• UNDERSTANDING AND CALCULATING YOUR SAAS MARKETING BUDGET •
CALCULATING YOUR
SAAS MARKETING BUDGET AFTER PRODUCT MARKET FIT BY SAMANTHA CUELLAR
TABLE OF CONTENTS
PART 1
PAGE 1
Preparing to Market Your SaaS Products
PART 2
PAGE 2
Ways to Calculate Your Marketing Budget
PART 2A PAGE 4
Using Your Projected ARR to Calculate Budget
PART 2B PAGE 8
Using CAC to Calculate Your Budget
PREPARING TO MARKET YOUR SAAS PRODUCTS Marketing starts for SaaS companies once they’ve achieved product-market fit… Not before. Achieving product-market fit means that your company is providing a solution for a real pain point and that you have a clear picture of your ideal customer and their profile. A good benchmark to determine this is when at least 40% of your users consider your product a "must-have". Now it’s time to focus your efforts on scaling that initial traction as much as possible. Before you begin investing in sales and marketing, make sure you are ready for it.
What does this mean? It means keep reading if you have achieved the following (and are ready to conquer the next steps).
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Problem-Solution Fit - This is where you have discovered a problem in the market and are trying to solve it for potential customers through your SaaS product. You are conducting interviews and have started customer development processes to learn more and more about your potential ideal customer.
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Language-Market Fit - This is when the language that you’re using matches the same language that is being used by people in the market. This is a great time to utilize the Value Proposition Canvas to help create your language and messaging. Finding the best language to set expectations for your customers and to find the language that speaks to your customers.
If you identify that your SaaS is currently in either of the above phases, you’re jumping ahead and that could be, and probably will be, fatal. I recommend checking out Emily’s eBook, Pre-Marketing SaaS Initiatives: Working Through Problem-Solution-Fit. If you have achieved both Problem-Solution Fit and Language-Market Fit, congrats! Let’s talk about how to prepare for marketing and what you should expect to spend.
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Ways to Calculate Your Marketing Budget: Create a budget that scales.
We know companies vary across the board in size, number of employees, amount in venture capital… Their budgets are no different. With this in mind, apply the following strategies to your business based on your needs, your goals, and your objectives.
First you need to determine your goals. Here are some questions to get started:
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What’s your growth-delta goal for the year? How many customers do you want to have by the end of the year? What is your annual recurring revenue goal for the next year? What does your annual recurring revenue for the next five years look like?
Once you have your goals set and fresh on your mind, it’s time to work backwards to find the budget with some classic arithmetic.
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Outlined below are a few metrics I’m sure you are familiar with that you need to have to determine your marketing budget: Customer Lifetime Value (LTV) - Lifetime value of a customer is an estimate of the total revenue a customer will pay you over a given amount of time. “Total revenue” means over the life of the customer. There are many different formulas for calculating LTV, but we’re going to stick to the two simple formulas. LTV is important to SaaS businesses because these transactions are not one-off sales. Subscriptions have more value than a one-off sale and revenue from a customer’s recurring payments at a frequency are determined by the subscription purchased. This metric is commonly overlooked and excluded from planning marketing budgets and can detrimentally affect your marketing plans and projections.
LTV CAN BE CALCULATED: ARPA (Average Recurring Revenue Per Account) x Customer Lifetime = LTV or ARPA / Customer Churn Rate = LTV Or more accurately, if you know your gross margin percentage: (ARPA * Gross Margin %) / Customer Churn Rate = LTV Customer Acquisition Cost (CAC) - CAC measures the total cost of your combined marketing, sales, and business costs to acquire a customer. This is important to know to keep track of how much you’re spending to acquire customers in relation to how many actually convert.
CAC CAN BE CALCULATED: Acquisition Costs / New Customers = CAC Acquisition Costs can include all of these areas added together: total marketing campaign costs related to acquisition (not retention), wages associated with marketing and sales, the cost of all marketing and sales software, any other professional services used in marketing and sales like designers or consultants, and any other overhead related to marketing and sales.
