The rule of thumb for SaaS spending as a percent of revenue for COGS/S&M/R&D/G&A historically has been 20/40/40/20. Explained further, COGS spend should be 20% of revenue, sales and marketing should be 40% of revenue, 40% should be R&D, and 20% G&A. Rules of thumb are just dumb generalizations, so we looked at the data. 81 SaaS companies have gone public since October 2017 and below are their margins.
Why we use recent IPO’s. The reason we like looking at companies at the time of IPO is because: i) an IPO is an exit event that receives intense investor scrutiny; and ii) companies at IPO are closer to the Series A to Series D companies that are the target of this article.
30/50/25/20. On median, COGS are 29% of revenue, sales and marketing is 48%, 26% is R&D, and G&A is 21%. So we believe “30/50/25/20” on COGS/S&M/R&D/G&A may be more accurate.
There are outliers. Rules of thumb are just general guidelines, and sure enough there are significant outliers. 45% of Dropbox’s spend was on R&D while only 13% of Zoom’s spend was on R&D. Similarly, 73% of Zoom’s spend was on sales & marketing, Rubrik spent 77%, Dropbox spent only 37% on S&M, and Bill.com spent 28% on S&M. Snowflake spent a whopping 130% of revenue on S&M and indeed their EBITDA margin is the worst of the bunch at -192%.
Don’t let G&A be the outlier. Obviously you should minimize spend on G&A. Building product and selling it should be the priorities. Cloudflare, Sendgrid, Snowflake, and Palantir are violators of this mantra (they spend 36%, 34%, and 37%, and 43% of opex on G&A).
Last 10 IPO’s. If we look at the last 10 IPO’s the median is 30/58/32/17, so very close to the entire dataset although we acknowledge S&M spend is materially heavier.
COGS isn’t 20%. The other rule of thumb that needs debunking is COGS should be 20% of revenue. The median and averages are 29%. Below you can see percent of revenue calculations.
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