customer acquisition & monetization -...
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Agenda
Business Model Innovation
CAC and LTV
The SaaS/Recurring revenue business model
Reducing CAC (Cost to Acquire a Customer)
The new rules of Customer Acquisition
Increasing LTV (Lifetime Value of a Customer)
Conclusion: Lessons Learned
Anatomy of a Startup
Unmet Need New Technology
The Old Model
The New Model
Unmet Need New Technology
EntertainmentNew Business
Models
Consumer Technology leads the Enterprise
Business Model Innovation:The Major Change Agents
The Internet
Web 2.0
Social
Networks
Mobile Web
SEO/SEM
Enables
low-cost
customer
acquisition
B2C Breakthrough Companies
The Fastest Growing Companies ever:
Zynga
Groupon
Gilt
All use Social and Viral techniques for customer acquisition
The Key Elements behind “Business Model”
Web-based companies make this abundantly clear:
Spend some money to drive traffic to your web site
Come up with a Monetization strategy Transactions
Subscriptions
Ads
Virtual Goods
Etc.
The Key Elements behind “Business Model”
Cost to Acquire the Customer (CAC)
Profit from that Customer
For subscription revenue businesses = the value of that customer over their lifetime (LTV)
This number takes into account the COGS or cost to serve
Startup Killer There is a common problem:
An out of balance Business Model
Monetization
(LTV)
Cost to
Acquire a
Customer
(CAC)
Entrepreneurs are over-optimistic
CAC for a Web driven business
Input Variables
Total Web Visitors 10,000
SEM cost per click 0.50$
Conversion to Trial % 5%
Trial conversion % 10%
No of Sales & Marketing Staff 3
Cost per employee per month 16,500$
Flow Qty. Conversion %
Total Paid Web Vistors 10,000
Trials 500 5%
Customers 50 10%
SEM Marketing Spend 5,000$
Total Headcount Costs 49,500$
Cost of Customer Acquisition
Without headcount costs 100.00$
With headcount costs 1,090.00$
CAC for a Direct Salesforce
Sales Sales Eng Inside Sales
Team composition 1 1 0.5
On target earnings 230,000$ 140,000$ 90,000$
Salary Cost 230,000$ 140,000$ 45,000$
Salary + Overhead 310,500$ 189,000$ 60,750$
Total Team Cost 560,250$
Avg. team Failure Rate 25%
Adjusted Team Cost 747,000$
No. of Marketing people 0.5
Average cost per person 200,000$
Marketing Programs Spend 150,000$
Total Marketing Costs 350,000$
Total Sales & Marketing spend 1,097,000$
No of deals per team per year 10
Cost of Customer Acquisition 109,700$
Annual
numbers
What we are looking for
Monetization
(LTV)
Cost to
Acquire a
Customer
(CAC)
A well balanced business model
The Balancing Act
Monetization
(LTV)
Cost to Acquire
a Customer
CAC)
• Viral effects
• Inbound Marketing
• Free or Freemium
• Open Source
• Free Trials
• Touchless conversion
• Inside Sales
• Channels
• Strategic partnerships
• Field Sales
• Outbound Marketing
• Recurring Revenue
• Scalable Pricing
• Cross Sell/Upsell
• Product line expansion
• Lead Gen for 3rd
parties
• High Churn Rates
• Low customer
satisfaction
Business Model Disruption in B2B
Open Source
Use Free Software to acquire customers cheaply
When done right, free creates viral spread
Monetize a portion of the free customer base
Business Model Disruption in B2B
SaaS
Rent software to customers monthly
Remove complexity (no IT)
Lower buying barriers
No big $ purchase decision
Easy to cancel if not working
No IT means that the business buyer can purchase
Business Model Disruption in B2B
The Low Cost Sales Model
The Touch-less Conversion
Freemium
Recurring Revenue
One Salesperson
Selling 5 Customers a month @ $1000 per month each
Means an additional $5,000 in new additive revenue every month
Turbocharger: Adding Salespeople increases monthly
new bookings
Churn
Churn Rate plays a huge role in success
1% to 2.5% churn per month is acceptable
Higher than that, you are filling a leaky bucket
Need to understand why you have low customer satisfaction and address the problem
How Churn affects LTV
Customer lifetime in months = 1 / Monthly Churn
Churn of 1% = 100 months lifetime
Churn of 2% = 50 months lifetime
Churn of 5% = 20 months lifetime
Impact on LTV for $1,000 average subscription
Churn of 1% = $100,000 LTV
Churn of 2% = $50,000 LTV
Churn of 5% = $20,000 LTV
The Big Issue with SaaS
Investments to acquire customers are all upfront
Revenue from each customer comes in slowly
Creates a cash flow problem in the early days
But once through the valley of death, cash flow is amazing
My rules for CAC/LTV balance in a SaaS model
LTV CAC> 3x
Months to recover CAC < 12 months
Required for Capital Efficiency
Another key SaaS benefit
Rapid development
Only one version of your code base at all customers
Rapid customer feedback on new features
Immediate deployment of new features to all customers
Other Recurring Revenue Benefits
Predictability
Highly valued by Wall St
Future revenue and cash flow for an acquirer
Buying Behavior has Changed
“Please understand that I get dozens of these types of messages a week. I
simply do not have time to read them, dig into them, follow-up on them, or reply to them. The most effective solution to this problem is for me to ignore the messages, which is what I usually do. …
… Finally, a small comment. As a customer, I find this type of approach to sales to be largely annoying to me and unproductive for you. We learn far more about what we want to purchase by searching the web, looking for customer references in blogs and forums, word of mouth, and by finding white papers on your site that concretely describe solutions to problems we are having.”
