How much should a B2B software startup spend on marketing?

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by Lindsey Francy Oct 5, 2022 News
How much should a B2B software startup spend on marketing?

Getting people to believe in, pay money and want to work for it is one thing, but marketing is another.

The mix of marketing activities you carry out varies based on your company's priorities so it's difficult for marketers to find industry benchmarks to measure themselves against

In order to understand how much you should be spending on marketing as a B2B SaaS startup, Sifted spoke to Balderton Capital and Notion Capital.

It's important to compete for attention before you can compete for value. Andrew Davies is the chief marketing officer of Paddle, a B2B software as a service company that helps other companies sell their services.

Depending on the stage of the company, the role of marketing can change. It exists to fulfill two important roles early on.

The company does something. What is it about it that makes it worth something? What makes it different from the others? If the company is offering something that hasn't been seen before, it's even more important.

The sales team needs opportunities to close in order to make sales easier and more effective.

What marketing has to budget for

Drawing up a marketing budget needs to focus on three areas.

People, programmes, infrastructure

The main costs associated with a startup's marketing department are the salaries of its team, the marketing activities it carries out and the tools and processes it needs to execute

Lauren Berkemeyer is the chief marketing officer. She said that she had a budget for marketing covers.

  • Inbound. Digital advertising — like Google Ads — for direct customer communication, and paid social media for brand awareness and retargeting.
  • Events. Trade shows and digital events for awareness and trust building. “Face to face time with potential clients and meeting the wider industry is undervalued” says Berkemeyer. 
  • Martech stack. Tools to enable the marketing team to do its work. These include Hubspot, Linkedin Sales Navigator, Gong and Vidyard. 
  • PR and content. A PR agency for external comms and SEO optimised content creation.

Marketing departments and CEOs focus a lot on budgeting for top of the funnel activities. That can be too broad. Money is needed in the middle and bottom of the funnel. New people are not brought in, but they close deals.

What do you think that looks like? Imagine if you have a customer that loves your product but can't afford it. A return on investment calculator can be built for key stakeholders to see the value. The CMO may take a potential client for dinner with three other customers in order to convince them to buy the product.

Give your team pocket money

Davies suggests that 20% of the budget should be "play money" Managers should be given the power to say no to their team's ideas. Creativity and innovation are rewarded. There needs to be some shots in the dark for marketing to have a big upside.

Headshot of Dave Kellogg —  entrepreneur in residence (EIR) at VC fund Balderton Capital
Dave Kellogg

How do you work out your marketing budget?

  • Marketing spend as a % of total spend

According to the latest survey, marketing budgets represent 11.8% of the company budget. 5% to 6% of gross revenue is spent on marketing in a traditional business according to everyone.

Berkemeyer says that a startup is not like a traditional business. While established businesses have brand visibility, startup businesses are not.

A pre-Series B startup should spend between 15% and 20% of gross revenue on marketing, according to her estimates. Post-Series B, this drops to 8%.

Figuring out your marketing budget as a percentage of revenue can be useful for larger businesses to benchmark, but in most startup businesses revenue shouldn't be the focus If you base your marketing budget on current revenue at public market benchmarks, it wouldn't be enough, according to Davies. You need to spend more to reach your goals. As a percentage of the net new annual recurring revenue, marketing spend is more useful.

  • Lean on industry benchmarks 

Looking at industry averages can be useful for early-stage startup budgeting. They can ask their investors, industry peers, and employees for insights from their previous companies. There are also external data sources that can help.

Key benchmarks can be used to begin.

  • The median percent of annual recurring revenue spent on marketing at B2B SaaS companies is 9%.
  • The marketing department’s budget is normally half of the sales department’s. 
  • At B2B SaaS companies, sales and marketing budgets together amount to 31% of total revenue on average — this is normally double the research and development budget.
  • Social media spend amounts to 15.4% of the overall marketing budget. 

There is a "best in class" bias when taking numbers from top businesses and from the stock market with publicly available data. A lot of data is US-centered. It isn't personal to a company and its resources.

