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 growth rate varies with sales and marketing (S&M) expense, and they’d know that KeyBanc tracks that:
If that SaaS company were spending 35% of revenue on S&M, then the median growth rate would be 23%, and top quartile growth starts at 34%.
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.