Sales/Marketing Expense Ratio

Live from Schenectady, New York, it's SAS Talk with the Metrics Brothers, Growth and CAC.

And I'm Growth, better known as Ray Reich, founder and CEO of Benchmarkit.

And I'm CAC, better known as Dave Kellogg, EIR at Balderton Capital, independent consultant, and the author of Kellogg.

And together we are the Metrix Brothers.

And we go together— wait for it, Ray— like Simon and Garfunkel.

Ah, well, thank you for not using food again for this week. But wait, who gets to be Paul Simon? You're not saying that I'm—

Ray, there's nothing wrong with being Art Garfunkel. He did lovely harmonies and he was the lead on Bridge Over Troubled Water.

Yeah, but I want to be Paul Simon.

Ray, Ray, let's not put Simon over Garfunkel. The point was about how well they work together. In fact, putting Simon over Garfunkel would be like putting sales over marketing.

Well, that sounds like a great idea.

Putting sales over marketing to create the sales and marketing expense ratio might be one of my favorite SaaS metrics. Or is it your favorite SaaS metric?

It's one of my favorite SaaS metrics, Ray. I don't know about you. It might also be one of yours. But indeed, but we put sales over marketing, literally, we get the sales to marketing expense Okay, but before diving into this potentially controversial topic, let's hear a word from our sponsor.

The Metrics Brothers is proudly sponsored by Benchmarkit, the B2B AI and software industry's largest, broadest, and most contextualized benchmarking index. Dave Kellogg and Ray Grothright have put the Metrics Brothers podcast on hiatus for the remainder of 2026. All episodes we have ever recorded are still available on your favorite podcasting app. You can reach Dave at Kellogg and Ray on LinkedIn at Ray Reich. Thank you so much for listening to the Metrics Brothers podcast.

Okay, well, you want to start the episode now, Dave?

Sure, Ray. Or should I say Art? Or should I say Growth? Who knows? So look, let's start at the top with sales and marketing as a percent of revenue. Normally, that's probably the most benchmarked sales and marketing metric because it's so easy to benchmark because everybody has revenue, everybody has sales and marketing expense. There's a lot of data available on sales and marketing as a percent of revenue. So it's a common metric, easily benchmarked. I'd say, and I'm the rule of thumb guy here, you're the benchmark data guy, I'd say the median runs 30 to 40% of revenue. That's my kind of comfort range for a typical company. I'd say the interquartile range, i.e., 25th to 75th percentile, Runs roughly 20 to 60% of revenue. I do believe those have been coming down, which I think your data will show. Probably the most important thing to me is that it's a function of growth rate, that the one thing that drives your CAC up, well, one is sales inefficiency, but the other is the specific type of inefficiency caused by carrying as yet unproductive, also known as ramping resources.

You're exactly right. But your rule of thumb benchmarks are pretty good, Dave. So we just started to publish public SaaS company benchmarks as well as private. And in Q3 '24, which is the last data we have available for public SaaS companies, the median was 35%. And for private SaaS companies last year, the median was 34%. So right in your 30 to 40 range. Now that is down about 5 to 10% over the last 2 years. These medians were much higher in 2022. than they were in '23 or '24. And then the last thing you talked about, the range for public companies last quarter, 21% was the 25th quartile. So the beginning of the lowest quartile of spend and 43% got you into the top quartile.

So one of the things that's happening here, Ray, is that as sales and marketing as a percent of revenue drops, it may start to adjust to one of my other rules of thumb, which is that your typical SaaS company spends twice as much on sales and marketing as they do on R&D. So, so I'm thinking that's starting not to be true already. If it's dropped to 34% at the median, I don't think median R&D is 17%. I think it's probably more like 25% to 30%. So I think back in this day when sales and marketing was 60% of revenue and R&D was 30%, that rule worked well. I think I have to be careful with that rule as we continue to put downward pressure on sales and marketing without corresponding downward pressure on R&D.

Yeah, the latest R&D that we saw in public companies right now is around 20 1 to 22%, Dave.

