Marketing is obviously critical for any business to achieve success, but arguably it’s even more important for SaaS businesses due to its unique characteristics:
- SaaS businesses are selling both a non-physical product and a service, so proving its tangible benefits to potential customers can be challenging
- The SaaS niche is heavily competitive. A proper marketing strategy is needed just to stay in the game.
- Most SaaS businesses use the recurring revenue, subscription-based model. This requires the business to invest in adequate marketing efforts both for acquiring new customers and keeping the existing customers engaged, which can be very challenging in practice.
With these concerns, having a comprehensive marketing strategy and proper execution is a must, and determining the appropriate marketing budget is a very important foundation for achieving this objective.
Answering the question, “How much should SaaS companies spend on marketing?” however, is easier said than done, as it will depend on a number of factors: the niche, size of the business, the competition, behaviors of the target market, and so on. Yet, it’s still important for SaaS businesses to try their best to determine the right marketing budget.
Spending too little, and you might end up wasting money (and effort) since it may not be enough to effectively reach the target audience to generate leads. On the other hand, if the marketing budget is too high, you will not make any profit.
In this guide, we will explore all you need to know about how to determine the right marketing budget for SaaS companies. We will cover the following:
- Understanding the SaaS business model and the need for effective marketing
- The factors that influence marketing budget allocation for SaaS companies
- Benchmarks and existing standards on marketing budgets in the SaaS industry
- Step-by-step to determining the right marketing budget for your SaaS company
- Best practices and tips for optimizing marketing budget
Without further ado, let’s dive into this guide to determining the optimal marketing budget for SaaS companies.
Understanding the SaaS Business Model
Software-as-a-service (SaaS) is a business model in which software applications are hosted by the service provider and are made available to users over the internet via a cloud-based delivery model.
In a traditional software distribution model, customers first need to obtain the installation file for the application (i.e., downloaded over the internet, on a physical storage device, etc.), install the application on their device, and maintain this application on their own device or server.
Most SaaS products are distributed in a subscription-based model: customers pay a recurring fee (i.e., monthly or annually) in order to access the software and its updates.
For users, this model offers a number of advantages over traditional software distribution, namely:
- Lower upfront costs for customers: the subscription fee for accessing a SaaS product is typically much lower—just a fraction—than the cost of purchasing traditional software.
- Convenience: users can access the software from any device as long as there is an internet connection. No installation or download is needed, and the application is not stored on the user’s device.
- Scalability: SaaS applications are highly scalable. You can simply add licenses when more people in your team need to access the software, and vice versa, you can easily scale down when you fire some of your team members. This can translate into a major cost-saving for the users.
Unique Challenges in Marketing SaaS Products
While the SaaS model offers various benefits to the users and, on the surface, SaaS products should easily attract customers, in practice, that isn’t always the case.
When it comes to marketing for SaaS companies—and thus, when planning a marketing budget—there are some unique challenges we’ll need to consider:
- Strong online presence as the foundation of SaaS marketing
Since SaaS products are typically web-based and accessed over the internet, it’s critical for SaaS companies to have a strong and secure online presence. This includes having a professionally designed website, a strong social media presence, and an effective content marketing strategy. All of these can be difficult and expensive to implement.
- The intangible nature of SaaS products
Another significant challenge is the fact that, unlike physical products, it’s often difficult to tangibly demonstrate the value of SaaS products. To tackle this issue, marketers must leverage various channels to communicate the value proposition of the product and its benefits to potential customers and must consistently publish high-quality content.
- The hyper-competitive SaaS landscape
The SaaS industry has a (very) low barrier to entry. While this can be a good thing if you are just planning to start a SaaS business, this also means other SaaS companies are entering the market virtually every single day, intensifying the already tight competition. Finding creative easy to differentiate your offerings and a comprehensive marketing strategy will be key to staying in the competition, and this often translates to the necessity of a hefty marketing budget.
- The recurring-revenue model
With the recurring-revenue model utilized by most SaaS companies, the subscription fee paid by a newly-acquired customer will only cover a fraction of the costs needed to develop the SaaS product and acquire this customer. In order to make money, this user must continue subscribing until a specific period of time.
This means that SaaS companies must divide their marketing focus into two equally important things: acquiring new customers and retaining existing customers. In practice, this can be very challenging to achieve.
