SaaS Spending Benchmarks For Different Types Of SaaS Companies
“You have to spend money to make money.”
Every entrepreneur and investor knows this all too well. In the business world, you need to shell out some kind of capital in order to make a return on your investment.
SaaS businesses are no exception to this rule, as they have their own unique set of expenses that they need to account for.
So how do SaaS companies know what’s the right amount of money to spend and what kind of benchmarks should you aim for?
Let’s take a look at some SaaS spending benchmarks that can help you and other SaaS companies get an idea of what your financial goals should be.
But first, let’s take a look at different expenses that a typical SaaS business may face:
Common Expenses For SaaS Businesses
Running a SaaS company is no easy task. And it is definitely not a cheap task.
Even just keeping the company afloat requires a significant amount of money. And it would cost so much more to grow it.
But hey — spend money to make money, right?
So here are some expenses you may need to take into consideration when running your SaaS business:
Cost of Goods Sold (COGS)
For a traditional type of business with tangible products, the cost of goods sold (COGS) is simply all the cost associated with creating or procuring the product.
For a manufacturing company, the COGS could include the raw materials, labor, and other costs needed to produce and transport the product.
For a retail business, it’s even simpler. The COGS is simply the price they paid for the item.
But what is COGS for a SaaS company that has a digital product without any tangible raw material?
For SaaS businesses, the COGS includes the following expenses:
- Customer support team compensation, taxes, and benefits
- License fees for software used for customer support
- Merchant fees
Research & Development (R&D) Expenses
Creating a SaaS product requires an immense amount of research and development (R&D). It is the R&D that enables SaaS companies to build digital products and make sure that they work in the real world.
R&D expenses may include the following costs:
- Salaries for software engineers, tech leads, designers, etc.
- Hardware costs (servers and other equipment needed to run SaaS applications)
- Software licensing fees
- SaaS subscriptions for testing purposes, etc.
DevOps is a combination of the words “development” and “operations.” It’s an approach that SaaS companies use to ensure their processes are efficient and reliable.
DevOps expenses can include the following:
- Cloud Service Providers fees (e.g., AWS, Azure)
- Software licenses for DevOps tools (e.g., Jenkins, Kubernetes)
- Compensation for DevOps engineers
Customer Acquisition Cost
Having a SaaS product isn’t enough. SaaS companies need to acquire customers in order to make money. This means that SaaS companies need to invest in marketing, sales, and other promotion activities in order to reach new customers.
The amount of money SaaS companies spend on finding and acquiring customers is known as the customer acquisition cost (CAC). CAC includes marketing and sales expenses such as:
- Advertising costs
- Marketing and sales team salaries, bonuses, taxes, and benefits
- Sales team commissions
- License fees for marketing and sales-related software you use
CAC is also one of the most important SaaS metrics for measuring marketing and sales performance.
Professional Services Costs
Professional services are an important part of SaaS companies. Whether you want to file for intellectual property rights or just need help keeping your books in order, SaaS companies need to invest in professional services.
The cost for these services can include
- Legal fees (patent applications, etc.)
- Accounting and bookkeeping services
- Consulting fees for business strategies and operations advice
- Fees for external auditors
General & Administrative (G&A) Expenses
General and administrative (G&A) expenses are costs related to running a SaaS business but do not necessarily fall under the categories we mentioned above.
In other words, the G&A expense is your overhead cost. It includes items such as:
- Office space lease cost
- Office equipment and supplies
- Office utility costs
- Internet bills
- Management team salaries
- Insurance premiums
- Travel costs
Factors That Affect SaaS Company Spending
Every SaaS business is unique. And each company goes through several growth stages. That means each SaaS company’s spending patterns will vary due to several factors.
Let’s talk about those factors one by one.
Source of Funding
The source of SaaS company’s funding can greatly affect their spending patterns.
SaaS companies that are bootstrapped (self-funded) may have a more conservative approach to spending money since they need to be careful with their cash flow.
On the other hand, SaaS companies who have access to external funds such as venture capital or private equity will be able to spend more freely.
The SaaS company’s growth stages will also largely shape their spending patterns
For instance, SaaS companies in the early stages of development may focus on R&D expenses so they can perfect their product. Or they may want to invest a bulk of their resources on customer acquisition to grow rapidly and grab a large market share.
On the other hand, SaaS companies in the maturity stage tend to focus more on customer success and moving upmarket.
This means they may invest more in customer support, bettering their product, finding new ways to generate revenue, or expanding to larger markets.
Annual Recurring Revenue (ARR) Levels
The annual recurring revenue (ARR) is the SaaS company’s main metric for measuring growth. Naturally, SaaS companies with a higher ARR tend to have more resources available for spending
For instance, SaaS companies with an ARR of $50 million or more can afford to invest in customer success teams and bettering their product at a much larger scale than SaaS companies with an ARR of less than $1 million.
