The Sales/Marketing Expense Ratio

Question:  how much does a $15M SaaS company spend on sales and marketing as a percent of ARR?  Answer:  35% (with 45% and 15% as the top and bottom quartiles).

Charts like this, from OpenView’s 2021 Financial & Operating Benchmarks survey, help to answer questions like that all the time.

Good SaaS executives keep these metrics in mind, and you can get them from KeyBanc, RevOps Squared, OpenView, or for bigger/public companies, sites like Meritech Public Comps, Public Comps, or Clouded Judgement.

A great revops or FP&A person will give the answer from multiple sources and explain the differences among them.  Moreover, they’d observe that sales and marketing (S&M) expense really should vary with growth rate, and they’d know that KeyBanc tracks that:

So if that $15M SaaS company is growing at 25%, then median S&M spend is 20% of revenue, whereas if it’s growing at 70%, then median S&M spend bulks up to 46%.

But that’s all SaaS Metrics 101.  Today, I’d like to hop to the 201 level by introducing a simple that metric that can reveal a lot and on which few people focus:  the sales/marketing expense ratio, which just equals sales expense divided by marketing expense.

To introduce the idea — quick, tell me what’s happening at this company:

My take:

  • The company is high relative to the benchmark
  • The company is not making much progress towards the benchmark
  • Sales is getting less efficient while marketing is getting more efficient

This situation is very common.  Sometimes, it’s justified bottom-up — e.g., we’re building a partners function in sales that is only slowly becoming productive and we’ve upgraded both marketing leadership and the martech stack to improve marketing efficiency.

Normally, it’s not.  In fact, normally, there’s no justification whatsoever.  When you ask, you get, “well, that’s just how the budget process worked out, the real focus was on improving S&M and we did.  Next question, please.”

Yes, you did improve S&M, but you put the “S&M” improvement 100% on the back of marketing (in fact, 200%) and with no bottom-up justification for why sales needs to get more expensive while marketing is going to magically become more efficient.  This is a mistake.  The likely result is underfed sellers screaming for pipeline, forming an angry mob with dogs and torches headed to the CMO’s office.

Let me tell you what’s going on when this happens:

  • Your CRO is a better negotiator than your CMO.  They better be.  If they’re not, you have an additional problem.
  • Your CRO has more negotiating leverage than the CMO.  They are negotiating the company number directly with the CEO and indirectly with the board.  This is high-stakes, board-level poker.
  • There’s usually no broken-out benchmark, typically only a combined benchmark, and given the prior two points, the CRO is just fine with that.
  • It’s easy to think that hiring sellers “leads directly” to new ARR than investing in marketing.  Why?  Because in enterprise software the bookings capacity model is typically driven off the number of sellers.  Yes, this is intellectually lazy and only works on the margin, but deep down, it’s what a lot of CEOs and CFOs feel.

So the CMO gets asked to suck it up, the board doesn’t notice the problem, the CFO notices but doesn’t want to rock the boat, and the CEO is just happy to get the plan approved.

Hopefully the CRO has the decency to attend the CMO’s going-away party in the fall.  Because if this process repeats itself for even a few years, that’s how it’s going to end.

So how do we fix this?

1. Shine a light on the problem, by adding the sales/marketing ratio to the in-line metrics presented in the plan.

I prefer to show it this way, which makes it clear we used to spend $2 in sales for every $1 in marketing, but that has crept up to over $3.  Showing the metric gives people the chance to ask the all-important question:  why?

The other way to show this is via “sales composition,” i.e., sales as a percent of sales and marketing:

In this case, you can say that sales has risen from two-thirds to three-quarters of S&M expense, and again ask why.  I think the former presentation is more intuitive, but the advantage of this presentation is that KeyBanc benchmarks it in this form:

2. Shine a light on your inverted funnel model.  Sometimes you can squeeze marketing expense just on the people side, but the real way you usually cut to these targets is by making a series of seemingly innocuous assumptions in your funnel.  Consider:

Saying, we need to take MQL to SQL from 10% to 12%, SQL to SAL up from 65% to 70%, and SAL to close up from 15% to 20% all sounds pretty reasonable.  When you combine these effects, however, you’re saying that you’re going to cut the cost of generating an opportunity by more than a third, from $2700 to $1800.  That should get some attention — without any explanation other than the compound effect of small tweaks, it sounds like an Excel-induced hallucination to me.

3. Get the CRO on your side.  Make them understand that squeezing marketing too hard for purely top-down reasons increases their risk on the plan.  Get them to go to bat for you saying, “we need to ensure we feed the sellers enough pipeline.”  Most boards solve for growth with one eye on the CAC and not the opposite.

