gravity 🧾
October 19, 2024
March 17, 2024 | Read Online
{{OPEN_TRACKING_PIXEL}}
Jay Nathan, GrowthCurve.io
There are two types of operational expenses in a SaaS business:
Costs of Goods Sold are the variable costs incurred when you deliver a new customer. Server and infrastructure expenses, support teams, professional services, customer success are all included in COGS [1].
SG&A costs are fixed expenses. They don't vary linearly by the number of customers added to your portfolio.
Most SaaS companies put SG&A expenses into the following buckets:
Of all expenses on the SaaS P&L, sales and marketing are generally the largest.
According to the Meritech public SaaS benchmarking tool, the median Sales & Marketing spend as a percentage of last twelve months (LTM) revenue is 36%. The highest on their list, 63%.
Here are some more examples to illustrate the magnitude of sales and marketing spend relative to revenue (using ARR as a proxy):
Company
Annual Recurring Revenue
S&M% of Revenue (LTM)
MongoDB
$1.8B
36%
Snowflake
$3.1B
37%
Hubspot
$2.3B
42%
Privately held SaaS companies, i.e., venture capital and private equity-backed firms, share similar characteristics:
Benchmarkit.ai private SaaS benchmark 1H 2023
For years, I’ve heard people complain about the level of attention given to sales in company town halls, board rooms, and in budgets.
There's certainly some validity in these complaints.
But in light of the financial realities, the "attention" is better thought of as scrutiny.
Sales performance lives under a microscope because failure to achieve sales plans impacts everything downstream.
SaaS budgets begin with bookings and retention assumptions. Any decisions to expand spending on product development, customer success functions, or G&A depend upon top-line performance.
Company managers and owners must ensure that go-to-market efforts yield planned results, and if not, manage expenditures accordingly.
When bookings are off, the company suffers on both ends of the financial equation.
Missing sales, especially early in the year, can cause revenue shortfalls. In turn, revenue misses without corresponding cost reductions eat away at bottom line profits, jeopardizing both growth rate and margin targets.
Last week, the Chief Customer Officer officer of a major, privately-held SaaS company told me that no matter what happens with bookings and retention this year, they will manage to their EBITDA target for the year.
Here's what that means in laymen's terms:
If the company misses revenue it will cut costs to keep profit margin inline with budget expectations.
Most SaaS companies I interact with are thinking the same way.
And because 75% of SaaS company expenses relate to people - salaries, benefits, training, entitlements, etc. - cutting costs almost certainly means hiring freezes (best case scenario) or layoffs.
When it comes to sales and marketing expenses, the tech industry has defied gravity since about 2010.
But just as the forces of nature are immutable, gravity was always there, lurking in the shadows.
525 basis points worth of interest rate increases between March 2022 and July 2023 laid bare the reality that profits still matter.
Even in B2B tech.
How are you helping your company hit its sales plan for the year?
🤘
[1] A portion of customer success costs may be allocated toward sales & marketing when heavily involved with expansion sales.
Whenever you're ready, there are 2 ways we can help you:
GrowthCurve.io is a weekly newsletter for SaaS sales, marketing, product, and customer success leaders.
Join over 3,000 subscribers who are leveling up their companies and their careers.
Update your email preferences or unsubscribe here
© 2024 The Chief Customer Officer
2070 Sam Rittenberg Blvd Suite B-272
Charleston, SC 29407, United States of America
We’re grateful you choose to read each week.
When you’re ready for more, there are a couple ways we can help:
» Cover Your SaaS is a financial literacy course for go-to-market leaders. Grab your copy here.
» Promote your product and services to over 4,000+ senior SaaS Sales, Marketing, and Customer Success pros by sponsoring our twice-weekly newsletter and podcast.