The SaaS industry you are in can also affect your spending patterns. SaaS companies in industries such as healthcare or finance need to invest more money into compliance and security so they can protect customer data.
At the same time, SaaS companies in other industries such as SaaS for marketing may focus more on user experience and features that will help them acquire customers.
SaaS Spending Benchmarks By Source Of Funding
As we mentioned above, SaaS companies can have different sources of funding, and it makes a difference on how they spend their resources.
Here are some SaaS spending benchmarks for SaaS companies with different sources of funds:
Bootstrapped SaaS Companies
Bootstrapped SaaS companies tend to be more risk-averse when it comes to their spending. As you can see, they tend to keep a large portion of their total revenue as profit.
Still, a large portion of what they do reinvest in growth goes to their R&D, sales, and marketing. These three expenses are key to scaling your SaaS product and acquiring more customers.
Equity-Backed SaaS Companies
SaaS companies who have access to equity funding have the freedom to be more aggressive when it comes to spending their resources.
Since SaaS companies with external funding can afford to take bigger risks, they often invest heavily in R&D and customer acquisition.
As you can see in the infographic, SaaS companies with external funding tend to allocate a much larger portion of their total revenue towards marketing and sales expenses compared to bootstrapped SaaS companies.
What’s more, because they are receiving external funding, they can exceed their own ARR when it comes to spending.
SaaS Spending Benchmarks By ARR Levels & Growth Stage
SaaS companies with different ARR levels at their different growth stages also tend to have different SaaS spending patterns.
Less Than $1 Million ARR SaaS Companies
For SaaS companies with an ARR of less than $1 million, most of their resources are allocated towards R&D, customer acquisition, and DevOps.
These SaaS companies tend to focus more on perfecting their product, rolling out new updates efficiently, and getting more customers in order to grow quickly.
They also tend to allot a larger budget for DevOps since SaaS companies in this stage tend to experience a lot of technical issues and are still working out the kinks in terms of their IT infrastructure.
$1 Million to $3 Million ARR SaaS Companies
SaaS businesses with an ARR between $1 million and $3 million tend to have a larger budget for R&D and sales. At this point, SaaS companies are starting to gain traction and might even be running some marketing campaigns, so they need to invest more into customer acquisition.
They also tend to ease up on DevOps expenses as SaaS companies in this stage are settling into their SaaS infrastructure and don’t need to spend as much on IT-related issues.
$3 Million to $5 Million ARR SaaS Companies
SaaS companies with an ARR between $3 million and $5 million are often looking for new ways to scale. As a result, spending for SaaS providers in this stage tends to be focused on their sales and marketing budget.
These SaaS businesses also generally lessen their budgets for DevOps and professional services as they already have more stable systems in place and don’t need as much help from outside sources.
$5 Million to $10 Million ARR SaaS Companies
As a SaaS company matures, it may start expanding to larger markets, particularly the enterprise market. As a result,t SaaS businesses in this stage tend to invest heavily in advanced enterprise SaaS sales processes and teams focused on closing large businesses as customers.
These SaaS providers also may increase their R&D budget as they scale their SaaS products to meet the needs of larger customers.
$10 Million to $20 Million ARR SaaS Companies
At this stage, SaaS businesses are focusing on maintaining their momentum. SaaS spending benchmarks for SaaS companies in this stage are more or less the same as the previous stage.
However, most SaaS providers within the $10 million to $20 million ARR range usually ease up on their spending on professional services.
More Than $20 Million ARR SaaS Companies
SaaS companies with an ARR of more than $20 million tend to continue investing in R&D and sales.
These SaaS businesses will also often invest in more advanced SaaS infrastructure to ensure that their SaaS product can scale and meet the needs of large customers.
Customer Acquisition Spending Benchmarks Per Software Type
The SaaS spending benchmarks for customer acquisition can vary depending on what type of software the SaaS product is.
As you can see, software types like data infrastructure and infrastructure SaaS providers tend to invest slightly more in customer acquisition than SaaS companies in other industries.
Final Thoughts About SaaS Spending Benchmarks
When it comes to the spending patterns of a SaaS company, there is no single benchmark that applies across the board.
Each SaaS business is different and SaaS spending benchmarks will vary depending on several factors.
SaaS companies that are funded by investors will have different risk appetites than bootstrapped SaaS startups. And as a SaaS business grows, it will have varying strategies and budget allotments as it goes through different growth stages.
Still, out of these examples we mentioned above, we can get an idea of how much you, as a SaaS business owner, should be spending on different aspects of your company.
By understanding your specific situation and SaaS spending benchmarks that may apply, you can make better decisions regarding your SaaS business’s financials and strategy.
This will help ensure that your SaaS business is able to grow into a successful enterprise.
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