STARTUP KILLERCAC, LTV & Other Metrics that will make (or break) you                             CAC                      ...
MICRO-ECONOMICS  PROFITABILITY AT THE CUSTOMER LEVELA POWERFUL WAY TO GAIN BUSINESS INSIGHT
An out of balance Business Model               Entrepreneurs are over-optimistic    Cost to   Acquire a   Customer    (CAC...
Simple Customer Acquisition Funnel         200 Visitors required for 1 cust                   Visitors    5%              ...
Add in People costs:- CAC increases dramatically   Input Variables   Total Web Visitors                  10,000   SEM cost...
Sales Complexity             No Touch      Light Touch    High Touch                   Field Sales Freemium               ...
How I assumed the two would relate
A rough estimate of CAC versus Sales Complexity                No Touch      Light Touch    High Touch                   F...
The relationship is roughly exponential                                     Clearly adding                                ...
CAC (logarithmic)                            10x                    10x            10x                      Sales Complexity
CUSTOMER MICRO-ECONOMICS    SaaS andRecurring Revenue
Cash Flow at the Customer Level   1000      0   -1000   -2000   -3000   -4000   -5000
Cumulative Cash Flow1000   0-1000-2000                     Ten months to-3000                 recover CAC-4000-5000
My rules for CAC/LTV balance      in a SaaS model     LTV           > 3x          CAC     Months to    recover CAC    < 12...
SALES & MARKETING FUNNEL METRICS
1 stTHE BASICSOF FUNNEL DESIGN
ExpandSuspects   Closed Deals    Upsell                          Cross sell
IN A PERFECT WORLD…       1 Step
IN A PERFECT WORLD…    MyProduct.com                            DESCRIPTION       HOW IT WORKS                            ...
REALITY IS DIFFERENT    Step 1       Step 2     Step 3             WE NEED TO BREAK THINGS DOWN               INTO MULTIPL...
WHAT WE ARE DOING   ACTION     ACTION     ACTION   MOVEMENT   MOVEMENT   MOVEMENT
2   MEASURE      "IF YOU CAN NOT MEASURE IT,      YOU CAN NOT IMPROVE IT."                   - LORD KELVIN
WHAT TO MEASUREFOR EACH STEP / ACTION:NO OF ACTIONS             % CONVERSION RATE                  TIME                   ...
THE KEY METRICS                    CAMPAIGNS                     TO DRIVE                     TRAFFIC                     ...
NOT ALL LEAD SOURCES ARE EQUAL     Google Ad Word Funnel        FaceBook Ad Funnel           Visitors                    V...
ROI by LEAD SOURCE    Cost per lead        OVERALL      CONVERSION %      (BY LEAD SOURCE)                         Lifetim...
THE ART OFMARKETING
DESIGNING YOUR FUNNEL
WHAT IS A FUNNEL?    ACTION    ACTION     ACTION   MOVEMENT   MOVEMENT   MOVEMENT
HOW DO WE DESIGN OUR FUNNEL?
THEBUYER
THE BUYING CYCLE                             PURCHASE             CONSIDERATION                                        CLO...
THEBUYER       CONSIDERATION        ADDRESS THEIR QUESTIONS & CONCERNS         • Will this work for my situation?         ...
TRIGGERS • Moving house     • Movers, phones, cable TV, furniture, insurance, etc. • Starting a new software project     •...
Suspects                                                           Suspects                                      Suspects ...
IMPROVE
IN DIAGNOSING MANY FUNNEL BLOCKAGE POINTS,I HAVE FOUND THAT THERE IS ACLEARPATTERN…
YOU ARE HOPING YOURCUSTOMERS WILL DOSOMETHINGTHAT THEY ARENOT MOTIVATED TO DO
IN OTHER WORDS…YOU DESIGNED YOUR FUNNELTHE WAY YOU HOPED IT WOULDWORK…BUT YOU MAY NOT HAVE THOUGHT ENOUGH ABOUTTHE CUSTOME...