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Annual Recurring Revenue (ARR) - ARR is a measure of the predictable and recurring revenue components from your paying subscription based customers normalized to a timeframe of one year. While most companies report their monthly recurring revenue (MRR) to monitor the monthly pulse of recurring revenue, we’ll use ARR to determine the yearly marketing budget. So, simply take your MRR and multiply by 12 to represent the ARR.
ONE WAY TO CALCULATE ARR: New MRR + Expansion MRR - Churned MRR = Net New MRR Then: (Net New MRR) x (12) = ARR
Now, here are two ways to strategically go about calculating your marketing budget based on your goals:
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USING YOUR PROJECTED ARR TO CALCULATE BUDGET Your marketing investment is a percentage of your revenue-growth goal.
If you’re considering using your projected annual recurring revenue (ARR) to calculate your budget, you want to position your marketing investment as a percentage of your revenue-growth goal in order to calculate how much you should allocate and how much you could expect to see in ROI. In one of our articles on marketing budgets in general (not specifically geared for SaaS businesses), we outline the basis of a marketing budget as follows:
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The industry standard for a marketing budget is around 10 percent of a business’s projected annual revenue. Around 40-60 percent of this money pays the people driving the marketing program, with the remaining budget going towards tools and advertising spend.
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Now for SaaS business, word around town is that you should definitely invest more aggressively. Experts suggest setting 10-40 percent of your ARR aside for your marketing budget. What is your ARR goal for the next year? What about for the next five years? Based on your answer, we can work backwards. Other advice on budgeting suggests that your ramp up period (the first three years or so) involves investing 80-120 percent of your revenue in sales and marketing. After this ramp up period, you can scale back to roughly 50 percent in year five as you gain traffic and make more revenue.
80-120 PERCENT?! WHY? Investing this amount of revenue makes sense for many variable reasons but the most obvious is that your product is most likely newer than a traditional product.
Take a pair of jeans for example: People know about jeans. They know the purpose of jeans. They know the jean brands they prefer. And they know roughly how much they’re going to cost. Consumers are very familiar with jeans and know where to find them when they need a new pair. Can you say the same about your product? Chances are, probably not and that means that you need to market your product more than you would market a pair of jeans to fully educate your customers.
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Investing heavily is essential in the beginning to ensure you’re in all the places possible where someone recognizes a problem that your product can solve. Especially if you’ve just found your market, you need to invest time and money to build it and to build your presence as a viable solution. The bright side of this is that once your market matures and your brand / product is established, you will be able to cut down to about 50 percent on this spending as the word of mouth, PR and other viral inexpensive strategies will help promote your product. Backtracking to the part about investing 10-40 percent or 80-120 percent of your annual recurring revenue, let’s walk through an example.
A RECENT SAASCRIBE ARTICLE DOES A PHENOMENAL JOB ILLUSTRATING THIS EQUATION. SO LET’S PIGGY-BACK OFF THIS SCENARIO:
Let’s assume that your product’s success is escalating faster than you can eat a slice of pizza, but you want to make sure you have room for dessert.
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You’re able to invest 30 percent of your revenue-growth delta as a reasonable marketing budget for the year.
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You currently have $500,000 in ARR and you want to scale to $2 million in ARR.
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This equates to a growth delta of $1.5 million. Take 30 percent from your growth delta of $1.5 million and your marketing budget will amount to $450,000 for that year.
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HERE ARE TWO EQUATIONS TO AID YOUR CALCULATIONS: ARR Goal - Current ARR = Your Growth Delta x % to Allocate to the Budget x Your Growth Delta = Your Marketing Budget Now we know that investing 80-120 percent of your actual revenue as your marketing budget sounds crazy. However, if you break it down and include the average lifetime value of your customers, you’re getting back much more than you’ve invested. If you market 100 percent of your ARR and the average LTV is 3 years, you’re getting 3 times what you’re spending in return. Tomasz Tunguz illustrated this perfectly in his article, The Sales And Marketing Spend Strategies Of Billion Dollar SaaS Companies:
IN THE FIRST THREE YEARS, THESE PUBLIC SAAS COMPANIES SPEND BETWEEN 80 TO 120 PERCENT OF THEIR REVENUE IN SALES AND MARKETING (USING VENTURE DOLLARS OR OTHER FORMS OF CAPITAL TO FINANCE THE BUSINESS).
