Presentation describing how Cost of Customer Acquisition (CAC) and Monetization (LTV) are they key elements to get right for a successful business model. Also describes the latest techniques for ...
Presentation describing how Cost of Customer Acquisition (CAC) and Monetization (LTV) are they key elements to get right for a successful business model. Also describes the latest techniques for reducing CAC, including Inbound Marketing, and the author's own methodology: Building a Sales & Marketing Machine.
Ed FarrellHighly recommended content. If you have a SasS model, you need to read, understand and practice the content in this presentation. Thanks for the hard work in preparing!2 years ago
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Customer Acquisition & Monetization - Keys to your Business ModelPresentation Transcript
Agenda
Business Model Innovation
CAC and LTV
Reducing CAC (Cost to Acquire a Customer)
Building a Sales & Marketing Machine
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
New Business
Entertainment
Models
Consumer Technology leads the Enterprise
Business Model Innovation:
The Major Change Agents
The Internet
Google
SEO/SEM
Enables
low-cost
customer
Web 2.0
acquisition
Social
Networks
Mobile Web
Next Generation Web Innovation
Traditional Magazines go on-line Polyvore
E-Commerce Gilt, BuyWithMe, Swoopo
Traditional Software Open Source, SaaS
Job Ads Monster.com theLadders.com
Paper Ads Banner Ads Search, Lead Gen
Yellow pages on-line Yellow Pages Google
Maps with GPS assisted search
A Common Theme
Business model disruption behind the innovation
Use the Web to acquire traffic, then monetize
Monetization strategies
Transactions
Subscriptions
Ads
Virtual Goods
Etc.
But – there’s a problem: Startup Killer
An out of balance Business Model
Entrepreneurs are over-optimistic
Cost to
Acquire a
Customer
(CAC)
Monetization
(LTV)
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 Annual
numbers
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
What we are looking for
A well balanced business model
Monetization
(LTV)
Cost to
Acquire a
Customer
(CAC)
The Balancing Act
• Viral effects
• Inbound Marketing
• Free or Freemium
• Open Source
• Free Trials • High Churn Rates
• Touchless conversion • Low customer
• Inside Sales satisfaction
• Channels
• Strategic partnerships
Cost to Acquire Monetization
a Customer (LTV)
CAC)
• Field Sales • Recurring Revenue
• Outbound Marketing • Scalable Pricing
• Cross Sell/Upsell
• Product line expansion
• Lead Gen for 3rd
parties
My rules for CAC/LTV balance in a SaaS model
LTV > 3 x CAC
Recover CAC in < 12 Months
Required for Capital Efficiency
Typical Customer Acquisition Funnel
Repeat
Suspects First Sale
Business
Funnel Blockage Points
Every company has a problem point in the funnel
Even Microsoft, Cisco, Oracle, etc.
Even eBay, Amazon, Google, etc.
To identify this, ask the question:
“What would you have to do to increase sales by 10x?”
Why?
There’s a clear pattern:
Failure to align your
process with the
customer’s motivations
In other words…
You are hoping your
customers will do
something that they are
not motivated to do
Get inside your Customer’s Head?
- I don’t have the time
Concerns - I have higher priority things to focus on
- I already have software that does this
- I don’t want to get spam email
- It will be painful to switch
- Yet another data integration headache
Understand what Motivates them
Concerns Motivation
The Psychological barrier is bigger than you think
People tend to
Software makers
overvalue the
tend to overvalue the
software they
software they offer
currently use by
by about a factor of 3
about a factor of 3
3x 3x
9x
Harvard Business Review, June 2006
Eager Sellers, Stony Buyers
by John T Gourville
(Thanks also to Josh Porter - Designing for Social Traction)
Example: Driving traffic to your web site
Concerns Getting Found
- Not going to find your site unless:
- You are on top page of Google search
that I am doing
- You were recommended to me by a
trusted source
- I see something interesting written
about you in social media or
blogosphere
Using Engineering for Marketing
Getting Customers to sign up for a Trial
- I don’t have the time
Concerns - I already have software that does this
- I don’t want to get spam email
- I don’t want yet another password to remember
Re-think the process
Conventional Approach Sign up Use Customer
Immediate Engagement Use Sign up Customer
Source: Josh Porter – Designing for Social Traction
Getting to Executive Decision Makers
TechCrunch for
Insurance Claims
Sales Funnel Design: The Usual Way
Build the sales process from the inside out
Why these usually don’t work:
Customer motivation is not aligned with proposed steps
Building a Sales & Marketing Machine
Scientific process for designing and evaluating sales
and marketing programs
Defining “Machine”:
A scalable process that can be cranked up when needed
Requiring minimal manual intervention
Clear understanding of costs and returns
Dashboard providing Key Performance Indicators
Customer Driven Approach
Start with a detailed understanding of your customer
Segment your market into named Personas:
Call Center Connie, IT Ian, Reseller Robert
Define the Personas
Age: 35; Married, 2 Kids; Car: Toyota Prius
Likes, Dislikes
Product sophistication, technical abilities
Where they hang out on the web
What their boss expects of them
Their buying goals
Their buying concerns
Etc.
