A common question we get asked from our emerging (< $1b revenue) SaaS clients is: when do I start focusing on the efficiency of my sales and marketing operations? Based on quantitative research as well as our anecdotal input from clients, the answer may be quite simple: never. This may seem counterintuitive, but a few, key observations suggest its validity:

• SaaS players must prove to their investors that their products are consistently catching on with new customer segments and/or use cases, as they must offset the market dynamics. The inherent deferred revenue model lowering the lifetime value of each customer, lower switching costs allowing customers to “try and then buy,” and the burden of displacing an existing service or an in-house solution are all risks of a SaaS product heavily concentrated in a few large customers or single market vertical. Acquiring new customers does pose a higher customer acquisition cost than upselling or cross-selling existing customers, but net new logos create more overall revenue opportunities and develop a more defensible customer base.
• Average customer acquisition costs between the faster SaaS growers and most profitable SaaS players is comparable (as per OpexEngine and KeyBanc SaaS surveys), showing the best companies are able to scale their operations linearly rather than inefficiently or non-strategically. Net dollar retention, the lifeblood of SaaS metrics, is surprisingly also comparable between the faster growing and most profitable companies.
• SaaS players are being measured by investors on their ability to generate growth. The “magic number,” coined by Lars Leckie of HWVP, is a common metric for investors, calculated as prior years’ sales and marketing expense over incremental recurring revenue in the current year. Fastest growing companies boast 1.25 figure and boast a 5-10x revenue multiple, while the most profitable hover around the average of 0.75 figure with a 2-5x revenue multiple.

So instead of reducing sales & marketing investment, I usually suggest exploring these questions instead:

• Should you refocus on acquisition of new customers vs. retention of customers likely to churn?
• Are you effectively upselling / cross-selling customers that have passed initial value creation?
• What are your worst customer / segments in regards to customer acquisition cost vs. lifetime value?
• Can you evolve your strategy into the next phase of your growth plan, such as entering new markets or pushing new products?