JBOSS EXAMPLEPUT A REGISTRATION FORMON THEIR WEB SITE BEFOREA FREE DOWNLOADIMPACTCUT THE DOWNLOAD RATEBY MORE THAN 10X
GET INSIDE YOURCUSTOMER’S HEAD            FRICTION &            CONCERNS            - Hate being sold to            - Find...
UNDERSTAND WHATMOTIVATES THEM           FRICTION &           CONCERNS           MOTIVATIONS           -   Want to solve my...
CREATE A SOLUTION THATENTICES THEM AND ADDRESS THEIR CONCERNS                    FRICTION &                    CONCERNS   ...
JBOSS EXAMPLE• Making $27,000 a month selling documentation• Solution:   • Give away documentation to get their email addr...
EXAMPLE: DRIVING TRAFFIC TO YOUR WEB                 SITE                          GETTING FOUND                          ...
LESSONS FROM WEBSITEGRADER•   Free tools drive viral spread•   Low customer work required•   High value delivered•   Score...
using engineering for marketing
USING DATA TO DRIVE WEBTRAFFICSYSOMOS: SOCIAL MEDIA MONITORINGLEVERAGED THEIR DATABASE TOCREATE BLOG POSTS WITH DATA ONTOP...
LED TO:          SYSOMOS ARTICLES IN          ECONOMIST, NY TIMES  WEB TRAFFIC TO READ THE FULL REPORT  LEADS – IMPRESSED ...
DROPBOX: SIMPLE FILE SHARING SOFTWARE–   Get you hooked for free–   Storage slowly increases to the point where you need t...
First Contact                          Sell                   Build       BuildFirst Contact                          Sell...
OFTEN NECESSARY TO FIND TOPICSTHAT ARE NOT RELATED TO THE SALE                    Build          Build                 Rel...
SELLING IS   10X EASIER…ONCE YOU HAVE ESTABLISHED   TRUST
THE KEYS TO SUCCESS     THE  BUYER               GET INSIDE              YOUR BUYER’S                 MIND
CONCLUSION
WHAT I DIDN’T COVER•   Sadly way too many topics for this time slot•   Virality – see my blog•   NPS – Net Promoter Score•...
For More information   Visit my blog at www.forEntrepreneurs.com
APPENDIX
WHYCHURN IS SOIMPORTANT
Why Churn is so Important                 Bookings Versus Churn                                    MRR (Monthly Recurring ...
The Impact of Negative Churn                 Bookings Versus Churn                                    MRR (Monthly Recurri...
MICRO-ECONOMICSFOR A SALES PERSON
How Revenue Builds for a SaaS Salesperson                                                (assuming no ramp up time)       ...
The Cash Flow Gap          MRR vs Expenses – New Sales Hire                                                       Net prof...
The SaaS Cash Flow Trough           Cumulative Net Profit - New Sales Hire    $400,000    $300,000    $200,000    $100,000...
UNDERSTANDING CUSTOMERENGAGEMENT
THE OLD WORLD HUMAN INTERACTIONS
THE NEW WORLDMACHINE INTERACTIONS
THE PRODUCT    HAS BECOMEYOUR SALESPERSON
TRACKING ENGAGEMENT What do we know  about them?      What do their                   actions tell us?     Buyer          ...
Account Profile
WHY MEASURE ENGAGEMENT?INSIGHTWhich customers are about to Churn?ACTIONUse emails and/or customer service repsto increase ...
WHY MEASURE ENGAGEMENT?INSIGHTWhich Free Trials are going wrong?ACTIONUse emails and/or customer success repsto increase u...
WHY MEASURE ENGAGEMENT?INSIGHTWhich free trials are going really well?ACTIONGet Sales to call and ask for the order
Active Lists
Engaged Evaluators Report
WHY MEASURE ENGAGEMENT?INSIGHTWhich key features in the Free Trial have not been tried?ACTIONUse emails and/or customer su...
