Marketing Costs for SaaS Companies

A few weeks ago I posted comparing two start up strategies for SaaS businesses; one being the slow, organic growth and bootstrapped route, the other being the well funded route. I summarised my posting saying that it was very much a case of horses for courses saying that;

There’s no black and white answers I’m afraid – it’s more a case of needing to be realistic as to the end result of any given strategy. At the risk of mixing metaphors, a sow’s ear is a good and useful thing; on a pig. But you’re mistaken if you think it’ll turn into a silk purse. Similarly those with champagne tastes better have the pockets to support it

I’ve just come across a post from Bruce Cleveland of Interwest VC that details the pre-IPO capital paid into 18 public SaaS companies. The interesting this is that the figures give a mean of just north of USD43.5million. Suggesting that it does in fact take some serious capital to build a SaaS company to scale.

Of course the analysis is somewhat flawed in that it looked only at public SaaS companies. What would be really interesting would be to look across the board at SaaS players, analyse everyone that was return over a certain level per dollar of investment and rank the results based on capital paid in. In this way we’d be able to assess whether the larger and better funded players are actually more profitable per dollar of capital than the smaller more organic players.

To somewhat backup my contention that publicly listed SaaS companies display traits that make a meaningful analysis difficult, it appears that the publicly listed vendors on average raised USD25million per-listing and primarily utilised this amount on sales and marketing – all in an attempt to heighten subscriber numbers and hence revenue prior to their IPOs.

So it would seem the publicly listed SaaS companies have customer acquisition costs far higher than their more organic competitors which, despite giving some stability in terms of market share, can quickly become problematic – especially given the ease with which SaaS customers can change providers (at least compared to traditional software).

Sage advice from the original post, at any time, but especially now;

In order for the SaaS business model to work, it’s critical to keep sales and marketing costs as low as possible. This means highly leveraged marketing programs that make the product as “viral” as possible — enabling current customers to easily tell others about the success they are having. And, sales costs must be kept down by using the website to answer as many questions as practicable, using customer video testimonials, self-service demos and web conferencing instead of travel for sales meetings.

In fact, if you’re a SaaS CEO, for 2009 I suggest you consider compensating your sales and marketing executives based upon achieving a pre-determined CAC/ACV [customer acquisition cost to annual contract value] ratio. This will force your sales and marketing organizations to work far more closely together — what a concept.