It’s Cheaper for SaaS Companies to Acquire Customers
Posted by Bob Warfield on July 17, 2007
As a continuation of the discussion of “How do SaaS Companies Make Money?”, I wanted to provide just a little of the data I’ve been accumulating about SaaS businesses. What I have is a clear indication that it is cheaper in terms of Sales and Marketing Expense for SaaS companies to acquire revenue. Let’s start out with a look at public SaaS companies and what it costs them to acquire $1 of revenue:
The curve fits pretty nicely, and we can see that there is a pronounced knee. Somewhere in the $20-$50M range, these companies reach critical mass and they start acquiring revenue more cheaply than Sales and Marketing Costs.
Now let’s see what happens if we take the same data and overlay similar sized public Enterprise software companies. The red boxes represent all public enterprise software companies with less than $350M revenues most recently reported numbers according to EDGAR filings:
The red boxes representing the non-SaaS Enterprise world are nearly all to the right of the trend line! From this, one has to conclude that it costs those companies more to acquire revenue than it costs a SaaS company. Note that for the really large software companies, these costs of customer acquisition start to subside. The knee is at about $1B in sales, and we don’t have much to compare there in the SaaS world, so we’ve yet to see how far SaaS keeps its advantage.
Why aren’t SaaS companies more profitable then?
I think it is because they’re in full investment mode spending every bit they can to grow themselves further. One could throttle Sales and Marketing back to a more profitable stance based on the analysis above, but why do it if you can log growth over 50% or so a year? Growth in the software world is ephemeral but on the flipside software companies seem to shrink very slowly. The moral is to strike while the iron is hot and lock in as much growth as possible.