PATTERN DISCOVERY  AND THE NEED FOR DATA SCIENTISTS
Which behaviors are mostcorrelated with Churn?       Which lead sources lead to       the most profitable customers?      ...
THEBUYER   WHO IS YOUR BUYER?   • Who is involved?   • What are their roles     (Champion, Influencer, Decision maker, etc...
THEBUYER       UNDERSTAND THEIR BUYING PROCESS       • What are their approval processes?          • e.g. IT approval need...
USING METRICS TO MEET TARGETS           WORK BACKWARDS FROM THE TARGET
Example: JBoss - Sales & Marketing Machine                                                       EnterpriseSuspects       ...
Metrics: The End Goal         4:1         3:1        4:1        (25%)       (33%)      (25%) Raw     Web                  ...
Using the model to work backwards                  4:1               3:1             4:1 Raw               Web            ...
David Skok's,  SMASH Summit NYC
David Skok's,  SMASH Summit NYC
David Skok's,  SMASH Summit NYC
David Skok's,  SMASH Summit NYC
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David Skok's, SMASH Summit NYC

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David Skok's (General Partner @ Matrix Partners) presentation at SMASH Summit on 7/26 in NYC

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  • In a perfect world, we would hope that we could take our suspected market directly to purchase in one step.
  • That would be like hoping we could simply put up a web site and expect that people would just find it and immediately buy our product.
  • Transcript of "David Skok's, SMASH Summit NYC"

    1. 1. STARTUP KILLERCAC, LTV & Other Metrics that will make (or break) you CAC ROI by Viral Lead Coefficient Time to Source Recover LTV CAC Churn Rate Viral Cycle Conversion Time Rate
    2. 2. MICRO-ECONOMICS PROFITABILITY AT THE CUSTOMER LEVELA POWERFUL WAY TO GAIN BUSINESS INSIGHT
    3. 3. An out of balance Business Model Entrepreneurs are over-optimistic Cost to Acquire a Customer (CAC) Monetization (LTV)
    4. 4. Simple Customer Acquisition Funnel 200 Visitors required for 1 cust Visitors 5% Trial Using Google: At 50c per click 10% Cost: $100 per cust Customer
    5. 5. Add in People costs:- CAC increases dramatically 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 Marketing and Sales people Flow Qty. Conversion % involved: Total Paid Web Vistors 10,000 CAC rises to Trials 500 5% $1,000 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
    6. 6. Sales Complexity No Touch Light Touch High Touch Field Sales Freemium Field Sales Self-Service Inside Sales Inside Sales with SE’s
    7. 7. How I assumed the two would relate
    8. 8. A rough estimate of CAC versus Sales Complexity No Touch Light Touch High Touch Field Sales Freemium Field Sales Self-Service Inside Sales Inside Sales with SE’s Rough Estimates of Cost of Customer Acquisition (CAC) $0- $50 – $1,000 - $3,000 - $25,000 – $75,000 – $10 $200 $2,000 $8,000 $75,000 $200,000
    9. 9. The relationship is roughly exponential Clearly adding Human Touch dramatically increases costs
    10. 10. CAC (logarithmic) 10x 10x 10x Sales Complexity
    11. 11. CUSTOMER MICRO-ECONOMICS SaaS andRecurring Revenue
    12. 12. Cash Flow at the Customer Level 1000 0 -1000 -2000 -3000 -4000 -5000
    13. 13. Cumulative Cash Flow1000 0-1000-2000 Ten months to-3000 recover CAC-4000-5000
    14. 14. My rules for CAC/LTV balance in a SaaS model LTV > 3x CAC Months to recover CAC < 12 months Required for Capital Efficiency
    15. 15. SALES & MARKETING FUNNEL METRICS
    16. 16. 1 stTHE BASICSOF FUNNEL DESIGN
    17. 17. ExpandSuspects Closed Deals Upsell Cross sell
    18. 18. IN A PERFECT WORLD… 1 Step
    19. 19. IN A PERFECT WORLD… MyProduct.com DESCRIPTION HOW IT WORKS Our product allows you … Only $9,999.99 BUY NOW!
