How much money should early-stage B2B SaaS companies spend on marketing? It depends on four things: your product & company maturity, your market maturity, your growth targets, and your existing marketing capabilities. Today we dive into each factor and share our thinking behind our new (upcoming) budget calculator. Hint: Throwing money at marketing is not always the best solution!
Conversational short-form marketing strategies, frameworks, and tactical advice to help early-stage B2B software (SaaS) companies on their journeys from MVP to PMF and beyond. Hosted by Brian Graf, CEO at Kalungi, and Stijn Hendrikse, Co-Founder at Kalungi, serial CMO for B2B SaaS companies and ex-Microsoft Global Marketing Leader.
Mike:
Yep.
Stijn:
Okay, Mike.
Mike:
Cool. Good stuff. All right. Well, we have somebody new that's joining us today.
Brian:
Hey guys.
Mike:
Brian Graf, he's an associate CMO here at Kalungi. He's been in the trenches a few times.
Brian:
Since the beginning. Yeah.
Mike:
And I guess today we were going to dive deep into our theory, methodology around how much money B2B SaaS companies should be spending on marketing. I think it's one of the more common questions we get and usually comes up in sales conversations, and one of the most downloaded assets that we have on our website, one of the most popular tools we have is our budget calculator. And so, recently we've been scrutinizing it, I guess, a little bit and looking into where the numbers came from and how they apply in different scenarios. And I think we came to the conclusion that while it's been really effective, there's a lot of variables that usually affect how much money you should be spending on your marketing function, especially in the early days. And there's so many different things that can impact it.
So, we started to, I guess, build a new version of it and we're in the throes of doing that. So, we thought it'd be interesting to have a conversation about the different components that we've included in the new calculations, and we're still adjusting some of the variables, but we think the reasoning behind it is pretty strong and won't change. So, I'm curious if you guys, I don't know where we want to start this, but...
Brian:
Yeah. Thinking about the budget that we created way back in the day, however... A year, two years ago, it served a definite need and I think it still does. It allows companies to think out, “what pieces of the marketing function do I want to spend money on? How much do I need to? How can I forecast this into the future so that I can take an annual budget and take it into a month by month spend?” And we put together some really useful things for it. I think one area where we were a little light, which we will definitely go into, is “how much money do I actually need to spend?” And it's a pretty complex question, especially if we're going to put together a template that is going to give advice to different companies with different nuances.
And up until this point, it's only had about two inputs, I want to say. Your total ARR, Annual Recurring Revenue, and how long since your first paying customer. And from there we've used our intuition and our best practices to give you some estimations, but it can only take you so far. And so, that brings us to this point where we've really taken a step back and Mike, Stijn and I have really dove into... I wish you could see this whiteboard that we're sitting next to, but there's exponents, there's different variables. We're really taking a deep dive into this so it should be fun.
Stijn:
How did you go about that? What are the tools you're thinking that could be useful for people?
Mike:
Yeah. Well, working on the calculations now, still getting those fine tuned. But I think generally-
Stijn:
And you're using existing customer data, right?
Mike:
Yep. Absolutely. Yeah, no. We're validating it with real data points from our customers and data that's out on the market. I think until we have the final ready, generally speaking, this isn't always the case, but the more mature your product is, the better Product Market Fit you have, the less you need to spend on your marketing. The thinking behind this is that if you have a lot of referenceable accounts who... Let's say 50% of your existing customers are Engaged Advocates, as you would say, they're going to do a lot of selling for you because they're going to be the people that are advocating for you in Slack groups, on Facebook groups, in Quora, when people are asking the question, “Hey, what kind of software is best for XYZ?” They're going to be out there doing a lot of work for you. So, you can make sure to nurture those relationships, but you don't have to invest as much in finding more of those people because they'll do a lot of that work for you.
The Market Attributes. Again, generally speaking, the more mature your market is, the more competitors you have, let's say, the more search volume there are for high intent keywords in your category, or the more people that are in the category that you belong to on Capterra, G2 Crowd, the more you generally need to spend in order to compete, to carve out your little niche of the market, because it's more saturated, more people are bidding on keywords, the cost to get to the top spot on Google Ads is going to be a little bit higher and so, it sometimes takes a little bit more to get your foot in the door there.
And then obviously the faster you need to move, the more you need to budget for and the less foundation you have, the more you're going to need to budget for. Does that answer your question? Kind of?
Stijn:
Yeah, I think so. I think, Mike, there's also a point, and I don't know if we have a good... A formula for that, but a couple of maybe rules of thumb, that before you have XYZ in place, you should probably not spend anything.
