When analyzing a B2B SaaS business, a fundamental area of focus is the product itself. First things first, from a strategic standpoint, Product-Market-Fit must exist for the business to scale. But once the product is built, proven, and scaling with a solid Go-To-Market strategy, what is the “right” amount of spend for research and development?
A Couple of Examples
Salesforce
Before we start, here are a couple examples to keep things in context. Most current day private company B2B SaaS benchmarking surveys have R&D spend over 20% as a percent of gross revenue. However, Salesforce as an example is running at 16.9% in 2021 and 2022. In their early days back in 2001 and 2002 when revenues were $5M and $21M, their R&D spend was 61.9% and 23.7% respectively. For the next several years from 2003 through 2009 their R&D spend never rose above single digits averaging only 8.0% of revenues.
Workday
A second example is Workday. Back in 2009 when their total revenues were $25M (54.5% subscription and 45.5% service) their R&D spending was 119.0% of total revenues or 218.6% of subscription revenues. By the time they reached $469M in total revenues in 2014 subscription revenue was up to 75% of total revenue. R&D spend was down to 38.8% of total revenue. In 2021 and 2022 Workday’s R&D spend was running 35.2% and 35.7% as a percent of total revenue. Subscription revenue in 2022 was 89.0% of total revenue.
Salesforce = 16.9%
Workday = 35.7%
Life Stage
By looking at these two examples, it is easy to see how life stage impacts R&D spend. Over the years, the Salesforce R&D spend went down from 61.9% to 16.9%. Workday from 119.0% down to 35.7%. The amount of R&D varies greatly by the life stage of the business. When first getting a product to market, a startup phase company has the greatest R&D spend when measured both as a percent of revenue and as a percent of expense. Since revenue is low, or even non-existent, the startup’s R&D spend as a percent of revenue is not as relevant a metric. This is true for both bootstrapped and funded startups
Company Uniqueness
Another observation when analyzing Salesforce and Workday is the uniqueness of the company. At $21M, Salesforce was spending 23.7% of total revenues. While at a similar revenue of $25M, Workday was spending 119%. Big difference! Each B2B SaaS business has a unique personality made up of culture, values, and leadership. These drive R&D spend decisions like complexity of product, quality, and innovation. The company personality also sets the tone for risk, profitability, and growth. This is not to say Salesforce had a lower risk profile. Possibly the opposite. During the same periods mentioned above, at $21M in total revenue, Salesforce spent 109.8% on sales and marketing. At $25M in total revenue, Workday only spent 82.7%. Both were focused on growth, but at different impacts on R&D spend.
Considerations When Benchmarking
Size of company in annual recurring revenue (ARR) is the biggest consideration when benchmarking R&D spend against other B2B SaaS companies. Be sure to use benchmarks for your size range.
Headcount is another good benchmark for R&D spend. This can be an R&D spend per total headcount or an R&D spend per R&D headcount. Both are valuable but for different reasons. Benchmarking per R&D headcount gives insight into efficiency of spend when combined with other development metrics of defects and development cycles.
Comparing R&D spend as a percent of total revenue versus recurring revenue should also be considered when benchmarking. If one company is heavy in professional services, their R&D spend as percent of total revenue might be low when benchmarked against a pure recurring revenue model SaaS company.
Tracking and benchmarking R&D spend as a percent of “Expenses” might be a better metric at early stages of growth. Comparing to revenue might not make sense when revenue is low. Comparing to total expense helps to track balance across the organizational initiatives outside of R&D.
In summary, R&D spend is a key metric for a B2B SaaS company. It can be even more valuable when combined with many other metrics such as revenue growth, headcount, S&M spend, and retention rates.
Photo credit to Kaleidico.
If you need help thinking through this or other leadership challenges, let’s have a discussion to see if I can help in some way.