Why Public SaaS Financial Benchmarks for Sales and Marketing Expense Don’t Tell the Story

August 17, 2018

Fifteen years ago, software company financial plans followed standard guidelines about sales and marketing expense targets. Traditional software sales and marketing expense aimed for 22%-25% of revenue, maybe 28-30% if strong revenue growth warranted it.  Anything north of that required a really good explanation for why and how the numbers would be reduced.  SaaS financial models have thrown those benchmarks out the window.

SaaS Sales and Marketing Expense for public companies averages around 50%

SaaS Sales and Marketing expense for public companies averages around 50% but the average includes a huge range of spending. is still investing just under 50% at $10B+ in revenue.   SaaS identity management vendor Okta invested over 65% of revenue last year in sales and marketing and achieved 62% annual revenue growth.   Cloud communications platform company, Twilio invested 25% of revenue in Sales and Marketing to hit 44% year-over-year revenue growth, while data platform HortonWorks invested almost 76.5% in sales and marketing to achieve about the same revenue growth rate as Twilio at 42%.

SaaS Sales and Marketing Expense at All Growth Rates Ranges Dramatically

We looked at a group of SaaS companies results and spending last year and segmented by revenue growth ranges to see the trends:

  • SaaS vendors with revenue growth over 30% last year,
  • SaaS vendors with revenue growth between 20% -30% of revenue, and
  • SaaS vendors with slower growth under 20% of revenue

As the following charts show, the level of sales and marketing expense is NOT a good indicator of revenue growth.  SaaS companies with similar revenue growth rates spend different amounts on Sales and Marketing.  In fact, for the public SaaS companies with the highest growth rates, expense ranges from a high of 81% to a low of 22% of revenue, although almost half of companies spend in the 40%-50% range.

Source: OPEXEngine

For companies in the mid-range of revenue growth between 20-30%, we see a range from 60% spending on Sales and Marketing at Box selling into a horizontal market to a low of 19% for vertically focused Veeva.

Source: OPEXEngine

Companies with relatively low growth rates compared to the sector also range widely in their Sales & Marketing spend.  From Cloud data company Tableau spending almost 60% of revenue on Sales & Marketing and only achieving 6% revenue growth last year to Ellie Mae and Athena Health (both companies with big competitive moats but low growth) spending 16% and 21% respectively.

Source: OPEXEngine

Sales and Marketing Expense Doesn’t Capture All the Investment

More recently, the Rule of 40 (balancing revenue growth against operating profit) broadens the focus from Sales and Marketing alone to looking at operating expense overall.   This makes sense because Sales and Marketing spend looked at in isolation can be misleading.  You can spend all you want if your growth rate outweighs your operating profit in the sum of both together.  However, if you have a deceivingly low Sales & Marketing spend, but you are spending heavily on R&D to automate Sales & Marketing, it still shows up as part of the total of operating expense.Low priced subscriptions sold in an automated, transactional model, may have low direct Sales & Marketing spend, but take a look at their R&D and Cost of Revenue. Websites that perfectly capture every lead, automatically process them through the sales and marketing funnel and close the deal with low human touch require a lot of ongoing investment.  Investment required for freemium and free trial models often are not included in direct Sales and Marketing expense, but should be, as they are really doing the work of Sales & Marketing in capturing new leads and bringing them to a closed contract.Operating executives benchmarking spending and investment for growth need to look beyond Sales & Marketing spend and look at a variety of metrics.  Here’s what we’ve found.

Key Take-Aways

If you are looking for guidance on Sales and Marketing expense targets, benchmark peer companies with similar Average Contract Values and business models.  The investments in selling and marketing a low-priced product tends is less in direct sales cost, but higher in Marketing and R&D. Conversely, companies with high priced products selling into the enterprise tend to spend much more on expensive Sales people and more complex sales organizationsAnother dimension that affects Sales and Marketing spend is whether a company is selling into a horizontal or vertical market.  Companies in broad horizontal markets tend to spend more on Marketing than companies in vertical markets.Overall, the whole picture of operating expenses (Sales, Marketing, R&D) as well as Cost of Revenue provides a fuller picture of a vendor’s go-to-market expense than just looking at direct Sales and Marketing expense.   SaaS companies are selling and marketing in the Cloud and automating more than ever.  Much of that go-to-market expense is a technology investment and doesn’t end up in direct Sales and Marketing.