Ballooning Cost of Sales

Part 1: The Evolving Anatomy of a Revenue Organization

According to recent data, the average public SaaS company spends about 50% of its revenue on sales and marketing and 20% on engineering and product. This allocation is becoming unsustainable as companies are spending more on sales without corresponding improvements in efficiency.

At the seed stage, companies typically operate with a very lean team. Founders or a small initial team handle multiple roles, with a primary focus on early customer acquisition and market validation. This stage often sees founders and possibly a single account executive (AE) covering 100% of the sales roles.

As companies secure Series A and B funding, they enter a high-growth phase and begin to build more specialized roles to support their scaling sales efforts. At this stage, the sales team headcount structure becomes more segmented. with the introduction of specialized roles such as RevOps and SDRs.

In public companies, sales teams are highly specialized and structured to support mature sales processes. These companies have well-defined roles such as Sales Enablement, Customer Success, and Sales Operations that support the entire sales lifecycle.

Part 2: The Unsustainable Paradox: Sales as the Unscalable Function

Despite the critical role sales plays in driving revenue growth, it remains the largest expense for B2B enterprises. In fact according to Tomasz Tunguz, a partner at Redpoint Ventures, “during their first three years, SaaS companies often spend anywhere from 80% to 120% of their revenue on sales and marketing.”The Sales Conundrum

Tomasz Tunguz, a partner at Redpoint Ventures, highlights a critical point: “during their first three years, SaaS companies often spend anywhere from 80% to 120% of their revenue on sales and marketing.” This staggering figure underscores the heavy investment required to gain traction and achieve growth in a competitive market. Nevertheless, this investment only grows over time.

This phenomenon persists even as these companies continue to scale. In fact, "The average public SaaS company spends about 50% of its revenue on sales and marketing and 20% on engineering and product.” This reveals a startling truth: sales is the only function that doesn't benefit from economies of scale.

A closer look at the data reveals a stark reality: sales is the only function that doesn’t scale. The graph below illustrates the percentage of headcount spend in B2B enterprise companies across four stages: seed, series A, series B/C, and public. It clearly shows that sales consistently takes up the majority of costs compared to engineering and G&A, with sales spend rising rapidly as the company grows.

This shows the unsustainable growth in sales costs as the company scales, highlighting the financial strain associated with scaling sales efforts.

Part 3: A Closer Look at the Linear Growth of Sales Spend: Case Study

Salesforce, a leading B2B SaaS company, provides a compelling case study on the linear growth of sales expenses as companies scale. Over the past five years, Salesforce’s spending on sales has grown at a faster rate than its R&D and G&A expenses, illustrating the challenges SaaS companies face.

During this period, Salesforce’s R&D and G&A expenses grew at a much slower rate, emphasizing the disproportionate growth in sales costs. The data underscores a critical issue: as companies approach public size, maintaining and growing their sales force continues to consume a larger portion of their revenues.

Conclusion

The data serve as powerful reminders of the unsustainable trajectory of sales spend in B2B enterprises. The disproportionate increase in sales spend compared to other essential areas such as engineering and product development can strain resources. Companies must innovate not just in their products, but also in their approach to sales to ensure they can sustain growth.