Mike:
Sure. Yeah, yeah, yeah. That's a good point.
Brian:
Mm-hmm (affirmative).
Stijn:
Both the, I think, the maturity of the market or the category and the maturity of your own team.
Mike:
Sure. Yeah. That's probably before you've, I guess, maybe even you've hit MVP. There's a threshold in the calculator right now where if your company attributes don't score high enough, it just tells you to keep building your product.
Stijn:
Yeah.
Mike:
And so, yeah. It's a good point. If you don't have at least some kind of validation that you've found people who are willing to pay for your product and stay and recommend that others do the same, it might not be worth investing heavily in marketing yet, because you might be going in the wrong direction until you can find at least a little bit of fit and then go investigate it further. So, that's a good point.
Stijn:
Find a little bit of fit.
Mike:
Yeah. How did you get to the first version of the budget calculator? Because that came from you, Stijn.
Stijn:
Yeah. It's interesting. You just mentioned, Brian, the only two factors that we use today is the maturity of you as a provider of a solution, right? How far have you gotten towards Product Market Fit? And we use a very simple metric, time since your first paying customer, which is definitely not very sophisticated. And then the other is a more common input for companies to set a marketing budget, it's a percentage of revenue. And the challenge with that metric, of course, is that it's really useful for more mature industries. Percentage of revenue, for example in consumer packaged goods, might work, right? And the percentages are, by the way, also typically pretty small. A couple percent, maybe up to 5, 6% is a pretty normal range. And that just does not really work for companies that have no revenue or very small revenues, and they want to invest in growth. And there is no real good formula for that.
Some start-ups spend 20, 30, 40% of their revenue, if you calculate it like that, on marketing. Because they're doing a market share grab, or they're trying to educate the markets, creating a new category, which then, you can argue it's maybe not even appropriate to call that traditional marketing budget, it's the budget you need to create the category, almost, right?
Mike:
Mm-hmm (affirmative).
Stijn:
So, you're not necessarily using that to drive your funnel, you're driving the market. Yeah. So that, Mike, is where I think we originally tried to build some frameworks that people could use with a couple of simple inputs to at least get a baseline. And then we have a lot of, of course, line items who say, “Hey, you need to think about all these things that you need to do.” But yeah, what we have worked on the last couple of weeks is super interesting, these four different types of inputs we now are thinking of-
Mike:
Mm-hmm (affirmative). Yeah. So, the categories... We broke them down into the first component, which is Company Attributes. So, things like your current ARR, your ACV plays a big role in that. And then the percentage of referenceable accounts that you have. So, how many customers would give you five stars so if you called them up today, would actually give you a glowing review and become a referenceable customer, a good testimonial on your website. Things like Logo Churn, if you've had any venture capital investment, because obviously if you have investment, you have a little bit more ability to spend and ramp things up quicker than if you're bootstrapped. The second grouping is the Growth Targets, which was something that was not encapsulated in the first version of the budget, which is super important. It's this idea of, if you have really aggressive growth targets, it also means that you have to usually spend more to get there.
So, if you have a certain target to increase your ACV over the next 12 months and get a certain number of customers at that new ACV, your investment might be a certain level. But if you then switch that and say, I need to achieve that in six months, now it changes the conversation entirely and those two scenarios are very different from each other. The third one is the Market Attributes. The Company Attributes talks about your product and how mature that is. And then the other component is the market, which is how mature the market is. So, you can think about it as... We thought about it, is it Geoffrey Moore's technology adoption curve? So, if you assign a status to your market, is it in innovation stage? Is it in early adoption stage? Have you crossed the chasm?
Depending on where the market is, it may have a pretty decent impact on how much you need to spend. The idea being, if you're in a more mature market and there's a lot of competitors bidding on high intent keywords, and there's a bunch of competition on Capterra and G2 Crowd, you might need to spend more on discretionary things like paid search, or lead gen, or sponsorships, or channel partnerships, than you would if you were in a less mature category where you might be spending more money on things like educational contents or bottom of funnel sales enable materials for your sales team.
Stijn:
Yeah. It's super interesting. I think, Brian, you did a lot of thinking, or at least you had to deal with this a lot, about also the size of the type of customers that you're targeting, impacting how you go to market. From very high touch versus more inbound, et cetera.