Diagram their buying process
Add the steps to address the buying process
Define the Actions to move them through funnel
Customer Concerns and Motivations
(JBoss Case Study)
• Is JBoss a
market leader?
• Operations
• Technical people: Safe
features? Choice? • Cost?
• Price? • Good support? • Quality of
• Easy of • Scalability & support?
download/use? • Safe Choice? • Cost?
reliability? • How much
• Good support? • Quality? • Cost? • Quality of did we use
• Fit with other • Successful
• Open Source • Scalability? • Quality of datacenter support? implemen- it?
fears • Good support? support? tools? • Value? tation • Value?
Download & Purchase Put JBoss Purchase Renew
J2EE Hear about Decision to Std-ize and
evaluate Training / into Production support
Developer JBoss use JBoss Expand
JBoss Dev Suppt Production Support contract
• Price • Price • References • Price • Need for • Price • Good support
• Easy to • Architecture, • Developer’s • Production insurance • Perceived
download and Features, providing References • References value
get started Performance, support • Partners • Value
• Recommen- etc. proposition
• Leadership
dation • J2EE quadrant of (needs
• Positive certification analysts? improving)
Review • References
• Press articles • Partners
Remaining steps
Test Linkages between steps
Software to automate (particularly linkages)
Define organizational resources for each step
Add Instrumentation (Metrics)
Refer to my Blog for more details
Brainstorming Topics
Bottlenecks
Where are we failing to move people successfully?
Why? & What can be done about it?
Conversion rates
Creative ways to increase these for each stage
Throughput
Why can’t we quadruple the throughput?
Cost of Customer Acquisition
Look at the cost of each step and ask if it can be done in a cheaper
way
Duration
Can we shorten the overall duration of the sales cycle
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
Use social media (Twitter, Facebook, etc) to build a
following
If the content is good it will spread virally
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
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/
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 Web based Help ticket system for
customer service
Extraodinarily 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
Old World evolving to a New World
Charge for
everything
(including Free Trials
on-site 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
Sales process:
Touch and Complexity versus Value
Value
Product Complexity
No Touch Light Touch Heavy Touch Field Sales
Self-Service Inside Sales Inside Sales with SE’s
Where I want to invest
Value Complexity
No Touch Light Touch Heavy Touch Field Sales
Self-Service Inside Sales Inside Sales with SE’s
SaaS versus Enterprise Software
Value Complexity
No Touch Light Touch Heavy Touch Field Sales
Self-Service Inside Sales Inside Sales with SE’s
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
What can happen when you get this right
SolarWinds
2009 Revenues: $116 million
EBITDA: $60 million
52% operating margins
Others: JBoss, LogMeIn, Constant Contact,
Salesforce.com, etc.
The Balancing Act
• Viral effects
• Inbound Marketing
• Free or Freemium
• Open Source
• Free Trials • High Churn Rates
• Touchless conversion • Low customer
• Inside Sales satisfaction
• Channels
• Strategic partnerships
Cost to Acquire Monetization
a Customer (LTV)
CAC)
• Field Sales • Recurring Revenue
• Outbound Marketing • Scalable Pricing
• Cross Sell/Upsell
• Product line expansion
• Lead Gen for 3rd
parties
Recurring Revenue
Benefits
Predictability – highly valued by Wall St
Future revenue and cash flow for an acquirer
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
Enterprise
Suspects Closed Deals
Rollouts
Web Web Phone Inside
Leads Scoring Call Sales
Lead
Nurturing
Metrics: The End Goal
Web
Tele- Tele-
activity
marketing sales
scoring
Using the model to work backwards
Web
Tele- Inside-
activity
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)
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
CAC / LTV balance
Build a Sales & Marketing Machine
Customer Centric behavior with Personas
Buying cycle diagram comes first
Customer Motivations and issues analysis at each stage
Metrics
Remove Blockage Points
Quarterly Brainstorming
Lessons Learned - (continued)
Understand the new buying behaviors
Think Inbound versus Outbound
Look for the breakthrough techniques
Free products / services
Use R&D as a marketing tool
Free Trials
Look for the next evolution in the business model
Don’t just think web-enabling of current ways
What does the web let me do that I can’t do today?
This is all obvious
Vision is easy
Execution is the hard part
All comes down to hiring great teams
For More information
Visit my blog at www.forEntrepreneurs.com
Karthik Ramanujam
Dan Pompilio 2 years ago