Unique Characteristics and Opportunities in SaaS Marketing
Despite the hurdles and challenges discussed above, there are also unique opportunities and advantages in marketing SaaS products compared to other types of products, namely:
- Free-trial and freemium models
Many SaaS businesses offer free-trial periods or freemium versions of their SaaS product as the core of their marketing strategy. This, obviously, is impossible to do when we sell more traditional products (i.e., foods.)
The trial and freemium tactic provide an opportunity for the SaaS business to directly showcase its product and its benefits to users, making it a powerful and cost-effective marketing tactic to drive conversion.
Effective utilization of this tactic could potentially lower overall marketing expenses.
- Global reach
Due to the digital nature of SaaS products, we can sell SaaS applications to customers in other countries all over the world, essentially expanding your potential market.
This allows SaaS businesses to be more creative with their marketing strategy and tap into more market opportunities without any geographical limitations.
- Data-driven marketing
Operating over the internet, SaaS products naturally collect and generate a wealth of data, that, in turn, can be analyzed and synthesized to form a better marketing strategy. Marketers, for example, can analyze user engagement metrics to learn more about customer behavior and gain insights into their needs and pain points.
This extensive data collection and analysis, in turn, allows a more targeted and effective marketing that can be regularly optimized based on real-time feedback. Marketers can quickly respond to rapidly changing customer needs and behaviors with this data-driven approach.
When discussing how to determine the right marketing budget for SaaS companies in the next sections, we will also take these opportunities and unique advantages into account.
Factors Influencing Marketing Budget Allocation
Obviously, every SaaS business is unique, and how much in marketing budget they’ll need will vary depending on various factors.
However, for most SaaS companies, there are three main factors to consider when deciding how much marketing budget to allocate:
- Market maturity, which will affect the competition level
- The SaaS business’s goals and growth targets
- Current and desired ratios between the customer acquisition cost and customer lifetime value
Below, we will discuss them one by one.
How does market maturity affect the marketing budget
Market size and maturity can affect the marketing budget in three different ways:
The more mature a market is, naturally, the more competitive and saturated it will be.
This means SaaS businesses in a matured niche would be required to spend more in marketing just to stay competitive, compared to a business in a less mature/popular niche.
It’s critical to first analyze how saturated your niche is before deciding on a marketing budget. If your niche is already saturated, you may need to invest heavily in marketing just to get noticed amidst the competition.
While in most cases more mature market will be more competitive and saturated, there are scenarios when a niche is too new or emerging, so you’ll need to spend more in marketing to generate awareness and educate potential customers about the product.
Evaluate whether there is enough pool of potential customers who are already aware of the specific type of SaaS product you are offering. If the answer is no, then you may need to invest more in marketing efforts that generate awareness for your product.
3. Competitive landscape
Even if your niche is not yet saturated, there can be scenarios where there are major competitors with large marketing budgets and very aggressive strategies. In this case, newer SaaS players may be required to invest more in marketing just to stay competitive.
A thorough analysis of the competitive landscape is essential to help accurately estimate the level of marketing investment needed.
4. How marketing goals and targets affect marketing budget
A SaaS business may have different goals and different strategic approaches in achieving these goals, which will affect how much in marketing they should spend. Here are the important considerations:
2. Influence of growth targets on marketing budget decisions
A SaaS company may set different growth targets depending on its objectives.
In general, when a SaaS company is aiming for rapid growth, it will need to invest heavily in marketing, which will reduce its profit. Sometimes a SaaS company may decide to grow its customer base first rather than pursuing immediate profitability.
On the other hand, if the SaaS business aims for a bigger profit margin and//or content with more modest growth in user base or revenue, then they may be able to get away with a lower marketing budget.
In short, the amount of marketing spend typically has a direct correlation to the growth trajectory.
- Marketing investment vs. revenue goals
There is another direct correlation between the size of marketing budgets with revenue goals: the bigger the marketing investment, typically the higher the potential revenue.
SaaS companies should first set their revenue targets and assess the conversion rates before they can calculate the necessary marketing investment to drive this desired revenue growth.
However, when planning a marketing budget according to revenue goals, it’s critical to consider that there is a point of diminishing returns. After a certain point, investing more in marketing may not increase revenue even further.
- The ratio between customer acquisition cost (CAC) and customer lifetime value (CLV)
Customer acquisition cost (CAC) refers to the total cost incurred to acquire a new customer, which consists of all marketing, sales, and other expenses.
Customer lifetime value (CLV), on the other hand, measures the total revenue generated by a customer over their entire lifecycle (their relationship) with the SaaS company.
Both CAC and CLV and to be more specific, the ratio between the two, are critical metrics that should influence marketing budget decisions. The higher the marketing budget, the naturally the higher the CAC will be, and vice versa.