Okay, got it. So it's not 1.5 to 1. Anyway, look, this is just the intro to the episode. So we're talking about the sales to marketing expense ratio, and we start at the top and say, hey, what about sales and marketing as a percent of revenue? And it's a perfectly fine metric, and lots of people use it. Technically speaking, I'm CAC here in the pairing. Uh, the CAC ratio is a better sales and marketing efficiency metric. Why? Because it's effectively sales and marketing as a percent of new ARR, right? It aligns the input sales and marketing expense with the output new ARR better because sales and marketing as a percent of revenue is a percent of all revenue, both kind of newly earned revenue as well as, you know, 5-year-old revenue that's been out there renewing. So the problem with revenue is it includes the old ARR too. So if you're really looking for a sales and marketing efficiency metric, I'd say CAC is better. Thoughts?

Well, number one, I'm glad you called CAC ratio an efficiency metric. Going back to our latest episode about effectiveness Versus efficiency.

You won that one, Ray. You have to rub my face in that. You won. There is a difference between effectiveness and efficiency.

But I will tell you, even, you know, I think it's the reason I love being on a podcast with you, because the CAC ratio is actually my favorite customer acquisition metric. So I totally agree what you said is just right.

Awesome. Awesome. So, so look, we talked, we're coming at it from the top. We talked about sales marketing percent of revenue. We talked about the CAC ratio. But the problem is neither of these metrics tells you about sales versus marketing. They're all about sales. and marketing. So we need a metric that can help you kind of drill in. Now there's 2 ways to do it. One is to bust up the CAC and to say, hey, we can do the sales contribution to CAC and a marketing contribution to CAC, i.e., sales expense divided by new ARR or marketing expense divided by new ARR. Literally just break the CAC in half, and of course you'd add them up to get the total CAC ratio. That's one way to do it. Ray, do you do much of that in your work? Do you see that out there?

I do it all the time, and I even break sales CAC into sales CAC and sales development CAC, and then marketing CAC. So this is exactly the right approach. And then if the CEO and CFO have an overall CAC ratio goal for the year, they know exactly how a marketing CAC ratio that goes up actually impacts the corporate one. And same with sales CAC ratio. So another one totally aligned. This is exactly how I do it to work with our customers.

Yeah, and speaking of busting up the CAC ratio, I got one more for you, Ray, which is you could do it on net new ARR, which people do. I think we talked about this in a recent episode. If it's a public company where it's all you have, so kind of net new implied ARR, right? Um, so there are tons of people do it on net new, but I think both of us would say, hey, let's do it on new ARR. And then there's people who also do it on new logo ARR versus expansion logo ARR, right? So there's a lot of ways to kind of skin this cat. Thoughts?

I think the CAC ratio is by far my preferred, but when it comes to doing budgets, etc., there's always this debate You can't compare my 0.50 market-to-CAC ratio to my 1.2 sales-CAC ratio. So you get into what percentage of the sales and marketing budget combined is going to sales versus marketing. And I really think that's the crust of today's show, right? The crux of today's show.

That is right. That is right. We're kind of just warming up into it because, um, well, we'll talk about why in a minute. But, but yes, Ray is, Ray is headed down to what I consider to be an alternative way to calculate the sales-to-marketing expense ratio, which would literally just be take the sales CAC and divide it by the marketing CAC. And you will get, right, you're needlessly putting new ARR in the equation. All you actually have to do is just say, what's sales expense divided by marketing expense? And you get what I call the sales-to-marketing expense ratio. An alternative form of that ratio is the one Ray just talked about, which is sales as a percent of sales and marketing, right? So for example, if sales is 66% of sales and marketing, well, then marketing is the other part, right? So 1 minus 0.66 equals 0.33, and therefore the ratio of sales to marketing expense is 2 I think it's way more intuitive to express this as a ratio. I know other people look at it this way. I'm not sure about you. I know David Spitz does. Some people look at marketing as a percent of sales marketing, but, but I'd rather just look at one and kind of let the other be implied. Thoughts?

Yeah, I do look at both.

And, you know, we just did some recent benchmarking with, um, in marketing, about 330 companies participated. And what we found was marketing represented at median across the whole population 30% of the sales and marketing budget. So very close to your rule of thumb of 2 to 1. But one of the things I would say is that lower ACV products had more marketing as a percent of total sales and marketing. It was 36% at median. And as companies' ACVs got larger, the marketing percent of budget went down. It was 25% at median for solutions over $250,000, Dave.