Brian:
Yeah. As Kalungi has matured and worked with different companies, we've definitely seen that different styles of marketing work with different styles of company, and we've simplified it into Company Maturity, Market Maturity and ACV. These three criteria really have given us a good viewpoint into what works for each category. What's interesting too, Mike has talked you through about Company Attributes and Market attributes and how those influence, but when you look into Average Contract Value, it seems logical but it's easy to overlook, the higher your ACV, basically, the more you can spend to acquire your customers. And so, that number fluctuating really restricts or opens up the tactics that you can use to acquire customers. And really shifts the viewpoint of marketing from, am I going purely inbound at scale to make sure that I can keep those costs really low, or am I supporting sales and wining and dining, maybe it's virtually now, big ticket customers and very hyper-specific, hyper-targeted messaging towards the individual and not just a persona? And so, these are all variables that we've been taking into consideration as we're building this model.
Stijn:
Yeah. That’s a really interesting dimension. And there might even be a fourth, I think that, Mike, that you talked about, speed, right? All these things can be a great starting point. And then you say, “okay, I need so many clients and they will generate this amount of revenue and then this is what I can invest in marketing” et cetera. But if you need to do it in a year versus in three years, it completely changes the budget conversation. And it almost feels to me, Mike, that it's often the biggest challenge when someone asks you -
Mike:
Yeah, sure.
Stijn:
“How much do I need?” Because you don't really know how fast they want to go. It's kind of a locomotive and caboose, like where do you want to start? What's more important for you, to get to a certain amount of revenue, or to do it in a certain timeframe?
Mike:
Right. And sometimes it's completely unrealistic if you don't have, what you were saying, that existing marketing foundation, does your website work? Does it communicate your value pillars? Can you actually track metrics down the funnel? Do you have automated sales follow-up? Do you have some of those basics in place? And if you don't, then it also means that three months might not be realistic. You have to tack on another few months on the front end of that, even to get to the place where you can start to make progress toward those goals.
Stijn:
Yeah. That's a great point. I think we have sometimes gotten to a point where we say “hey, we should not spend anything on this yet” because it would be a waste. Because you don't really have any way to track, optimize, follow up or all those important things that would make the money just not very... Well, it's not a good idea to use that then.
Brian:
Yeah, you can throw all the money in the world at marketing, but if you don't spend time to really nail the foundational elements of positioning, messaging, branding, you're going to be wasting it.
Mike:
And to be clear, it's really foundational, not necessarily deep dives into everything. I think a lot of times when we have the conversation with companies who are interested in engaging with us, they're usually at a point where they're completely fatigued by agencies. They come in, they say, "I don't want to do the strategy workshop because we've done it four times and it hasn't amounted to anything." And it's totally understandable. But I think you have to do at least a little bit of a back step and understand where you're aiming before you can kind of like, fire the cannon, I guess. And there are some of those pieces that you just have to do. You have to understand what your Go-to-Market Strategy actually is. It's easy to say, we need to get... Increase ARR by 20%, but what does that actually mean? Are you going to prioritize upsells and cross-sells, are you going to try to launch a product into a new market? Are you going to expand your beachhead and your current ICP? Are you developing new products?
Those are all very different things that require a different mix of marketing activities, and you have to at least determine those things, get them on paper and get agreement from the leadership team so everybody's on the same page. And then from there, you have to understand the ICP and your personas and the pains and your value propositions. And, again, it doesn't have to be extremely deep, but there has to be at least that foundation, because otherwise, like you're saying, I think you're going to waste time.
Stijn:
Yeah. You should definitely not fire the cannon if you don't know where to aim it.
Mike:
All right. And that's it for episode 20 of B2B SaaS Marketing Snacks. Thank you so much for spending your time with us, I really appreciate it. I do realize that we didn't truly answer the question of how much you should be spending on your marketing function for your early stage company. And the reason for that is it really just depends on so many different things. The new calculator we have has upwards of 10 different inputs, and it's tough to give any kind of recommendation without knowing a good majority of those. So, as a consolation, if you're interested in helping us test drive it, we are looking for a couple of companies to give us some additional inputs. And we'd love to hear from you, if that's something that you're interested in, as we wrap up the final adjustments on the calculations and build on the calculator in the next few weeks. So, if you're interested in doing that, I'd love to hear from you.
Just shoot me an email at mike@kalungi.com. And I'd love to have a conversation. And as always, if you feel like you're getting value from this content, we would appreciate it so much if you could share it with one of your colleagues or someone that you think could also get value from it, it's how we find new people to listen and how others find us. So, that's one thing that you can do to help us out. You can also leave a review on Apple Podcasts or wherever you listen and let us know what you like, let us know what you don't like. And yeah, I think that's it. Thanks so much for joining and we will talk to you soon.