SaaS [software as a service] companies typically spend more on sales and marketing as a percentage of revenues than their on-premise software counterparts; and for most SaaS providers, customer acquisition is the single largest expense on the income statement. But what is the right amount to spend? SaaS companies need to be prepared to make the required investments in marketing and sales, but at levels that are sustainable in the long term. In a recent blog post, "Three Deadly SaaS Marketing Mistakes," Peter Cohen outlines three ways to do it wrong:

  1. Spend more on acquiring customers than you can earn back in revenues. Mathematically, the problem looks like this: CAC > CLV, where CAC is customer acquisition costs and CLV is customer lifetime value. Though either side of the equation can be at fault, the outcome is the same: You're spending $1 to earn less than $1. No matter how you look at it, you can't make that up in volume.
  2. Race against the clock. In this situation, your CAC exceeds annual revenues, so you're burning cash in the short term while betting you can reduce costs and increase revenues before the money runs out. Such a strategy is risky and requires deep pockets.
  3. Bail with a teacup. Unlike mistakes 1 and 2, this scenario involves under-spending. Here, companies set out a huge task for sales and marketing—building awareness, generating and cultivating leads, closing business and retaining customers—but then short-change them on resources.

The Po!nt: When developing your SaaS marketing plan, take the time to understand how much of a customer acquisition cost is right for your business—both now and in the long term. Then commit to paying for it.

Source: Practical Advice on SaaS Marketing. Read the full post here.

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