Okay, so, so you're jumping the gun a teeny bit there, Ray, but it's okay. So Ray's talking about benchmarks, which is what he does after all. So Ray's saying, hey, what do these typical figures run for? In Ray's case, he expresses it as sales as a percent of sales of marketing. He says that's 70 for sales, 30 for marketing. I would express it as a ratio. And of course, Ray has picked 2 numbers that you cannot divide easily in your head— 7 divided by 3. But the answer, and this is kind of cosmic, Ray, is 2.3.

2.3.

And does 2.3 sound familiar? It's like one of these Hitchhiker's Guide to the Galaxy, the answer is 42. What else is 2.3? I don't know if you're gonna get this. There's a very important new rule hint where 2.3 is a part of it. Hint, hint, hint, hint.

Oh boy, the only thing I think is Rule of X, but I'm not sure.

Bingo, bingo, he got it. This was not staged. So 2.3 is like emerging as this universal constant, right? Which is 2.3 is the Growth weighting of growth to profit in the Rule of 40. 2.3 is also the typical benchmark sales-to-marketing expense ratio. Ooh. But if you want to remember it, you can either use Dave's rule of thumb, which is normally sales is twice marketing, or you can use Ray's more precise rule of thumb, which requires you to divide 7 by 3. But we can just remember that that's the universal constant of 2.3.

Hey Dave, can you believe that the sales guy in these partnerships is the precise guy? This doesn't make sense.

Yeah, yeah, it's amazing. I love rules of thumbs, right? Because I don't have all the data at my fingertips like you do. So I think that's why you like it because you've got it. But I just need to walk into a meeting and go, what is this? I think it usually runs around 2 to 1. And by the way, the most important part for this metric, because I don't actually think the benchmarks are that compelling. I've worked with companies where sales outguns marketing 5 to 1, 10 to 1, seriously. weighted towards sales. And telling the CEO and CFO of that company that they're wrong because the rest of industry runs at 2 to 3, right, doesn't get you very far, right? So what gets you a lot further is looking at your own history, um, and saying, hey, what have we done? Because that's more real to the CFO and CEO than the benchmarks. So the— so look, there is a place for benchmarking here, but, but I want to do an example. I'm going to— this was in my Kellogg blog post on sales-to-marketing expense ratio, and let's just walk through it. We got a company that in 2019 was 40% of sales on sales, 20% on marketing. The 2 together was 60% back in the good old days when you could spend 60%, not 40%, on sales and marketing. And this company has a benchmark of 50%. And over the last couple years, they've been making slow and steady progress. They went from 60% of sales at sales and marketing to 59% to 58%, and next year's plan was 57%. So kind of slow and steady progress. People, you know, the CFO can say, well, we're slowly improving sales marketing efficiency, yada yada.

Right.

But if you look inside this, you'll see that sales has gone from 40% to 43% over that period, and marketing has gone from 20% to 14%. And these seem like relatively small figures, and this is precisely why I like to show it as a ratio, because you're like, well, from 20% to 18% to 16%, is that a lot or a little? It's a little bit like a— I call NPS an amplifier. Like, if you go, our CSAT fell from 4.2 to 4.05, It's not as alarming as saying that NPS fell from 60 to 30, right? Because it's kind of a signal amplifier. And I view the ratio a little bit— in the case of NPS, it really is an amplifier because it's excluding a lot of other data points. But, but here it's the same sort of thing. It's a better light shiner where that, that, that percentage— look, if you look at it as ratio, it goes from 2.0 to 2.3 to 2.6 to 3.1. And that was not obvious to me just looking at the numbers. Right. But wait a minute, 43 divided by 14 is 3.1. Holy cow. We used to expect to get to basically $1 of marketing to support $2 of sales expense. Now we want $1 of marketing to support $3 of sales expense. And the question is, that's a 50% relative change. And is there a why behind it? To me, there's no truth, Ray. 3 might be a better answer. 3 is in my rule of thumb range, right? My rule of thumb is it runs 2 to 3. If you're above 3, I start getting nervous. If you're below 2, I start having questions about how you can be so efficient in marketing. But the question is always to me, this is not about the benchmark. I don't need any other company to talk to this customer and just say, this is you, right? Or the TV series, This Is Us, right? This is just you. And you have changed from a 2.0 ratio to a 3.1 ratio over the past 3 years. Why?

Yeah.

And then if there is no good why, if there's no big marketing efficiency initiative or no big sales productivity initiative, I think it's just a result of the ongoing grind of the budget process. Before I drill into that, Ray, thoughts?

