Does the SaaS sales and marketing economics model work?

While searching for some benchmarks data on SaaS companies’ sales and marketing spend, I found a great analysis by Bob Warfield in his blog “Smoothspan”: Why do SaaS companies lose money hand over fist.

In this article, Bob compared and contrasted 3 software companies SuccessFactors, Salesforce.com and SAP. SuccessFactors and Salesforce.com are both pure CRM companies, and SAP has a tiny SaaS division. In the line by line comparison, it turned out that, as expected, the two SaaS companies spent a lot more on sales and marketing than SAP, while there is no clear differentiation between the SaaS companies and SAP on G&A and Research and Development. But in return for the investment in sales and marketing, both Salesforce and SuccessFactors have much much higher expected growth rate than SAP. Of course, we have to take into account the fact that both are much smaller than SAP, especially SuccessFactors which had just IPOed in 2007.

Clearly SaaS companies are on a high growth path – and they are sacrificing a lot of upfront sales and marketing costs for the acquisition of long term, recurring streams of revenues from the customers that are compounded year over year. This is even more remarkable if we consider that SaaS companies often charge a lot less overall in the first year of service as compared to on-premise vendors.

Bob’s article is almost a year old, but since then the SaaS sales and marketing model has actually become even more attractive because the economic downturn has let to smaller budgets that in turn compels former on-premise customers to look for alternatives with smaller total cost of ownership. The downturn has actually increased the SaaS foothold in the market while reducing the cost of customers acquisition, because now more customers are actually looking for a SaaS alternative.

However, the flip side of this is that most SaaS companies tend to raise a lot of venture capital funding to support the initial sales and marketing growth. Now, if venture capital funding actually comes from a partner that also provides strategic and operational support so that the company consistently improves its sales and marketing economics, then the risk profile has been dramatically improved and both the venture capital investors and the company share the same concerns and goals. This is the core tenet of OpenView Venture Partners investment model. We hope to do our part in helping the best SaaS software companies succeed and growth profitably into large, important technology companies.

Tien-Anh Nguyen
Tien-Anh Nguyen
Chief Business Officer at UserTesting

Tien-Anh joined UserTesting as the VP of Finance after extensive financial and strategic experience at OpenView, where he was an investor and advisor to a global portfolio of fast-growing enterprise SaaS companies. He is currently the Chief Business Officer at UserTesting.
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