SmoothSpan Blog

For Executives, Entrepreneurs, and other Digerati who need to know about SaaS and Web 2.0.

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.

7 Responses to “It’s Cheaper for SaaS Companies to Acquire Customers”

  1. […] of customer acquisition for SaaS businesses… An insightful post over here that plots the cost of acquiring extra revenue for SaaS businesses. In essence Bob has found […]

  2. […] by smoothspan on August 7th, 2007 Phil writes about the cost of sales and marketing, and quotes our blog post on the subject.  He’s correct that the original post did not give the full story on where the perpetual […]

  3. […] They are focused single-mindedly on an offering that has compelling advantages.  Is it any wonder they can acquire revenue more cheaply than Old World ISV’s do?  Doesn’t this just make SaaS even more disruptive and threatening?  You bet it […]

  4. […] core application space has the potential to be the most profitable when you get scale (see this post by Smoothspan). Up till then it might not be the most optimal part of this ecosystem (13% […]

  5. […] tell me is that it’s just easier for them to sell than it is for the hybrid counterparts.  I’ve presented real data on real companies that makes this obvious.  Part of it has to do with the fact that many of the benefits of SaaS […]

  6. […] cost of sales:  I’ve actually done the numbers on this one and can tell you without a doubt that SaaS provably costs less to sell.  The hubub about SaaS […]

  7. […] I’ve said for a long time that it’s cheaper to acquire SaaS customers than perpetual customers, and that the only reason companies like Salesforce aren’t more profitable is that they’re throttling expenses to maximize growth.  With Salesforce coming up on the $1B mark, there will be less need to spend so much.  Growth has flattened a bit, although its still excellent, and as they’re coming up to the $1B mark, the brand, and more importantly, SaaS itself, is well established.  Time to dial back on the aggressive spending a bit and show how the business can shine for shareholders. […]

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