I've never looked at it like this before with the ratio. And I like your example where sales kept increasing their percentage of revenue, where marketing decreased and they almost decreased almost 33%. So it is interesting, but I think the why is more important. So that's why the CAC ratio would be so good to see at the same time, because if both sales and marketing are both getting more efficient as measured by the CAC ratio, I would be excited. But if sales CAC ratio was going up, i.e., less efficient, and marketing was going down, more efficient, then I'd be saying, what's going on with the sales organization?

Yeah. Now in this example, and this could be wrong because we're not looking at ARR, we're looking at percent of revenue. I mean, the argument just looking at revenue benchmarking, P&L benchmarking, is that sales and marketing together is getting more efficient, only modestly so, right? We've gone from 60% of sales down to 57%, but basically all that efficiency is on marketing's back. They improved by 6 percentage points. Sales got worse by 3 percentage points. So I don't know if you'd see that in the— I think you would see it in the CAC because it's very similar math. The only difference is you're dividing by new ARR. are. And that's the variable I don't know. Maybe they're both getting more efficient, maybe they're both getting less efficient, maybe they're, they're at constant overall efficiency. And this is the case I'm most worried about as a former CMO, that the pain is just being borne by marketing. Um, and that's what I mean is the result of the budget process. Let me talk about that, right? So, so first, I hope I can help you see the light of using the ratio because it really does light this up. And like, just somehow those numbers— and that's why I designed this example— they don't move me. But going, hey, wait a minute, the sales-to-market expense ratio went from 2 to 3 over a 3-year period, that's a big change. And if there is no why, if I just say, why did that change? And people go, ah, I don't really know. It was just, you know, just how the budget process worked. Well, when they— Actually, I feel much better if they have a why. Because if they go, that's just the way the budget process worked, I'm like, okay, wait a minute. Let's just think about this budget process for a second. We've got a CRO who is a better negotiator than your CMO. Lord knows they better be, right? So, so let's just assume as a fact your CRO is a better negotiator. Number 2, your CRO has way more negotiating leverage than the CMO. Sorry, the CRO has way more negotiating leverage than the CMO, right? The CRO is signing up for next year's number. That's a very delicate dance between the CEO, the CFO, and the CRO. The marketing person is more of a support resource. And this is a career marketer, over a decade in the CMO chair, 3 different companies, right? It's just reality. The CRO is a better negotiator than you are, and they have more leverage. Hmm, how's that gonna work out, right? Let's just think there. And then finally, right— and actually, we won't do the final one. Just those 2 alone means this trend happens every year, that sales and marketing is getting squeezed down by the CFO, but we're silently allocating more money to sales and less to marketing. Why? I don't even need reason 3. Reason 1, CROs are the better negotiator. And 2, they have better cards to play. They have more negotiating leverage. And that's to me the scariest reason why this happens, because it's emergent and it's going to break, right? If you keep letting that process play out, you're going to push it too far one day. Thoughts?

Well, I agree, by the way, that CROs typically are better negotiators and often have more leverage.

He's a former CRO. He loves this part.

I really want to go to number 3, because I think the 3rd point is really interesting to me.

Okay, so, so, so Ray conceded the first argument, which is good because it, it's just true. Um, and the— to a certain extent, that's the default. Like, this— the sales and marketing— the sales-to-marketing expense ratio by default will go up over time for those 2 reasons, period. Um, now number 3 is many enterprise software CEOs harbor a secret belief that new ARR equals some constant times the number of sales reps. Um, i.e., that hiring more reps directly leads to more new ARR. Everything else is indirect. So that means when on the margin, when on the fence, they're like, ah, hire 3 more reps. Because why? Because reps lead directly to new ARR. Why? Because new ARR equals K times the number of reps. So in fact, at one point when I was at Salesforce, a guy named George Hu, who I think was the COO at the time, did some work And he discovered, I don't know, it was 1.1 million or some constant. And over the last N years, you know, the starting reps or reps in February, I don't know when he snapshotted the reps, times K was new ARR. And Benioff started believing that. And that drives this behavior. If your CEO believes that, that's going to drive this behavior.