    20. 20. REALITY IS DIFFERENT Step 1 Step 2 Step 3 WE NEED TO BREAK THINGS DOWN INTO MULTIPLE SMALLER STEPS
    21. 21. WHAT WE ARE DOING ACTION ACTION ACTION MOVEMENT MOVEMENT MOVEMENT
    22. 22. 2 MEASURE "IF YOU CAN NOT MEASURE IT, YOU CAN NOT IMPROVE IT." - LORD KELVIN
    23. 23. WHAT TO MEASUREFOR EACH STEP / ACTION:NO OF ACTIONS % CONVERSION RATE TIME TIME
    24. 24. THE KEY METRICS CAMPAIGNS TO DRIVE TRAFFIC VISITORS OVERALL CONVERSION CONVERSION % % TRIALS CONVERSION % CLOSED DEALS
    25. 25. NOT ALL LEAD SOURCES ARE EQUAL Google Ad Word Funnel FaceBook Ad Funnel Visitors Visitors5% 2% Trial Trial 10% 20% $5,000 Customer $8,000 Customer
    26. 26. ROI by LEAD SOURCE Cost per lead OVERALL CONVERSION % (BY LEAD SOURCE) Lifetime value of the Customer
    27. 27. THE ART OFMARKETING
    28. 28. DESIGNING YOUR FUNNEL
    29. 29. WHAT IS A FUNNEL? ACTION ACTION ACTION MOVEMENT MOVEMENT MOVEMENT
    30. 30. HOW DO WE DESIGN OUR FUNNEL?
    31. 31. THEBUYER
    32. 32. THE BUYING CYCLE PURCHASE CONSIDERATION CLOSED DEAL AWARENESS
    33. 33. THEBUYER CONSIDERATION ADDRESS THEIR QUESTIONS & CONCERNS • Will this work for my situation? • Is it the best product in the market? • Is it a safe choice? (Who else is using it?) • Will I get a return on my investment? • Is it scalable, secure? • Is it easy to implement? • Will I get good support? • Etc.
    34. 34. TRIGGERS • Moving house • Movers, phones, cable TV, furniture, insurance, etc. • Starting a new software project • PaaS (Platform as a Service), Dev Tools, etc. • Need to hire a lot of new employees • Applicant Tracking System • Just lost my data in hard drive crash • Backup software/service • Read about a new scary computer virus • Anti-virus software
    35. 35. Suspects Suspects Suspects Suspects Suspects Suspects Suspects Suspects Suspects Suspects Suspects SuspectsBUT EVEN IF YOU AREMICROSOFT, CISCO, ORACLE, ORGOOGLEYOUR FUNNEL WILL HAVEBLOCKAGEPOINTS
    36. 36. IMPROVE
    37. 37. IN DIAGNOSING MANY FUNNEL BLOCKAGE POINTS,I HAVE FOUND THAT THERE IS ACLEARPATTERN…
    38. 38. YOU ARE HOPING YOURCUSTOMERS WILL DOSOMETHINGTHAT THEY ARENOT MOTIVATED TO DO
    39. 39. IN OTHER WORDS…YOU DESIGNED YOUR FUNNELTHE WAY YOU HOPED IT WOULDWORK…BUT YOU MAY NOT HAVE THOUGHT ENOUGH ABOUTTHE CUSTOMER’S POINT OFVIEW
    40. 40. JBOSS EXAMPLEPUT A REGISTRATION FORMON THEIR WEB SITE BEFOREA FREE DOWNLOADIMPACTCUT THE DOWNLOAD RATEBY MORE THAN 10X
    41. 41. GET INSIDE YOURCUSTOMER’S HEAD FRICTION & CONCERNS - Hate being sold to - Find it offensive to give name and email - Don’t want to get spam sales emails - Worried that email address will be given to other marketers
    42. 42. UNDERSTAND WHATMOTIVATES THEM FRICTION & CONCERNS MOTIVATIONS - Want to solve my problem - Recommendation from a friend - Education - Data/ information reports - Entertainment - Free stuff - Meeting other people like me that have insights to share
    43. 43. CREATE A SOLUTION THATENTICES THEM AND ADDRESS THEIR CONCERNS FRICTION & CONCERNS ENTICE & ADDRESS CONCERNS - Customer testimonials address vendor risk - Free trials address product viability and fit concerns - Lowest price guarantees
