The process of creating a demand generation budget that supports the company’s revenue goals is often a challenge for many SaaS founders. During the early stages of a startup, having enough leads is usually not an issue. The founder is taking all the sales calls and can leverage his/her network of connections, partners, and investors to close the first few customers. Generating a higher volume of new opportunities is often not a priority.
At some point, the founder brings onboard the first one or two account executives. They take over the incoming inbound leads, follow up with stale opportunities, and start doing outbound prospecting via email and LinkedIn. Unless the company can leverage an existing community or network, inbound leads dry up quickly, and the new reps are not as busy doing demos as they should be. This is typically when a growth-oriented CEO looks for ways to scale demand generation and pipeline.
“How much budget should allocate for demand generation?” “What campaigns should I run?” “Should I invest $1M in demand generation or hire 5 more reps?” These are common questions that we hear from SaaS founders at the early stage of the company. Even Series A and B startups are still trying to implement a predictable model for growth. The ultimate goal is to build a system that for every dollar spent, consistently generates four, five, or even ten dollars in recurring revenue.
Why SaaS Founders Don’t Invest Enough in Demand Generation
It’s rare to come across a seed-funded SaaS startup that is investing a big chunk of its annual budget on marketing campaigns. The reason is simple: it’s hard to tell if that investment is returning a positive ROI. When the founding team doesn’t have a B2B marketing background, they are more comfortable hiring a Head of Sales, assigning him/her an annual quota, and tracking the results. Within a few months, they will know if the salary invested for that person and the rest of the sales team has returned a profit.
The argument for marketing spend is less straightforward. Especially for companies with long sales cycles (3+ months), it’s often hard to find a direct correlation between dollars invested to annual recurring revenue (ARR). You have to start looking into marketing attribution models (first-touch, last-touch, multi-touch) in order to evaluate campaign performance and make the right decisions. I have personally interacted with several startups that raised over $50M but paused their marketing spend because they couldn’t understand if it was producing results or not (in most cases it was extremely profitable). Not being able to connect the dots, and track marketing attribution for each paid channel is the #1 reason why early-stage startups don’t grow fast enough.
It might take 6 or 12 months to see the effects of a marketing initiative, especially for anything related to content or SEO. Many founders don’t have the luxury to think long-term, so they are often looking for short-term hacks that would help them reach the quarterly revenue goals. According to a study performed by ProfitWell, SaaS startups average a 5-12 month CAC payback period. This means that it will take the company up to 12 months of subscription payments to recoup the money spent to acquire a new customer. Or in other words, for every $100K in new ARR, they spend up to $100K between sales and marketing.
One important lesson to highlight: there is no such a thing as a “free lead”. Every opportunity has a cost, and it can be translated either in dollar value (e.g. digital ad campaign, tradeshow sponsorship) or in time and resources (e.g. writing 3 blogs per week, getting a warm intro from a connection). The inexpensive leads eventually run out, and they are not reliable nor scalable. If your quarterly goals double next quarter, you can’t all of a sudden double the number of organic demo requests or referrals. Only companies that are able to figure out paid acquisition can quickly scale to $50M ARR and beyond.
Reverse Engineer Your Funnel
The first step to building an accurate demand generation budget is to map the marketing and sales funnel from lead to revenue. Starting from the bottom of the funnel, it’s important to identify all the different stages that are required to close a deal. A typical enterprise sales funnel looks like this:
- Discovery call
- Solution development
The role of demand generation is to drive a predictable number of qualified discovery calls per month for the sales team. Then it’s the responsibility of the sales team to push the opportunity down the funnel stages and close the deal. The most important metric to track at this stage is the conversion rate from discovery call to closed-won. In this way, once you account for your average deal size, you’ll be able to understand how many initial meetings will have to be generated in order to drive the desired number of new customers. For example, if you are looking to generate $2M in new ARR by the end of the year, and your average deal size is $50K ARR, you know that your new business goal is to close 40 new customers. If your conversion rate from discovery call to customer is 5%, the marketing goal becomes clear (source at least 800 new meetings during the next fiscal year).
Each new meeting generated will have a cost associated with it. It’s important to track the average cost per meeting (and for each funnel stage, as shown below in red) to be able to allocate a realistic budget for customer acquisition. In the above example, since the average cost per meeting is $2,500, a realistic budget to generate 40 new customers should be around $2M.