CIO of Large Pharma Co.
Buying Behavior has Changed
Outbound Marketing: Annoying to your customers
Expensive
Increasingly less effective
What is the new process? Google Search
Web Site
Reviews
Blogs & Social Media
Influencers
Trials or Free software / services
Avoid sales people
Requires Inbound Marketing thought processes
HubSpot: Inbound Marketing
Remarkable Content
Write a Blog
Create content that is REMARKable
Educational
Humorous
Controversial
Optimize that content for Search
Keywords used by your buyers
Use social media (Twitter, Facebook, etc) to build a following
If the content is good it will spread virally
A Crucial Insight
Never sell or promote your product in your blog
Instead Educate and Entertain
Focus on the areas of greatest interest to your buyers
The Power of Free
Wired Magazine: Free! Why $0.00 Is the Future of Business
Free is dramatically different to even $1
If done right can lead to viral spread
Examples:
Open Source software (JBoss, Asterisk)
HubSpot’s WebSiteGrader
Monetize some portion of your free customer base
Use of a free product/service develops a level of trusted relationship
Makes it easier to sell something to them
Using Engineering for Marketing
Freemium
Dropbox Example
Get you hooked for free
Storage slowly increases to the point where you need to pay
But by then they have established trust
And it is hard to move your data that is shared with others
Virality
Often hoped for, rarely achieved
The best businesses:
Virality plus Monetization
Examples:– Google
– Gilt.com
– Zynga
Entire Blog post devoted to this topic: www.forentrepreneurs.com/lessons-learnt-viral-marketing/
Old World evolving to a New World
Charge for
everything
(including
on-site trials)Free Trials
Free Product
Monetize a Fraction of Custs
Old World evolving to a New World
New World Give things away to optimize spread
Large Footprint of customers = Great brand value
Price low to get fast decisions
Old world Optimize pricing to extract the most
“But the customer is quite happy to pay that much”
Key realization CAC is one of the highest P&L expense items
Optimal Pricing limits spread
Optimal Pricing damages CAC
The Low Cost Sales Model
Web & Inbound Marketing
Free product, or Free Trial
Insides Sales
Examples
SolarWinds
Constant Contact
LogMeIn
JBoss
HubSpot
The Touchless Conversion
ZenDesk
Common Funnel Metrics:
10% of visitors do a trial
20% of trials convert to paid
Extraordinarily scalable
Extremely low cost
Free Trials require different Product Thinking
The product is your salesperson
Extreme focus on:
Ease of installation
Ease of use
Clear instructions on how to test (short videos, etc.)
