NetSuite IPO Filing Shows The Huge Cost Of Marketing SaaSNetSuite IPO Filing Shows The Huge Cost Of Marketing SaaS

As Larry Ellison prepares to bring NetSuite Inc. public, the company's legal filings show how sales and marketing costs are often the biggest hurdle for software-as-a-service vendors.

In a filing with the Securities and Exchange Commission, the provider of on-demand enterprise-resource planning software reports solid revenue growth: from $17.7 million in 2004, to $36.4 million in 2005, and then $67.2 million last year. But up until last year, sales and marketing costs always exceeded revenue: $27 million in 2004, and $39.2 million in 2005. Last year, sales and marketing costs were $43.9 million, or 53% of revenue.

That's not unusual. Salesforce.com's sales and marketing costs, for example, typically hover between 50% and 70% of revenue, according to past financial statements. That's huge compared to traditional software vendors, where sales and marketing costs typically run between 20% and 25% of revenue.

Marketing and sales costs for SaaS vendors run high for a number of reasons. Because they're typically pursuing small and midsize businesses that don't want to pay high upfront costs for software licenses, a lot more outreach is required, both through online advertising and marketing and in person. SaaS vendors also spend money on not just marketing to new customers, but to replace those that have left. It's easier to leave a vendor that's offering software as a service at the first sign of dissatisfaction, and SaaS companies typically have a higher churn rate than traditional software vendors. Under its risk factors, NetSuite notes, "Our customers are small and medium-sized businesses, which can be challenging to cost effectively reach, acquire and retain."

Among other risks NetSuite documents are any disruption of service to its single data center, and liability to customers or lost customers if there are defects or disruptions in service. These, of course, are typical concerns of both SaaS users and reasons why some businesses choose not to use the SaaS model.

NetSuite, which Ellison started in 1998, plans to raise up to $75 million in its initial public offering. Ellison, the founder and chief executive of Oracle, controls 74% of NetSuite common stock. NetSuite's net loss was $23.4 million last year and $3.7 million for the three months ended March 31. NetSuite says it has more than 5,000 customers of its salesforce automation, accounting, human resources, E-commerce, and Internet marketing.