Most SaaS companies get their marketing budgets wrong. They underinvest and don’t utilize the full potential of their market – or in the worst case, they invest reasonable amounts but don’t get enough ROI.
Over the recent years, SaaS B2B (and B2C) companies have developed a standard metric for the success of an optimal marketing budget. It was initially introduced by Trello’s founder, Joel Spolsky, and is a widely-acclaimed metric. The objective is to obtain a “Golden Ratio” of 3:1 between their Customer Lifetime Value and Customer Acquisition Cost.
If their LTV to CAC ratio is below 3:1, say, it’s 2:1 or 1:1 – the company will be in great trouble. It is hardly possible for them to break even. On the flip side, if their LTV to CAC ratio is well above 3:1, say 5:1 or 8:1, it means that they are underinvesting in their marketing. Which ultimately means that they have left their customers for their competition.
To talk of competition, B2B SaaS companies have it a bit tougher than the B2C ones. The B2B products/services are more sticky, and users are less likely to switch to new alternatives once they sign up for certain companies. The process is slow, and to top that off, the costs of switching from one SaaS company to the other are high for B2B clients. After all, it is what makes the B2B SaaS market lucrative.
Therefore, SaaS companies need to have an optimal LTV to CAC ratio. For that, companies must find the Right marketing budget for their business. In this guide, we will share a data-based method for finding the optimal marketing budget for your business with a calculator that makes your life way easier!
What Do Most B2B SaaS Companies Get Wrong About Their Marketing Budgets?
The two most common mistakes that B2B SaaS companies make when devising their marketing budgets are:
- To begin with, they are unaware of their LTV. Most of the time, it happens because getting data such as average purchase value, average order frequency, and other metrics is too time-consuming. The data is so cluttered in different spreadsheets and departments that they don’t go ahead and approach it.
- Even if they have their LTV and CAC ratio data and it is not less than 3:1 – they don’t invest more into marketing. Hence, they miss out on a big chunk of the market.
These are the two mistakes that most B2B SaaS companies make when planning their marketing budgets. Once they sort these two out, it will be easy to calculate their marketing budget. But the question is, how do they calculate the required marketing budget that is optimal?
We have a solution. We sort it out using the Target MRR. How do we do that? Read on to learn more about it.
How To Get The Right Marketing Budget With The Help of Target MRR?
Even when founders are unaware of their LTV, it is less likely that they are unaware of their MRR too. And if they know their current MRR, they would know their Target MRR. It will help us calculate the optimal marketing budget for a company that best suits its goals and objectives.
For clarification, MRR refers to Monthly Recurring Revenue – and the Target MRR refers to the target a company sets to achieve within a specific period.
The process of calculating the optimal marketing budget from the Target MRR is straightforward. Here is the step-by-step process:
Step 1: Identify or Set the Target MRR
First and foremost, there needs to be a Target MRR to calculate the marketing budget from the target MRR.
Step 2: Calculate the number of new users required to complete that target.
For example, if you set the Target MRR to $20,000 and your product has a subscription fee of $100 – you will need 200 new users to hit the target you set.
Step 3: Calculate the Demo Closure Rate and the required number of demos.
How many demos/trials does it take to add one user? That is your demo closure rate. For example, if 5 out of 100 demos that you offer convert and buy your product, your demo closure rate is 5%. Now, to calculate the required number of demos to hit your target of new users, you will have to divide 200(required new users) by 0.05 (5% – demo closure rate) – which equals 4,000. So, you will need 4000 demos to add 200 new users to your business.
Step 4: Calculate the Number of Website Visits required.
It is time to calculate the required number of clicks/website visits needed to get 4,000 demos. For that, you will need the Demo Conversion Rate. It is the same as your conversion rate. It tells you how many people subscribe to a demo after visiting your website. For our example, let’s assume that it is 1%. Now, to calculate the Required Number of Visits, we will need to divide the number of demos required (4,000 – see the last step) by the conversion rate(0.01 or 1%), which equals 400,00. You need 400,000 new visits to your website to get your Target MRR of $20,000.
Step 5: Calculate the Marketing Budget Required.
Now that you have the number of visitors you need to hit your target, your job is almost complete. Multiply that number with a blended average CPC from all your marketing channels (average CPC of Facebook, LinkedIn, Quora, or any other marketing channel you find suitable). For example, if the blended CPC for your optimal channels is $0.03 – your required marketing budget to hit your target should be $12,000.
We have also created a SaaS Marketing Budget Calculator. If you have the required data, it will help you calculate your marketing budget.
Apply the above formula very simply using this easy to use calculator:
A Final Word
Remember that this method and calculator will give you an overview of your marketing budget. It does not provide you with a 100% accurate magic number that will make you millions. The marketing budget also depends on other factors, such as the market you are operating in, the platforms, and your management competency.
Our guide will help you have a good overview of your marketing budget so that you can put effort maximize the results.