The ideal scenario is to have a CAC that is lower than the CLV, so you are making more money from each customer than what you are spending to convert them into a customer.
What’s the optimal CAC-to-CLV ratio?
There is no universal fixed ratio that is considered “healthy” since every SaaS business is unique.
However, a CAC-to-CLV ratio between 1:3 and 1:5 is considered optimal, allowing the SaaS company to have a sustainable business model with adequate profitability and growth.
A CAC-to-LTV ratio of 1:3-1:5 means that for every $1 spent on acquiring a new customer, this customer should generate between $3 and $5 in revenue over their whole relationship with the SaaS company.
With this knowledge, SaaS companies can calculate the average CLV of their existing customers first, then reverse engineer the number to decide on a marketing budget. For example, if the measured CLV of a customer is $100 and you’d like to achieve a CAC-to-LTV ratio of 1:5, then you can plan your marketing budget so that the CAC will be $20.
Benchmarks and Industry Standards to Consider
There are a number of research reports and studies that have been conducted on marketing budgets in SaaS companies.
You can leverage these studies to gain valuable insights into how much you should plan your marketing budget and how to allocate that spending.
According to SaaS Capital, higher growth equity-backed companies spend 45% more on sales and 50% as much on marketing vs. lower growth equity-backed companies, although for bootstrapped companies, the difference in marketing budget is minuscule (10% vs. 11%.)
This data corroborates what we’ve discussed above: equity-backed companies typically aim for rapid growth due to access to funding and thus invest more heavily in marketing. On the other hand, bootstrapped companies need to manage their cash flow better and generate profits, so they decide against a big marketing budget.
Other interesting findings to consider:
- The average SaaS company spends 15-25% of its revenue on marketing ((Source: Before.io)
- SaaS companies that invest in marketing see a 20% greater ROI on average. (Source: Accelerate Agency)
- B2C SaaS companies typically spend more on marketing. This is because B2C companies are required to reach a wider audience with a bigger potential market
Benchmarks and Averages for Marketing Spending in Various SaaS Sectors
Another good approach to identifying how much is the ideal budget for a SaaS company is to look at industry averages and benchmarks.
Below are some important data you can consider:
- CRM SaaS: the CRM software market is extremely competitive, so the marketing budget tends to be high. According to Gartner’s 2021-2022 study for marketing budgets in the CRM industry, most CRM software providers allocate between 15% and 25% of their annual revenue to marketing.
- HR SaaS: in the HR SaaS niche, marketing budgets typically range from 10% to 15% of the company’s annual revenue.
- B2B SaaS: according to OpenView’s 2021 SaaS Benchmarks Report, B2B SaaS companies typically allocate between 10 and 20% of their revenue to marketing.
- FinTech SaaS: according to a 2022 report by the research firm CB Insights, studying over 1,000 FinTech companies, the average company in this secret allocates 15% of its annual revenue to marketing efforts.
- Retail and eCommerce SaaS: HubSpot’s “The State of Marketing 2023” report states that the average marketing budget for retail and eCommerce SaaS companies is $1.4 million, or around 10-14% of revenue.
- Security SaaS: according to Frost & Sullivan’s “Security and Compliance Market Growth Trends,” the average security and compliance SaaS companies allocate 10% of their revenue to marketing.
Of course, these are just averages, and the amount of the marketing budget will vary depending on the size of the company, its objectives, and the stage of its growth. Yet, this data can give you a good starting point for planning your own marketing budget.
How Marketing Budgets Correlate with SaaS Company Success
Will spending more on marketing translate to success for SaaS companies? Many studies have suggested that the answer is yes, although we should take it with a grain of salt.
According to Harvard Business Review, there is a positive correlation between marketing budget and revenue. The size of the marketing budget can play a significant role in the company’s ability to acquire new customers and increase lifetime value by maximizing retention, both will effectively increase revenue.
Various studies have found that companies that increase their marketing budget tend to also see an increase in revenue, and vice versa, a decrease in marketing budget tend to result in lower revenue.
This data shows how marketing is a critical driver of success for SaaS companies, but it’s also critical to remember that marketing is not the only factor determining the SaaS company’s success. Other factors like the quality of the product itself, pricing strategy, and quality of customer service will also play significant roles, but marketing and the size of the marketing budget are two of the most important factors that can help a SaaS company achieve success.
Not to mention, the size of the marketing budget alone won’t mean anything if it’s not allocated to the right channels and activities.
