What B2B SaaS Companies Get Wrong About Marketing Budgets

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We get insights into dozens of SaaS company marketing budgets every single week Here's what most of them get wrong:

A lot of people think that if they're at 3:1 LTV to CAC ratio then everything will be fine But: a) that's magical thinking b) it's a ratio that leaves out a lot of factors about growth

Example: If you're spending $100 to get a $300 you're left with $200 margin That's infinitely scaleable right?! WRONG It's scaleable to the extent that there are additional customers to acquire

The reality is if you're at a 3:1 ratio or better, then you should probably be spending as much as possible to acquire customers Otherwise, your competitors will And in B2B SaaS, once a customer has bought, they're locked out of the market for a long time

The downstream impact of underspending on marketing: Marketing execs who don't get enough budget because they're nervous about spending end up needing to spend significantly more because they fall behind on the growth curve and market share

So with that in mind, how should you set the marketing budget for your SaaS?

First thing's first: know your numbers. Minimum viable metrics: LTV, CAC, target growth, conversion rates on funnel Bonus if you know your payback period Top marks if you know these metrics for different customer tiers (but that's the subject for another thread)

Let's start with LTV People can build surprisingly large businesses (we see some $5-10M+ ARR) without knowing LTV There's a lot of formulas for it taking in lots of stuff but for ease, let's just use this one (98% accurate in my exp): LTV = MRR / Monthly Churn

Now let's talk about CAC: Again, lots of things you *could* factor in but we like the simple formula for people just putting budgets in place This graphic by @patticus/@ProfitWell shows it nicely:

OK but didn't you just say I should be spending as much as I can to acquire new customers to dominate a market? Yes, I did But it's important to know your CAC so you can calculate progress and to measure against acceptable limits as you grow

If you're in SaaS, you should be setting a target for MRR growth What's yours? We're going to use an example of a company who wants to add $10K MRR and work backwards to talk about their budget

Example company: MRR growth goal: $10K MRR Subscription fee: $500/mo 10,000/500 = 20 new users per month But how are they going to get them? Customers don't just appear magically You have to kiss a lot of frogs before you find the right prospect in the ICP

But first: if you're enjoying this thread, you'll love the detailed blog post that we wrote about this topic (and podcast episode too!) poweredbysearch.com/blog/saas-marketing-budget/

Question we ask: What percentage of demos/free trials/freemium signups convert to paid accounts of a value of $500/mo? Founders tend to overestimate: 70-80% Reality from experience: 30-40% Why? They’re probably demoing too many prospects that aren’t sales-ready

Let's say that the demo-to-close rate of our example company is actually 25% We know that they'll need to demo to 4 times as many people as they need to hit their MRR growth goal 20 x 4 = 80 demos per month needed But ask yourself: how many website visitors do they need?

Generally speaking, when we start working with a client, we find that they're probably converting a tiny fraction of website visitors into demos Usually it's ~1% (Don't worry: it improves once we start working with them!)

Taking this into our example: If the website converts 1% of visitors to demo, and we need 80 demos a month: 80/0.01 = 8,000 new visitors each month needed

How does that relate to the budget though? Well, if you need 8K new visitors a month to get close to your MRR growth goal, you're going to need to finance the marketing somehow

Channels we see doing this time after time: Content/SEO (mid term with some quick wins) PPC (quick wins!) Content/SEO + Outreach is becoming increasingly important

Let's say you test PPC out and you find that you're getting a good conversion rate from clicks on your ads to demo bookings: You'd take the cost per click multiplied by the number of clicks necessary If you want to do this for multiple channels, do a blended cost per click

The number that comes out of that should be the minimum marketing budget Remember that we're looking at projected values. They might not turn out to be the reality It's worth factoring some waste – just like tiling a floor – into your marketing budget ~20% of base budget

Also factor in some experimentation budget for trying new channels/approaches (~10% of base budget – this'll really compound over time) Eventually, the channels you're killing it on will dip in ROI and you'll be glad you invested in finding new channels early

We're almost done here. But before I quit adding new tweets to the thread, let's just say a couple words about: Payback periods

Payback period is the interval over which a company recoups the CAC If you're VC funded, you can usually afford a long payback period But not if you're bootstrapped!

Bootstrapped companies should attempt to shorten payback period as much as possible Remember: if you can't invest in marketing to acquire customers fast enough, someone else will do it on your behalf And this will severely impact your growth potential

On the other hand: Often VC founders are so obsessed with their runway that they don't take advantage of the long payback period their VC funds have given them

The result is a perpetual negative feedback loop: Fearing that the market won’t reward them, the founder is likely to lose share in it.

In either case, you should attempt to optimise payback period for the kind of company that you are and make the most of whatever your bank balance affords you