: 15%
Communications / Media: 13%
Mining / Construction: 13%
Service Consulting: 12%
Healthcare / Pharmaceuticals: 10%
Retail Wholesale: 10%
Banking / Finance / Insurance: 8%
Often these numbers are based on the effort that it takes to capture a new client in these markets. It could reflect all of the factors we are discussing in this article such as the level of competition, length of sales, aggressiveness of the industry to expand, education of consumer, and a wide range of other things.
Do you have the right website, CRM, and other systems to make your marketing effective?
To get your marketing working effectively, you have to have the right systems in place and working together. As the foundation to marketing, you at least have:
- A Content Management System (CMS) to keep your site updated, driving search traffic, and building landing pages.
- Your Customer Relationship Management system to keep track of contacts, leads, opportunities, and customers.
- A Marketing Automation or eMail Marketing tool to nurture prospects and customers - often integrated closely with your CRM.
If you’re looking at large projects, like websites or mobile apps, or some other long-term project, you should pull that out of your budget as a line item, so you can have that as a piece that you’re building. Especially if it’s something that is going to last 3-5 years, or even 7 years like a website where you do that initial build, pull that money out and think of it as a 3-year investment. If you take 2% of this year's annual revenue and put it towards a new website that will last 3 to 5 years and significantly increase your conversion rates, it is well worth it.
How SaaS Companies Budget For Marketing
One consideration for software companies is their funding model and MRR ( Monthly recurring revenue). A great facite to software companies over other industries is that they often have a consistent flow of revenue rather than ups and down of projects or product sales.
Depending if your SaaS is bootstrapped or funded by capital investors, that also will make a huge impact on budgeting. A capital funded business often puts a lot of their budget into user acquisition and marketing while a bootstrapped SaaS may need to be cautious about their spend across various channels.
A last consideration is the type of software that you sell. B2B versus B2C will require different approaches - a mobile game app will be marketed very differently than an ERP system. In some cases a software company may need to look at how their target industries budget marketing to balance that concept with their SaaS.
A budget is a smart starting place rather than just guessing as you go.
You should have an annual budget, then break it down into each month, so everyone knows what you’re trying to achieve and what resources are available to spend each month to help achieve those goals.
So when you’re looking at budgeting, make sure you’re thinking about a lot of these factors, but also make sure you don’t have NO budget determined at all. Learn more by working with our SaaS marketing budget calculator.