    44. 44. JBOSS EXAMPLE• Making $27,000 a month selling documentation• Solution: • Give away documentation to get their email address
    45. 45. EXAMPLE: DRIVING TRAFFIC TO YOUR WEB SITE GETTING FOUND Not going to find your site unless: friction & - On top page of Google concerns search results - Recommended by a trusted source - Referred to in social media or blogosphere
    46. 46. LESSONS FROM WEBSITEGRADER• Free tools drive viral spread• Low customer work required• High value delivered• Score leverages competitive urge, and acts as a trigger• Builds trust through clear demonstration of expertise
    47. 47. using engineering for marketing
    48. 48. USING DATA TO DRIVE WEBTRAFFICSYSOMOS: SOCIAL MEDIA MONITORINGLEVERAGED THEIR DATABASE TOCREATE BLOG POSTS WITH DATA ONTOPICS OF CURRENT INTEREST:• IRAN ELECTION RIOTS• TWITTER’S GROWTH• FACEBOOK USAGE
    49. 49. LED TO: SYSOMOS ARTICLES IN ECONOMIST, NY TIMES WEB TRAFFIC TO READ THE FULL REPORT LEADS – IMPRESSED BY THE CAPABILITIES OF THE SOFTWARE
    50. 50. DROPBOX: SIMPLE FILE SHARING SOFTWARE– 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
    51. 51. First Contact Sell Build BuildFirst Contact Sell Relationship Trust
    52. 52. OFTEN NECESSARY TO FIND TOPICSTHAT ARE NOT RELATED TO THE SALE Build Build Relationship Trust First Contact Sell
    53. 53. SELLING IS 10X EASIER…ONCE YOU HAVE ESTABLISHED TRUST
    54. 54. THE KEYS TO SUCCESS THE BUYER GET INSIDE YOUR BUYER’S MIND
    55. 55. CONCLUSION
    56. 56. WHAT I DIDN’T COVER• Sadly way too many topics for this time slot• Virality – see my blog• NPS – Net Promoter Score• Etc.
    57. 57. For More information Visit my blog at www.forEntrepreneurs.com
    58. 58. APPENDIX
    59. 59. WHYCHURN IS SOIMPORTANT
    60. 60. Why Churn is so Important Bookings Versus Churn MRR (Monthly Recurring Revenue)$150.0 $3,000.0 2.5% Churn $2,500.0$100.0 $2,000.0 $50.0 $1,500.0 Months $- 5% Churn $1,000.0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 2.5% Churn $500.0 $(50.0) 5% Churn $- Months 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58$(100.0)
    61. 61. The Impact of Negative Churn Bookings Versus Churn MRR (Monthly Recurring Revenue)$200.0 $8,000.0 -2.5% Churn -2.5% Churn $7,000.0$150.0 $6,000.0$100.0 $5,000.0 $50.0 $4,000.0 Months $- $3,000.0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 2.5% Churn 2.5% Churn $(50.0) $2,000.0 5% Churn $1,000.0$(100.0) 5% Churn $- Months 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58$(150.0)
    62. 62. MICRO-ECONOMICSFOR A SALES PERSON
    63. 63. How Revenue Builds for a SaaS Salesperson (assuming no ramp up time) With no Churn With Churn of 2.5%$45,000 $45,000$40,000 $40,000$35,000 $35,000$30,000 $30,000$25,000 $25,000$20,000 $20,000$15,000 $15,000$10,000 $10,000 $5,000 $5,000 $0 $0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Custs Feb Custs Mar Custs Apr Custs Jan Custs Feb Custs Mar Custs Apr Custs May Custs Jun Custs Jul Custs Aug Custs May Custs Jun Custs Jul Custs Aug Custs Sep Custs Oct Custs Nov Custs Dec Custs Sep Custs Oct Custs Nov Custs Dec Custs