Here are some important considerations:
- Having clear marketing goals and objectives. It’s critical for the SaaS company to have a clear idea in mind of what they are hoping to achieve with the marketing budget. Will it be growing the customer base or minimizing churn? Should the company focus more on generating leads or maximizing retention? Only after the company knows what they want to achieve can it tailor their marketing strategy and utilize the marketing budget effectively.
- A clear understanding of the target audience. One of the worst mistakes in marketing budget utilization is the failure to understand the SaaS product’s target audience. If we don’t know their needs, interests, and pain points, our marketing campaigns won’t be effective, which may lead to inefficient usage of the marketing budget.
- Choosing the right marketing channels. There are so many different marketing channels available to choose from, both for traditional and online channels. While more options can be good, choosing the wrong channels that won’t resonate with the company’s target audience will result in a waste of money, effort, and time.
- Regularly monitor and adjust your strategy. No matter how well-planned you are, the actual execution won’t be perfect due to one reason or another. It’s critical to keep track of the results of your marketing campaigns, see what’s working and what can be improved, and use this information to make informed decisions to optimize your strategy and adjust how you allocate your marketing budget.
- Don’t overspend. While we have discussed how a bigger marketing budget typically equals a higher chance of success, it’s important to set a realistic marketing budget and stick to it. Spending more than you can afford may backfire, and your SaaS business could end up in financial ruin.
- Don’t try to do everything at once. Another common mistake—especially for companies with large marketing budgets—is spreading the marketing efforts on too many different channels at once. In most cases, it’s better to focus on just a few proven marketing channels and execute the strategy really well rather than spreading too thin on too many channels.
Determining the Right Marketing Budget for Your SaaS Business
Now that we’ve discussed the key factors that may influence the size of the marketing budget, as well as the average benchmarks in various SaaS industries, we have enough foundations for planning our own marketing budget.
In this section, we’ll share a step-by-step guide on how to determine your marketing budget from start to finish, starting with the first step:
Step 1: Assessing your SaaS company’s stage of growth
As we have discussed, the marketing focus of SaaS companies may vary depending on their current stage of growth. A brand-new startup may need to put more focus on building brand awareness and generating more leads, while established companies may focus on maintaining their market leadership. These differences in focus may determine the required marketing budget.
Most startups have limited capital and hence a limited marketing budget. Thus, the focus of budgeting is to strategically allocate the available resources to achieve more results within the budget constraints.
Startup SaaS companies may want to focus on marketing tactics that are relatively low-cost or free, such as content marketing (and SEO,) email marketing, and organic social media efforts.
To accelerate results, startups can invest in paid advertising or more expensive channels to either amplify their reach or generate more leads quickly. However, it’s critical to be careful not to overspend.
Startups may need to allocate up to 50% or more of their existing revenue to marketing due to the need to raise brand awareness and acquiring the initial customer base.
For mid-sized SaaS companies
Mid-sized SaaS companies typically have a larger capital available, so they can have a larger marketing budget when needed. These companies may focus on scaling their existing (and already working) marketing strategies and expanding their market share.
Mid-sized SaaS businesses may also want to allocate some of their marketing budgets to improving customer retention and minimizing churn.
If your company is already in this growth stage, you can incorporate a mix of marketing channels, like content marketing, email marketing, influencer marketing, and social media, and invest more in paid advertising.
Mid-sized SaaS companies can cut back on their marketing budget and allocate only 25% to 50% of their annual revenue to marketing.
For established companies
Established SaaS companies already have a more established customer base and brand awareness, so they can cut back on marketing investments related to building brand awareness.
Instead, established SaaS companies typically focus on maintaining their market leadership and expanding into new markets while optimizing retention and upselling to existing customers.
At this stage, established SaaS companies may need to allocate only 10% to 25% of their revenue (taking into account the revenue is typically much bigger than a startup SaaS) due to the already strong customer base and brand identity.
Step 2: Analyze and choose marketing channels
There are a variety of marketing channels a SaaS company can utilize to achieve its marketing goals, some may be relatively affordable or even free, and some others may be (very) expensive.
This means which marketing channels you choose will significantly affect how much marketing budget you should allocate.
Below are some of the most common channels in SaaS marketing and their associated costs:
- Content marketing: refers to creating and publishing valuable content in various forms (blog posts, infographics, white papers, videos, podcasts, etc. The main purpose of content marketing is to build brand awareness and establish the SaaS company’s credibility as the thought leader in the field, which will result in lead generation. Content marketing is a relatively low-cost channel, and you can even do it yourself for totally free.
