What tech startups should be spending on marketing
There is no short answer. And should marketing spend be based on a % of gross revenue or a % of the net ARR?
Generally speaking, in a traditional business, their marketing spend is 5% to 6% of revenue. But tech startups are not like traditional businesses. In the UK we’ve seen pre-Series B tech startups spending as much as 15% and to 20% of gross revenue on marketing. Despite lacking brand visibility, tech startups are expected to grow fast and disrupt. Using gross revenue as a benchmark for marketing budgets is useful for larger companies, but may be not for tech startups. If the marketing budget was based on the current revenue of a growth-stage tech startup, it wouldn’t be enough due to the rapid growth of revenue.
One school of thought is that to achieve the growth rates you need, you need to spend more. Marketing spend may therefore be more usefully analysed as a percentage of the net new annual recurring revenue (ARR) you are trying to generate in a period.
Another method for determining how much should be spent on marketing is by working backwards. You need to know how many sales have to be closed in a certain period of time before you can determine an overall budget. In this way, you can determine how many opportunities, or marketing qualified leads (MQLs) need to be generated. The budget can be created once you know how much each opportunity costs to create, the cost of people needed to execute the work, and the fixed costs of infrastructure.
For early-stage tech startups without historical data to work from, leaning into industry benchmarks can be useful:
- Data from the 2022 Gartner CMO spend survey shows that marketing budget allocations tend to trend at 9.5% of company revenue. This is an increase from 6.4% in 2021, according to Gartner, Inc.
- Deloitte’s latest CMO Survey sites that marketing budgets represent 11.8% of overall company budgets
- SaaS Capital, which annually researches B2B spending metrics, and Meritech Capital’s benchmarking tool benchmarks include:
- The median percent of annual recurring revenue spent on marketing at B2B SaaS companies is 9%
- The marketing department’s budget is normally half of the sales department’s
- At B2B SaaS companies, sales and marketing budgets together amount to 31% of total revenue on average — this is normally double the research and development budget.
- Social media spend amounts to 15.4% of the overall marketing budget.
Nevertheless, every startup has its own considerations and challenges to take into account when determining its marketing budget. In many startups, founders underestimate the importance of marketing early on. They may be focused on product development and setting up the operations of a business in the early stages,and they don’t start marketing until it’s too late.
Here’s a real-life scenario:
The founder of a UK tech startup was on a mission to build an exceptional product. He carefully considered every detail. Hundreds of hours were spent interviewing customers to understand their motivations, pain points, and habits. Prototyping took place throughout the development process. He measured user activation goals, acquisition funnels, and user journeys to understand how the App performed. Then finally, the final product was more appealing than any other in its category. It was highly recommended by users and received positive feedback. But there was just one problem: user growth was still too slow. The startup never got to Series A. Eventually, the money ran out.
Marketing starts before launch
In early-stage tech, growth is a big deal. If you had to ask a few founders whether they’ve invested in marketing yet, the answer is often, ‘not yet.’ Marketing development efforts don’t require a product to be launched at all. You need to compete for attention before you can compete on product value. The best-marketed product, not necessarily the best product, is much more likely to succeed.
Before a product is launch, there is a long list of activities that needs time and resource to get going: like creating and promoting content for future customers, capturing leads in a mailing list, nurturing them with a newsletter, building an online following, forming distribution partnerships, cultivating influencer relationships, speaking at events, and testing communications on different segments.
If you need help with navigating your expenses and costs, our experienced startup accountants and tax advisors can assist. Call us today on 0203 282 7109 or email us.
Seedcamp is a European seed-stage VC, who collected data of the salaries of 185 founders from the UK, Europe and North America. You can find the source to their research here.