Customer Acquisition & Monetization - Keys to your Business Model

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

Key Funnel Metrics Campaigns to drive traffic Visitors Overall Conversion % Conversion % Trials (by lead source) Conversion % Closed Deals

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

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Customer Acquisition & Monetization - Keys to your Business Model

by David Skok on Feb 12, 2010

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