Sales Vs. Marketing Spend
Once we have defined a ballpark customer acquisition budget, there are more decisions to make. Should the budget be split 50/50 between the marketing and sales department? Should you prioritize sales and leave marketing with a smaller allocation? Or is it better to push hard with demand generation campaigns, while reducing the sales investment?
The answer to these questions relies on the company’s go-to-market strategy. Is your startup a high-volume, transactional type of SaaS? Or an enterprise/mid-market, high-ticket B2B requiring several marketing or sales touches, and with multiple decision-makers?
For SaaS companies using a freemium or self-service model, most of the customer acquisition budget is allocated to demand generation. Web traffic is converted to leads, leads to free trials, and free trials to paid users. For enterprise SaaS companies, sales become the largest investment, since there is the need to hire and support expensive field reps, who must visit their target accounts in person multiple times.
|Go-To-Market Strategy||Marketing Budget %||Sales Budget %||Description|
|High-Velocity(self-serve, freemium)||95%||5%||– Small ticket SaaS- Mostly inbound leads|
|Inside Sales(SDRs/AEs)||70%||30%||– Low-touch sales- Deal size less than $100K|
|Enterprise(field reps)||30%||70%||– 6-figure deals- Multiple decision-makers- Long sales cycles|
Inbound Marketing or Account-Based Marketing?
Now that you have finalized the total budget to allocate for demand generation, your Head of Marketing will have to create a plan on how to distribute the resources across different programs and channels to generate the required number of Sales Qualified Leads (SQLs). For low-ticket, high-volume SaaS platforms, it’s better to invest more heavily in inbound strategies like SEO, content marketing and search ads. Startups focused on enterprise customers will have a better ROI if they prioritize an Account-Based Marketing (ABM) strategy over inbound campaigns.
With ABM, your marketing and sales team work together to identify upfront which companies are the ideal targets, and segment them based on potential value and likelihood to close. The ABM budget is only invested in channels that are effective at targeting that specific list of accounts and personas. Examples include targeted ads on LinkedIn, targeted display ads, executive roundtables, VIP dinners, and direct mail. You can also allocate different portions of the budget based on the account tier (Tier 1, Tier 2 etc).
Allocating the Demand Generation Budget Across Channels
If you have access to the previous year’s data where you tracked campaign performance, otherwise you’ll have to come up with estimates based on benchmark conversion rates. This is what a simple demand generation budget could look like:
One common mistake at this stage is to allocate most of the budget to campaigns that are driving last-touch conversions (opportunities). In B2B, it’s often a combination of several marketing touches across multiple stakeholders that creates an opportunity. Make sure to balance top-of-the-funnel campaigns (that generate awareness) with bottom-of-the-funnel programs (that drive conversion).
Also, don’t forget to add a line to the budget for testing new channels and campaigns. Unless you are part of a mature company, you don’t know what initiatives will generate the highest ROI. You should be testing new programs every month with a small budget, then scale those that produce results and cut the rest. This is why it is crucial to diligently track marketing attribution for every dollar spent.
Having a clear and detailed demand generation budget is an important milestone to ensure that the company achieves its revenue goals at the end of the year. Leads and pipelines are often leading indicators of growth, so it’s important to act promptly and revise the plan accordingly if the campaign results are not matching the initial estimates.
Early-stage SaaS startups are often guilty of not investing enough in demand generation and paid acquisition, and they rely on the sales team to drive new customers from outbound prospecting alone. This can be a costly mistake and one that will take time to fix. With a solid investment in demand generation, you’ll be able to build a scalable system that can generate a predictable number of sales opportunities per month, which is the key to scaling recurring revenue to $50M and beyond.
About the Author
Franco Caporale is the founder of SaaSMQL. He has 10 years of experience working with high-growth SaaS companies in San Francisco.
Before founding SaaSMQL, he led demand generation teams at Branch, Apptimize, Duetto, and Couchbase. He is also the founder of DemandGen Club, a community with over 1,500 demand generation professionals.
You can find out more about Franco, his entrepreneurial journey and what he believes many SaaS businesses are getting wrong: Franco Caporale: The Messy World of Lead Generation.