- SEO: search engine optimization is the process of optimizing the website and its content to rank higher in the search engine results pages (SERPs). The higher the website ranks, the more it can attract organic traffic to the website. SEO can be done for free, but hiring an SEO/marketing agency to do the job may be quite costly.
- Social media: using social platforms such as Facebook, Instagram, LinkedIn, Twitter, YouTube, etc., to connect with the SaaS company’s target audience and promote the product. The cost of social media marketing can vary depending on the platform, whether you are using the advertising options given, the level of engagement you’d like to achieve, and other factors. Organic social media efforts are considered low-cost, but paid social media advertising can be very expensive.
- Public relations (PR): the process of generating (positive) media coverage for your SaaS company, such as sending out a press release. The cost of a PR campaign can vary. Getting an editorial published in a prominent media, for example, can be expensive. PR campaigns, similar to content marketing, can help SaaS companies increase brand awareness, establish thought leadership, and generate leads.
- Paid advertising: the cost of running paid advertising can vary, but it is generally considered a high-cost channel. Advertising costs can vary depending on the platform you use (Google Ads, social media platforms, etc.), the bidding strategy you use, the targeting options, and others. Despite being expensive, paid advertising can be very effective in reaching a wide range of audiences, driving traffic, and generating leads quickly. Think about investing in paid advertising as “buying time” to support your slower (but low-cost) marketing channels.
- Email marketing: refers to the process of sending regular emails to an email list about your brand and your SaaS product. Email marketing is an especially important channel for nurturing leads and driving sales conversions. For SaaS companies, email marketing also plays a critical part in increasing customer retention. Considered a low-cost channel, but the cost may vary depending on the frequency of your emails, the design/content creation of your emails, and the cost of building (or purchasing) an database.
The best marketing channels for your SaaS company will depend on your marketing goals, market saturation, and target audience.
Don’t be afraid to experiment and take a trial-and-error approach with different channels. Track your results, see what’s working and what’s not, and adjust your strategy.
Step 3: Estimating marketing budget based on goals and KPIs
Once you’ve determined which marketing channels, you should identify the desired goals of each channel in order to estimate the appropriate budget.
What do you want to achieve with the channel in question? This can be:
- Increase brand awareness
- Generate more leads
- Converting leads into customers
- Retaining existing customers
- Increasing the number of referrals
These goals should align with your SaaS company’s overall objective.
Next, identify the KPIs you will use to measure the success of your marketing efforts against these goals. For example, if your goal is to generate more leads, then the KPI is the number of leads generated.
Analyze the cost associated with each channel against its potential reach, targeting capabilities, potential impact against the desired goal, and engagement levels. To do so, you can take a look at the historical performance of the channel, as well as industry benchmarks, so you can identify the potential effectiveness of each channel.
Step 4: Allocate the budget proportionally
Once you have a clear understanding of the impact/effectiveness and the costs associated with each channel, the next step is to identify the priority of each channel.
For example, if your strategy’s main focus is to build awareness, then you should focus on channels that are the most effective in generating awareness, like content marketing on social media marketing.
List your chosen marketing channels based on priority, and start allocating your budget to each of them.
The basic idea is to allocate more money to marketing channels that:
- Have the biggest potential and contribution in achieving your goals
- Have a critical function for your business. For example, a marketing channel may be critical in ensuring optimal customer retention
Step 5: Monitor and adjust
Regularly monitor the performance of each campaign, and measure the actual ROI against the KPIs you’ve identified.
Use this data to make more informed decisions about adjusting your budget allocation. If a certain channel is performing exceptionally well, you may want to invest more in it, and vice versa, consider reallocating your budget from low-performance channels to more successful ones or explore new tactics.
Treat your marketing strategy and marketing budgeting as a long-term game. Continue to monitor and re-optimize your strategy.
To summarize, there are a number of factors to consider when estimating an appropriate marketing budget for a SaaS company: your business’s goals, target audience, the cost of different marketing channels, specific requirements of the industry/niche, and so on.
Regardless, it’s always important to find the sweet spot between investing more in marketing efforts and maintaining a healthy profit margin.
Above, we have also shared a step-by-step guide on how to plan and allocate your marketing budget. By following these steps, you can more effectively determine a budget that is most likely to help you achieve your marketing goals and grow your SaaS business.
If you are still unsure how to allocate your marketing budget, consider consulting with a marketing professional or a marketing agency.