Well, maybe because I did grow up in sales, I kind of am aligned with Mr. Benioff. But about 2 months ago, Salesforce said we're going to hire 1,000 new salespeople. By the way, this is after cutting sales and marketing expense over the last 2 years by about 12%, from 47% of revenue to 35%. He then said we're going to hire 1,000. In my little head, what I did was 1,000 times $1 million of quota per agent force rep— that was $1 billion of revenue. And 2 weeks later, he came out and said The demand is so high, we're going to hire 2,000 Agentforce reps. And I'm like, wow, $2 billion he's expecting from Agentforce. So I must admit, I'm guilty of the Marc Benioff thought process.

So when you get excited, Ray, you get closer to your microphone and we're getting more distortion. And you sound like Dr. Evil when you say billions.

Billion dollars.

Billions of new ARR. Now, when he said salespeople, just out of curiosity, because I have to ask, was he referring to quota carriers or was it just sales employees? So I'm sure it didn't make the distinction, but do you actually pay sellers?

He said salespeople. He didn't say in the sales organization. 1,000 new salespeople.

Billions of new ARR. Okay, fantastic, Ray. Um, so look, Ray just gave the demo. People believe this. And by the way, it's true on the margin. Like many things enterprise software, you hire one extra rep, you don't need more demand gen, you don't need more SDRs, you don't need more SEs. Hire 100 extra reps, you sure as heck do, right? So, so that's the issue here. And I just think it's very important for CMOs to be aware of this. And to a certain extent, unless the CRO has your back, you're done. You're not going to win. So, so step 1 is get the CRO on board with you that we need to plan holistically and say, look, let's build a single holistic ratio-driven go-to-market model. If you're signing up for more target, maybe it's because of more productivity, Maybe it's because of more hiring. Maybe it's because a little bit of both. Let's see what the model says for support resources, including marketing dollars, specifically marketing demand gen, which I did a post I think this weekend on. Please view demand generation as any other sales support resource, right? So the two things you could do to protect yourself from this is one: commit with your CRO to a single, holistic, ratio-driven go-to-market model, right? There's not one in sales, not one in marketing. Holistic means it's not just reps and SEs. It also includes demand gen spend. And ratio-driven means the hiring is driven off ratios. Single, holistic, ratio-driven go-to-market model. And then the other thing you can do, I guess kids now use the expression, you slide into someone's DMs. I think it has a romantic overtone, but you can just slide this metric into your dashboard. And I would, I wouldn't make a big deal. I would just slide this in and let people go, hey, what's that new ratio there? That sales to marketing expense ratio. And just say, that's just something we're tracking. Just sliding in, and we're going to look at it and we're going to look at the change over time. And if it's going up, we know why.

I love it.

And I would slide right in there with the CAC ratio. So I'd have my sales and marketing expense ratio, then I would show my total CAC ratio, my marketing CAC ratio, and my sales CAC ratio right next to it.

Yeah, goes without saying the CAC ratio is in for me, Ray, as you know. But yes, it is true, and it would be higher up in the sheet as well. So So that's all I've got for today. Randy, do you have anything?

No, but it's the sales to marketing expense ratio. I think this is a great topic. And there was a blog post they should be looking at, Dave. Is that accurate?

Sure. Kellogg post called the sales to marketing expense ratio. Did it several years ago at this point. I guess with the example, I guess I did it in 2022 because that was the plan year in my example. It went back to 2019. You can always look at the data. But yeah, it's a relatively old post. It's still absolutely valid. Sales to marketing expense ratio on Kellogg.

God, that was a fun one, Dave. Thank you so much.

Thank you, Ray.

The Metrics Brothers AI, SaaS, and More is a production of the Metrics Brothers Growth and CAC and a member of the Benchmarket Podcast Network. By accessing this podcast, you acknowledge that the Metrics Brothers make no warranty, guarantee, or representation as to the accuracy or sufficiency of the information provided or the humor content of the jokes told. Ray, information, opinions, and recommendations presented are, according to our spouses, probably wrong and provided for information purposes only. This podcast should not be considered professional or for that matter, unprofessional advice. We disclaim any and all liability for any direct, indirect, indirect, misdirect, incidental, special, ordinary, consequential, inconsequential, or other damages arising out of any use of, or God help you, reliance upon the information presented here. Ray Grothreich is based in New York City and available on X @rayreich. Dave Kellogg is based in Silicon Valley and available on X @davekellogg. Kellogg. Schedectity, which is French for unspellable, is not our actual production location. Thanks for listening.