    64. 64. The Cash Flow Gap MRR vs Expenses – New Sales Hire Net profit - New Sales Hire$30,000 $25,000 11 months to $20,000 breakeven MRR$25,000 $15,000$20,000 Expenses $10,000 $5,000$15,000 Cash $- Gap Month 10 Month 11 Month 12 Month 13 Month 14 Month 15 Month 16 Month 17 Month 18 Month 19 Month 20 Month 21 Month 22 Month 23 Month 24 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9$10,000 $(5,000) $(10,000) $5,000 $(15,000) $(20,000) $- Month Month Month Month Month Month Month Month Month Month Month Month 1 2 3 4 5 6 7 8 9 10 11 12 $(25,000) (Slightly later breakeven point, because Gross Profit is less than MRR)
    65. 65. The SaaS Cash Flow Trough Cumulative Net Profit - New Sales Hire $400,000 $300,000 $200,000 $100,000 $- $(100,000) $(200,000) Total amount 23 Months to get But a great invested: back the return on $110k investment investment
    66. 66. UNDERSTANDING CUSTOMERENGAGEMENT
    67. 67. THE OLD WORLD HUMAN INTERACTIONS
    68. 68. THE NEW WORLDMACHINE INTERACTIONS
    69. 69. THE PRODUCT HAS BECOMEYOUR SALESPERSON
    70. 70. TRACKING ENGAGEMENT What do we know about them? What do their actions tell us? Buyer Behaviors Attributes
    71. 71. Account Profile
    72. 72. WHY MEASURE ENGAGEMENT?INSIGHTWhich customers are about to Churn?ACTIONUse emails and/or customer service repsto increase usage
    73. 73. WHY MEASURE ENGAGEMENT?INSIGHTWhich Free Trials are going wrong?ACTIONUse emails and/or customer success repsto increase usage
    74. 74. WHY MEASURE ENGAGEMENT?INSIGHTWhich free trials are going really well?ACTIONGet Sales to call and ask for the order
    75. 75. Active Lists
    76. 76. Engaged Evaluators Report
    77. 77. WHY MEASURE ENGAGEMENT?INSIGHTWhich key features in the Free Trial have not been tried?ACTIONUse emails and/or customer success repsto focus on those features
    78. 78. PATTERN DISCOVERY AND THE NEED FOR DATA SCIENTISTS
    79. 79. Which behaviors are mostcorrelated with Churn? Which lead sources lead to the most profitable customers? What Free Trial behaviors indicate a customer that won’t buy? Etc.
    80. 80. THEBUYER WHO IS YOUR BUYER? • Who is involved? • What are their roles (Champion, Influencer, Decision maker, etc.)?
    81. 81. THEBUYER UNDERSTAND THEIR BUYING PROCESS • What are their approval processes? • e.g. IT approval needed, Board approval needed Wife’s approval needed
    82. 82. USING METRICS TO MEET TARGETS WORK BACKWARDS FROM THE TARGET
    83. 83. Example: JBoss - Sales & Marketing Machine EnterpriseSuspects Closed Deals Rollouts Web Web Phone InsideLeads Scoring Call Sales Lead Nurturing
    84. 84. Metrics: The End Goal 4:1 3:1 4:1 (25%) (33%) (25%) Raw Web Closed Tele- Tele-Leads activity Deals marketing sales scoring
    85. 85. Using the model to work backwards 4:1 3:1 4:1 Raw Web Closed Tele- Inside-Leads activity Deals marketing sales scoring• 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)

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