How Funded SaaS Companies Define Their Paid Media Budget: A Deep Dive
As the Performance Marketing Lead for a Series B funded company, I have had first-hand experience in defining, adjusting, and optimising paid media budgets. In this article, I'll share insights about how funded SaaS companies determine their paid media budgets. We'll explore benchmarks for funnel conversion rates and budget allocation, reverse engineering based on MQL/SQL/customer objectives, and the consideration of unit economics frameworks that factor in customer churn rate.
Let’s dive in!
Understanding the Basics of Paid Media Budgets for SaaS
Before diving into the calculation process, let's discuss key factors that affect your paid media budget:
- The average marketing expenditure for companies generally hovers around 10% of revenue, according to Gartner. For SaaS firms, it's a different story. SaaS Capital reports that SaaS companies exhibiting above-average growth tend to allocate an average of 14% of their revenue to marketing.
- In the early stages of growth, SaaS providers often spend substantially more—sometimes exceeding their revenue—to establish their brand and product in the market. This trend isn't exclusive to newcomers. Major SaaS players, such as Salesforce, Zendesk, and ServiceNow, allocate more than 40% of their revenue to marketing, leveraging high marketing budgets to dominate their respective product categories and fuel rapid, sustainable growth.
- Stage of Your Business: Your company's lifecycle stage greatly influences your marketing budget. Rapidly growing companies with healthy LTV to CAC ratios can afford to invest more in marketing.
- Type of Funding: VC-backed SaaS companies have more latitude for experimentation and rapid scaling, thanks to substantial resources. Conversely, bootstrapped companies need to exercise more caution, operating under tighter budget constraints.
- Understanding LTV to CAC: This ratio offers insight into the value a customer brings to your company over time compared to the cost of acquiring that customer. A ratio of 3:1 signals a path to sustainability, while 4:1 or higher suggests your company is scaling.
Defining Your Paid Media Budget through Reverse Engineering
A common approach for SaaS companies is to reverse engineer the paid media budget from your customer acquisition plan. Let's illustrate this process with a revised hypothetical example.
Step-by-step Guide to Reverse Engineering Your Paid Media Budget
- Define Your Objective: Let's say your goal is to add €2M in new ARR, which would be achieved by acquiring 400 customers annually with an average ARR of €5,000.
- Understand Conversion Rates Across the Funnel: For our example, we'll use the following conversion rates which are based on
- Calculate Required MQLs at Each lifecycle Stage:
- Estimate Budget Based on Cost Per MQL:
In this scenario, the LTV to CAC ratio comes out to be 3.35:1 (€15,000 LTV / €4,500 CAC), indicating that your customer acquisition strategy is profitable and that you're well-positioned to sustain or possibly increase your marketing budget.
With these insights, you are now equipped to calculate and optimize your SaaS company's paid media budget. The secret lies in understanding your business's unique factors, conversion rates, and the profitability of various marketing channels. By applying this knowledge, you can make informed decisions and drive sustainable growth for your business.