Budget Planning 2022: Product vs. Sales
It’s December – your 2022 budget is drafted, circulated, revised, completed and board approved… right?
Perhaps it is, but there is no call for panic if it isn’t yet. I certainly wouldn’t recommend it, but I’ve seen budgets get approved 6 months into a fiscal year.
Whether it’s complete or not, there is a 100% chance that the budget will be adjusted over the course of 2022. As it changes, there’s one question that every startup should hope to hear and be prepared to answer:
“If you were to spend more, where would you put those dollars to work?”
This isn’t an easy question to answer – even if it’s clear what the business’s biggest challenges are. For example, if churn is a priority, an incremental DevOps Engineer will help decrease outages, but an incremental CSM may make more sense if a significant portion of customers are coming up for renewal. The answer isn’t always cut and dry, or there could be more than one ‘right’ one.
OpenView’s 2021 Finance and Operating Benchmarks Report highlights a framework that can unwind this death by a thousand cuts analysis to start with a simple question: Should we allocate resources to R&D (product) or to sales & marketing (sales)? From there, it becomes a much simpler question to tackle.
OpEx Spend Benchmarks: Product or Sales?
To better understand how businesses are allocating their resources, we asked almost 600 SaaS startups:
“As a % of your most recent quarter’s ARR, how much did you spend on Sales & Marketing and Product and Engineering?”
Based on ARR, here is how our respondents stacked up:
Early stage companies with less than $1M in ARR spend 2x on product vs. sales. As they reach scale, more resources are allocated to taking those products to market. By $20M in ARR, spend on selling products begins to exceed spend on building products.
The ARR threshold where sales outpaces product and engineering in spend continues to creep upwards ($2.5M in 2019, to $10M in 2020, to $20M in 2021). This suggests that business focus remains on the product for longer as companies and their shareholders are more focused on customer value creation for longer.
Based on where your current budget lines up, these benchmarks help provide a gut check for where you’re allocating your resources. However, no two startups are identical.
For Product-Led Growth, Product is the Quick Answer
Product-led growth (PLG) focused companies allocate ~10 percentage points less of their OpEx budget toward sales and marketing than the average company and sales spend doesn’t eclipse product spend until the $50M ARR threshold is crossed. This is unsurprising as leveraging product to fuel the sales engine is a key pillar of PLG companies.
However, these dollars aren’t necessarily shifted towards building the product. With the exception of companies in the $10M – $50M range, product-led growth startups aren’t allocating more of their spend to building their products – they’re just spending less overall. On average, companies that cite PLG as “fundamental to their business” have 17% higher operating cash flow.
Spending less on sales does reach its limits as companies scale beyond $50M in revenue and a formal sales team becomes necessary.
High Growth Companies: The Answer Depends on Your Stage
It’s worth noting that there is a high correlation between high growth and PLG. However, when we look at growth alone, the top quartile startups tell a different story. The fastest growing startups tend to spend 10% more on sales and marketing to reach $1M in ARR. While surprising, it isn’t shocking given that 300% growth needs to be obtained to qualify for this quartile (vs. 100% in 2019 and 150% in 2020). Additionally, fueling 300% growth likely means your sales spend is ahead of your ARR on a relative basis.
These sub $1M ARR businesses aren’t just spending differently between sales and product, they are allocating their sales spend differently. Ten percent of their ARR is spent on customer success and account management functions (vs. only 3% for slower growing startups). This tactic makes sense as very early stage startups look to assess the value of their products beyond original sale before allocating resources to their long term product vision. It also doesn’t hurt to sow the right seeds for +110% net dollar retention early on.
High growth companies that reach $2.5M in ARR spend 53% of their ARR on product and simultaneously decrease the relative spend on Sales to 21%. The benchmarks hint that investing relatively more in product development is required at this stage. However, in order to continue to be a high growth start up, these product and engineering dollars need to be focused on how they will contribute to top quartile growth. Examples of this include, developing high value features to grow ARPU, coding in virality to create natural expansion, or building for a specific part of your addressable market to widen competitive differentiation.
Finally, as start-ups begin to exceed $50M in ARR, they’re not necessarily spending any less on product and engineering than their slower-growing peers, but they are putting more fuel on the sales fire (10 percentage points more).
So I picked one, now what?
Well, unfortunately, it’s a bit more complicated than that. If you’re spending much more on product and engineering than your peers, the answer isn’t as simple as just shifting the incremental budget over to sales and marketing. However, it does mean that if you aren’t starting to make that shift, you should have good reasons for continuing to buck the trends.
At the very least, it’s helpful data to show your departmental leaders when communicating why they are or aren’t getting that much needed head right away.
For more ways to assess how you stack up to peers, check out our complete 2021 SaaS Benchmarks Report here: 2021 Finance and Operating Benchmarks Report
Our fifth annual Financial & Operating Benchmarks Survey (formerly known as Expansion SaaS Benchmarks) takes a deeper look at the performance metrics behind some of the most successful SaaS businesses and identifies markers of long-term growth.
An overview of the most critical SaaS metrics, along with tips and insights on how to measure and act on them to boost your revenue and fuel your growth.