BY YEAR FIVE, THAT RATIO HAS FALLEN TO ABOUT 50%
WHERE IT REMAINS FOR THE LIFE OF THE BUSINESS.
This is one way to go about determining your budget. It’s strategic, relevant to growth and it’s what a lot of successful SaaS companies adopt to define how much they should allocate to their marketing budget.
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Using CAC to Calculate Your Marketing Budget Another way to determine your marketing budget is by calculating how much you are willing to spend to acquire customers.
Measuring your customer acquisition cost to determine your budget is a matter of measuring the efficiency of your sales and marketing efforts. The average CAC in SaaS for sales and marketing costs combined is suggested to be 6-12 times the MRR. In other words, 50-100 percent of your first year annual contract value.
So simply put, if your monthly subscription fee is $295/month, you would ideally be willing to invest $1,770 to $3,540 per month. Let’s go a little further in this example and say the cost to acquire a lead is $300, and your lead to customer conversion is 12%, then it takes on average $2,500 to acquire one customer. With this information, you’ll want to invest 8.5% of your MRR which would be $2,507. With this budget, you should be acquiring about one customer / month.
Depending on the amount of funding and / or revenue you have, you may want to invest more. As much as 18 times your monthly fees or 150 percent of first year ACV, so long as the LTV is more than or equal to three years or so. Note that it is possible to have a LTV:CAC ratio (high return) and not reap the returns very quickly. This happens when you have a low churn rate and your calculations assume that your customers will stay and pay for the next five plus years; revealing that you have a large LTV.
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When this happens, we suggest investing more upfront to account for the occurrences that your customers leave early. Times change and so do people so you may want to use this calculation only to justify your conclusions of another strategy.
Here are a few scenarios on where you should be with your LTV:CAC ratio:
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Less than 1:1. - You’re in trouble and on the road to failing 1:1. - On every acquisition you’re losing money 3:1. - This is the perfect ratio. You have a solid business model and prosperous business. 4:1. - Great news but you should be growing faster. You’re under investing and need to start more aggressive campaigns to acquire customers and bring your ratio closer to 3:1
It’s also worth noting that word of mouth, PR and other inexpensive marketing tactics do come into play when averaging out your CAC. This means that some of your customers cost little to nothing to acquire or upgrade, while others cost one and a half to three times your average CAC. So while the most reliable figure to focus on is the average CAC, it’s good to know that you’re actually paying more to acquire a segment of your customers while the rest of the group are almost free to acquire. Keep this in mind as you may actually be able to spend more money on the customers that you need to pay to acquire.
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So you have X amount to work with.
What are you going to do with it? Our team of SaaS experts will be happy to work with you to determine what a healthy budget should be for your business and what should go into that budget. We also enjoy long walks through marketing strategy building and talks about SaaS marketing tools and practices. If this sounds like a relationship you’re interested in, we would love to talk.
CONTACT TODAY!
HOUSTON 2000A Edwards St. Suite 314 Houston, Texas 77007
SOURCES http://saascribe.com/how-to-calculate-saas-marketing-budget/
Phone: 877.519.0555
https://www.quora.com/How-much-should-SaaS-companiesbudget-for-marketing-after-product-market-fit?__snids__=15279 28393%2C1527658328%2C1527612562&__nsrc__=2
Email: connect@inturact.com
https://www.quora.com/What-is-the-typical-acquisition-cost-ofa-SaaS-customer-by-monthly-multiple http://tomtunguz.com/saas-marketing-spend/ https://docs.google.com/spreadsheets/d/1f3SiUqW51RXDEQ_ wANLVyqHkdZj5cj8--xaLuVR34g4/edit#gid=0 http://www.inturact.com/blog/how-to-determine-yourmarketing-budget-and-what-to-expect-2015