Fast proof that it works
Enables you to reach the SMB market
Not economically feasible in the past
Now opens up a vast new market
In many ways a better business than Enterprise Software
Need to Build a Sales & Marketing Machine
Automated
Top of the Funnel
Middle of the Funnel (lead nurturing)
CRM
Scalable
Instrumented
Clear understanding of Costs and Returns
Visitors
Trials
Campaigns
to drive
traffic
Closed Deals
Conversion %
Conversion %
Overall Conversion %
Metrics are crucial for success
(by lead source)
Experimentation and A/B Testing
Constant Experimentation
New Lead Sources
New Messaging
New Pricing
New Product Features
A/B Testing immediately reveals what is working
Sales Complexity
FreemiumNo Touch
Self-ServiceLight TouchInside Sales
High TouchInside Sales
Field SalesField Sales with SE’s
How I assumed the two would relate
A rough estimate of CAC versus Sales Complexity
FreemiumNo Touch
Self-ServiceLight TouchInside Sales
High TouchInside Sales
Field SalesField Sales with SE’s
$0-$10
$50 –$200
$1,000 -$2,000
$3,000 -$8,000
$25,000 –$75,000
$75,000 –$200,000
Rough Estimates of Cost of Customer Acquisition (CAC)
The relationship is roughly exponential
Clearly adding
Human Touch
dramatically
increases costs
Sales Complexity
CAC (logarithmic)
10x
10x
10x
High CAC requires higher pricing
Higher pricing unfortunately leads to greater approval complexity
To get deals through requires high scores:
Product value
Customer Pain
Urgency to get something done
Sales Complexity
Value / Pain / Urgency = LTV (logarithmic)
High CAC, requires high scores for: Value, Pain, Urgency
Sales Complexity
Value / Pain / Urgency = LTV (logarithmic)
Unprofitable:LTV < CAC
Blue Zone 1Blue
Zone 2
Sales Complexity
Value / Pain / Urgency = LTV (logarithmic)
Red Zone 1Red
Zone 2
AmberZone 2
Amber Zone 1
Sales Complexity
Value / Pain / Urgency = LTV (logarithmic)
Green Zone 1
Green Zone 2
Green Zone 3
Sales Complexity
Value / Pain / Urgency = LTV (logarithmic)
Sales Complexity
Value / Pain / Urgency = LTV (logarithmic)
How SaaS changes Sales Complexity
Levers you can use to move from Red to Green
Make it easy for customers to sell themselves
Make the first decision to work with your product easy Simple product
Free versions, Free Trials, Open Source
Remove Complexity from closing the Sale Remove IT (SaaS)
Eliminate committee decision making
Make the first financial commitment easy $10,000 or below for enterprise sales
$250 per month for very small business SaaS
Sales Complexity
Value/Pain/Urgency
Able to leverage the
Internet revolution
Human Costs dominate:
Old world business model
What can happen when you get this right
SolarWinds
2009 Revenues: $116 million
EBITDA: $60 million
Others: JBoss, LogMeIn, Constant Contact, Salesforce.com, etc.
52% operating margins
The Balancing Act
Monetization
(LTV)
Cost to Acquire
a Customer
CAC)
• Viral effects
• Inbound Marketing
• Free or Freemium
• Open Source
• Free Trials
• Touchless conversion
• Inside Sales
• Channels
• Strategic partnerships
• Field Sales
• Outbound Marketing
• Recurring Revenue
• Scalable Pricing
• Cross Sell/Upsell
• Product line expansion
• Lead Gen for 3rd
parties
• High Churn Rates
• Low customer
satisfaction
The Highlights
Breakthrough Business Model
Open Source
A great example of the power of Free
5 million downloads
The first challenge: How to monetize
The second challenge: Conversion
While keeping CAC low
Solution: Build a Sales & Marketing Machine
The Original Brainstorming Session
The First Blockage Point
5 million users had downloaded JBoss
But none had given their names
The problem:
email registration in front of download reduces conversion rates significantly
The Solution
Look for something that those developers really wanted
JBoss had been earning $27k per month for documentation
Solution: give this away, in exchange for email address
JBoss - Sales & Marketing Machine
Phone
Call
Lead
Nurturing
Inside
SalesWeb
Leads
Web
Scoring
EnterpriseRolloutsSuspects Closed Deals
Metrics: The End Goal
Webactivityscoring
Tele-marketing
Tele-sales
Using the model to work backwards
To do $4m in the month:
If Average Deal Size is $10k
Need $4m divided by $10k deals to reach target = 400 deals
Means 1,200 deals being worked in Inside sales (400x4)
Know that each rep can work 60 deals at a time, means 20 reps
Means 3,600 telemarketing contacts (1,200x3)
Means 14,400 Raw Leads (3,600x4)
Webactivityscoring
Tele-marketing
Inside-sales
The next challenge: Increase LTV
Multi-pronged approach
Add services to the subscription (beyond just support)
Key service was JBoss Operations Network
Broaden the product line and upsell
JBoss Enteprise Middleware Suite (JEMS)
Scalable Pricing
4 axes to drive pricing higher
Result
Drove average deal size from $10k to $50k
While maintaining the same pipeline flow and conversion rates
The Results
Before venture financing
2003 $2m
Early 2004 – venture round closes
Revenue Growth:
2004 $11m
2005 $26m
2006 on plan to do $65m
JBoss Summary
Business Model disruption Gave the product away entirely free
Monetized support & management
Low CAC Leveraged free and virality to acquire non-paying customers
Sales & Marketing Machine Careful study of customer motivations
Low cost Sales model
Excellent Metrics
Scalable pricing model
Lessons Learned
Business Model Innovation
The new trigger for startups
Understand the CAC / LTV balance
Look for the breakthrough techniques for acquiring customers
Free products / services– Use R&D as a marketing tool
Free Trials
Viral
Social
Etc.
Lessons Learned - (continued)
Understand the new buying behaviors
Think Inbound versus Outbound
Build a Sales & Marketing Machine
Look for the breakthrough techniques
Look for the next evolution in the business model
This is all obvious
Vision is easy
Execution is the hard part
All comes down to hiring great teams
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