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SAAS Benchmarks: R&D Spend

  • Post category:Metrics / SaaS

This is the fifth and final article in our series covering SAAS benchmarks.   

The other articles in the series have focused on critical topics such as:

In this article, we focus on R&D spend including tech headcount for SAAS companies at different stages in their growth journey.   

In the early days, spend on R&D is the most material component of costs, frequently outpacing all other items.  Understanding if your spend on R&D is consistent with the norm is a useful gauge of the level of capability being deployed to face those early product breakthrough challenges.  

As a business starts to scale, having achieved a solid product market fit, R&D spend is a useful indicator with which to stimulate internal debate as to whether or not momentum will be lost further down the line due to lack of further innovation investment. 

Both questions are particularly relevant at this time of year as many organisations plan and budget for the upcoming 12 months. The key conclusions are below, boiled down into an easy 5 minutes read.  Enjoy 

What is the best way to measure R&D?

You may remember from our other articles that there are a limited number of SAAS benchmarks for UK companies.  As such, we have created several measures of R&D spend which provide a robust view across geographies.  

  • Number of R&D employees
  • R&D as a % of Revenue:
  • R&D Productivity

Number of employees:  Our definition of R&D includes employees and contractors in both the software development and product teams, including those who work on tech debt and new features. 

R&D as a % of Revenue is calculated as the total cost of the tech and product teams (salaries, pensions, cost of their tools and equipment) divided by revenue. This metric is readily available for larger SAAS companies, including those that IPO, and thus is useful in determining the gold standard for SAAS companies 

R&D Productivity is a performance measure of how much new revenue is associated with each £/$ invested into R&D.  It is certainly the hardest to calculate but is the most insightful measure for long term growth, with clear differences between the SAAS companies that lead their competitive set and those that fall behind.

These measures are consistent across geographies, as FX differences are muted, which is essential in compiling benchmarking data.

Is there a gold standard?

To kick start the discussion on the numbers, it is useful to consider the gold standard, which in our opinion, can be defined as SAAS companies that grow quickly and ultimately IPO.

To determine the R&D at these companies, we assess the R&D spend 90 SAAS (and specifically software) companies which IPOed in the last three years.  

On average, their spend on R&D spend as a portion of revenue was averaged 22 and 24% per year.  See the table below for full details.

R&D Spend for SAAS Companies that IPO

Interestingly, once companies IPO their spend on R&D falls.  The consulting firm BCG found that across all software publicly listed companies, spend on R&D is between 17% and 26%, depending on the speed of their growth. Higher growth companies spend more, which reinforces their position at the top of the growth charts.

BCG’s Findings on R&D Spend

This data is specific to SAAS companies but derived from publicly listed businesses and thus only includes larger businesses.

For smaller companies, what is normal?

To help answer this question, we read every benchmarking study we could find published in the USA and Europe.  

The data is shown in Image 2 below.  Key conclusions are: 

  • USA SAAS companies tend to spend more building their software teams initially.  Seed stage companies in the USA report spending 68% of their early revenue on R&D, whereas in Europe, this is 50%.  
  • This spend is reflected in headcount for the tech teams.  Early USA SAAS companies have 10 employees in the product and tech teams, compared to 6 in Europe. 
  • This higher level of spend between European and USA companies persists in Seed and Series A.  
  • The gap starts then closes for Series B companies and disappears for companies by the time they reach £20M ARR.  This conclusion reflects our findings on other SAAS benchmarks:  From Series C onwards, SAAS funding markets are global with few differences between European companies and their American counterparts. 
R&D Spend in Europe v. USA by growth stage

At face value, this data suggests that European companies deliver results at lower cost, bringing their products to market with less upfront investment. This conclusion would be interesting, and certainly result in US VC money flowing into Europe.

Sadly, our deep dive into the data highlights that the overall spend is not materially different.  European companies spend less on their tech but replace this with marketing spend, spending faster in marketing and sales as Seed and Series A companies. 

We – as data nerds – find this difference interesting, particularly because there is a growing body of research suggesting that spending on product at Seed and Series A is the most effective way to grow quickly.   Getting the product nailed before spending on marketing drives faster growth in the long term.  This philosophy, called product led growth, is backed by strong data derived from the strongest and highest growth USA SAAS businesses.  

(We will publish an article on ‘product led growth’ soon, as this research is worth sharing- .  If you want to get the articles as soon as they are published, just ‘Follow’ ScaleXP.) 

And what about R&D productivity?

R&D productivity is the most complex of the three metrics.  It tracks how much new revenue is associated with each £ of R&D spend and is used by companies once they have a product in the market and some revenue traction. 

The metric is calculated as 

Revenue from New Product / R&D spend for this product

This metric – which becomes relevant from Series B – requires splitting R&D costs into maintenance (or dare I say tech debt) spend and new product development.  Spend on new product development is then tracked for material new features, which are expected to generate revenue.

Tracking R&D spend by initiative and comparing it to revenue may seem tedious but there are simple ways that much of this data can be captured and automated. 

And so what can we learn from this measure…..Mid-sized (Series C+)  SaaS companies on a fast growth trajectory have an R&D productivity measure between 2 – 3. World class R&D productivity is closer to 10+.  This means that companies with a slower growth trajectory will recoup 2 or 3 times their R&D spend on new products.  The top recoup 10.  This data is compiled by OpEx Engine, having tracked both privately owned and public SAAS companies. 

This metric ultimately highlights the level of detailed tracking which is put in place at the highest growth SAAS companies.  It is one of the most important critical success factors for early stage companies, with mountains (yes entire mountains!) of data showing that the strongest performing companies are data driven and ensure that the right KPIs are in place early.

The data is so compelling that reputable McKinsey concluded that “top SAAS performers insist on transparent data and metrics that allow them to gain an integrated view of growth and margin drivers.”

Data such as R&D spend as a % of Revenue, customer growth, net revenue retention, ARR, MRR, CAC, should be available each month, compared to your own targets, even for companies at seed stage.

Get in touch

At ScaleXP, our ambition is to ensure that all B2B companies have immediate access to their critical metrics and KPIs, including all of those listed above . We want to automate your routine reporting,  freeing up your time to take action and drive growth.  

If you struggle to access your critical metrics easily automated, please get in touch.  This data is a critical step to driving growth, and the ScaleXP platform can ensure that you have access to the most important KPIs in a click.

And finally….what’s next?

Benchmarking data can be so useful in helping everyone gauge their performance, identifying areas that are best in class and those which may need attention.  Over the last several weeks, we have received positive input and comments from so many of you; thank you!

Your thoughts, feedback and likes are so important!