4. Get the CFO on your side.  In my experience, the hardest person to convince in these debates is the CEO, not the CFO.  Why?  Because the CEO is the one and only person who must negotiate the plan target with the CRO and that’s always something of a painful process.  So, if you get the CRO and CFO on your side, you will greatly increase your odds of getting the CEO to along with you.  You win the CFO over by emphasizing risk.  Think:  “we’ve (finally) got the CRO signed up for the number, but we’ve squeezed marketing too hard and that’s adding risk to the plan” and then say the magic words, “we don’t want to miss plan — do we, CFO?”  They never do.

Conclusion
In a world where sales has more political power, better negotiating skills, and more negotiating leverage than their marketing colleagues, the somewhat natural state of affairs is for this ratio to slowly increase over time.  The question is:  should it?  Everyone on the e-team needs to take accountability for thinking about that and ensuring the company gets the right, not just the easy, answer.  And the CMO has the unique responsibility of ensuring they do.

13 responses to “The Sales/Marketing Expense Ratio

  1. Brilliant insight

  2. Great idea.

    One potential addition is the pandemic’s impact on spend – on average, 40% of a B2B Marketers budget are/were in person events. So naturally, when the pandemic came, those events were wiped out, causing the sales/marketing ratio to likely increase with a dramatic decrease in marketing. The CMO should provide that context though when looking at these ratios, especially as in person and hybrid (costly) events start to re-emerge together. CFOs or Boards who may be use to zero based budgeting are going to be extra challenged with event travel costs that also were recently zero.

    • True, great point. And remember, that when our company stopped doing events, our competitors stopped doing them too. So, to the extent you believe events are “inefficient” (and I don’t but they can be expensive) we have to remember that everyone got more efficient due to an externality — but going forward if some start redoing them and others don’t, i think the former group looks worse on expense but the latter looks worse on market share in a year.

  3. Dave, truely a fantastic post. I’ve lived every bit of this multiple time and it all rings true. Seems to me the key planning assumption is the source of demand. If brand leadership puts you in demand fulfillment mode, by all means, more reps! The GTM / C-suite that aligns on the full model and check-in regularly on this will outperform. CMO’s need to drive an early, direct and honest conversations about lead sourcing with metrics and $’s.

  4. Dave, great post. In an ideal state, what % of the pipeline should be sourced from Marketing vs Sales?

  5. This is great! Question – where do MDRs/BDRs/SDRs fall in Sales vs. Marketing for thees benchmarks? If some percentage of MDR time is focused on outbound vs. inbound, would it be fair to split that cost between sales and marketing?

  6. Great post. We have a large MDR/BDR organization – would that fall into Sales or Marketing spend based on these benchmarks? Or, would it make sense to break up and allocate cost for outbound activities to sales, and inbound activities to marketing?

    Thanks!

    • Deceptively hard question. Personally, I’d put inbound SDR expense in marketing and outbound in sales. A lot of people put it all in sales. I think it likely introduces non-comparability in different benchmarks because people do it different and only a few (e.g., opex engine) in my experience give deep classification guidelines.

    • Btw, if you’re splitting inbound to marketing and hybrid to sales then an allocation between them makes sense to me for hybrid roles.

  7. Slightly off topic but I’ve never liked looking at these as a percent of revenue because it implies they are cost functions when in real life they are revenue producing functions. You can say that sales and marketing expenses average 35% of ARR, but I’d rather think of it this way – for every dollar spent on sales and marketing you get almost three dollars of revenue. Intuitively, that makes sense to me. (Although it is a bid muddier with ARR).

    It seems a CRO will have a better conversation with the CEO when they say “Right now for every buck we spend on sales we get five bucks in ARR. Now let’s talk about our growth path,”

    BTW, I can’t see which ARR you are using in your analysis. Is it last year’s ARR as of Dec 31, or this year’s projected ARR?

    So, let’s assume you want to grow by 35% as above and you are, say $10 million ARR. That’s an additional $3.5 million of ARR which, you say, is the average amount a company of that size should spend on S&M. Seems high to me.

    • CACD ratio * desired new ARR = expense to get it. Yes, having such conversations I agree with the approach. When doing modeling I build sales off a bookings capacity model (number of sellers, ramping, productivity) flow that into an ARR leaky bucket (with churn assumptions) then model G&A and R&D top-down as % of sales and IMHO that doesn’t imply anything other than that’s an easy way to model them, and model demandgen marketing using an inverted funnel and, hack, uplifting that for the other part of product marketing. In the end, you’ll need to look at revenue and % of sales because that’s where the benchmarks are expressed in.

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