Sales/marketing spend vs. Product development spend at recently IPO’d SaaS companies

By: Kyle

As someone in the SaaS business, I am intrigued by the recent rush of SaaS companies that have IPO’d. The biggest two expenses in most SaaS business going for scale is product and sales/marketing. I wanted to know the proportional breakdown in spend on product dev and sales. So I made a Google Spreadsheet and filled in the numbers from the S1 filings of ten SaaS IPOs. Here’s how much each spent on sales/marketing for every dollar on product dev*:

  • Workday spent $0.97 on sales for every dollar spent on product / dev
  • Veeva Systems – $1.43
  • Marketo – $2.06
  • RallySoftware – $2.28
  • Eloqua – $2.31
  • ExactTarget – $2.52
  • RingCentral – $2.55
  • BazaarVoice – $3.16
  • ServiceNow – $4.36
  • Marin Software – $5.00

Workday is hailed as the model SaaS IPO and has been crushing it for many reasons. At least one of those “secrets” is that they can spend as much on building out their product as they must in convincing people to buy their product.

Deciding how to allocate resources between Sales and Product Dev is an especially difficult question for new SaaS companies. On one hand, spending significantly more on sales can help you hit near term numbers. But a significantly higher spend towards sales may be telling of  a larger problem: that there is less natural demand for your product. Smart investors and entrepreneurs should make a distinction of which one of the two it is.

Now, I don’t think a significantly higher spend for Sales/Marketing relative to ProdDev is always a bad thing, especially in cases where you can show high customer retention and lifetime value. In Workday’s case, their lifetime value is incredibly high because they deploy their solution to large organizations that pay them millions of dollars for a robust solution. But this also means that the Workday product must be that much advanced given its critical role in the day to day operations of its customers. Therefore, we find Workday’s spend on sales to be very close to their spend on product.

In contrast to the role Workday plays in the life of its customers’, a company that loses access to their BazaarVoice subscription is unlikely to suffer any significant organization-wide disruption. This naturally means that BazaarVoice is a much “simpler” product relative to Workday.

You can see my original spreadsheet here.

*Data is based on 3 full year numbers from the S1, typically 2010, 2011 and 2012 but not always

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