Davies says that priority should be given to the costs that will generate in-quarter and next-quarter demand for your startup, while creating as much learning as possible so you can hone the messaging and channel mix for the next period.

To figure out a budget, you need to know how many deals need to be closed. The number of opportunities that need to be created by the marketing department will be determined by this. A budget can be created if the team knows how much each opportunity costs, how many people are needed to execute the work, and how much infrastructure costs.

According to Davies, a well run process should generate at least 7x of the total cost of creating opportunities.

The back-of-the-envelope calculation is used.

  • If your goal is £400k in sales and each deal generates £200k, the team needs to close two sales.
  • You know the sales team —  based on historical data or on industry standards — close two of every 10 opportunities presented to them. 
  • The marketing team now knows it needs to create 10 opportunities for the sales department. 
  • If you know the cost per deal is between £2k and 4k, to create 10 opportunities you need £30k to 40k. This could cover marketing channels, branding materials or a closing dinner, for example. 
  • If you assume the people cost equals the cost of marketing activities, another £30k to 40k will need to be budgeted. 
  • The total marketing budget for £400k in sales would then be £60k to 80k. 

Fixed costs, like software costs, are not included.

Historical data and industry standards can be unreliable at B2B startups. Most marketing departments give credit for how a lead was added to the funnel, but how did they get there? Was it a marketing email or a social media ad? The amount of money spent on those channels is influenced by this analysis.

Mid and end of funnel activities get zero credit and show up as a complete waste of money because of the way credit is assigned. The budget is cut if no leads come in. If the purpose of the dinner was not to find new people but to help close leads, it should be funded. For budgeting, aholistic approach of how a deal reached the dotted line needs to be considered.

Work out your CAC

The total cost of acquiring a new customer is known as the customer acquisition cost. If their spending is efficient, it helps. It is a metric used by VCs to determine if an injection of cash will benefit growth.

The number of acquired customers is used to divide the costs from the beginning of the customer journey into the number of acquired customers.

There are many ways to calculate it. Yu Life looks at a fully loaded CAC. It divides sales and marketing costs by the number of customers acquired in a given time period.

If a new customer uses your product or service on a trial period but doesn't pay, it's a sign that the product or service isn't worth the money. This can lead to a more impressiveCAC, which is usually used to impress VCs.

If you only use sales and marketing costs for a single month, your numbers will be off.

It's possible to paint a more accurate picture if you look at the customer lifetime value. The predicted revenue is called the LTV. To understand a customer's worth, you need to look at the ratio of LTV to CAC. The ratio is 3:1. You may be missing out on opportunities if it is higher than expected. You need to seriously look at your marketing strategy if it tracks below.

Davies says that if you have a lot of investment and can afford it, a high CAC isn't always bad. If you want to generate £5m in new ARR in the next year, and have capital in the bank to pay for a payback period of 12 months, your total CAC can be £5m.

Once you know how much you can spend, play it back through your funnel to understand how you can make money. This helps your team understand the constraints they are working within.

How to get the most out of your marketing budget

  1. Understand your business’s go to market model. Davies says: “If you want to advocate for your department to get enough of the overall company budget, you need to understand the company inside out. You need to understand the constraints of capital, market size and growth targets.”
  2. A data-led approach is key to spending money. “Track everything, it helps qualify why the department needs a certain budget. For example, YuLife’s attribution modelling reported back that 48% of deals in 2021 were influenced by marketing. It showed us where we should be spending more of our efforts in the next period,” says Berkemeyer.
  3. Don’t reinvent the wheel. “Integrating with the tech stack that is used locally is critical to succeed when entering a new market. Don’t start from scratch. I wouldn’t recommend spending marketing dollars unless your product is ready to be used in a given market,” says Itxaso del Palacio, partner at Notion Capital.
  4. Manage your vendors like your team. According to Berkemeyer, “PR agencies, influencers and any other external partners you work with… you want to treat them as if they were your own team. They will like you and work harder for you.”
  5. Justify every single cost. “Rather than trying to spend a specific amount, justify every single cost against its expected return. You want to treat it like a zero-based budget,” says Davies.

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