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The Advocacy-Centered Company: A deeper look at CAC and LTV
The document discusses the importance of advocate marketing for B2B companies, emphasizing how customer advocates can enhance customer acquisition cost (CAC) and lifetime value (LTV). It presents strategies for maximizing customer profitability through effective advocate mobilization, engagement, and integration into marketing efforts. The data supports that utilizing advocates leads to improved sales efficiency, higher revenue, and greater customer retention.
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The Advocacy-Centered Company: A deeper look at CAC and LTV
- 1. The Advocacy-Centered Company: Adeeper look at CAC and LTV Bowery Capital CFO Summit August 6, 2013
- 2. 2 About Influitive 2013 CoolVendor in Social Marketing Influitive helps B2B marketers recruit, mobilize and recognize an army of advocates that outsell their best sales reps. WHO WE ARE: • Founded in 2010 • Toronto, Bay Area and Boston • >$11M raised from top tier investors SELECT CUSTOMERS:
- 3. 3 Double-Entry Daddy? Ladyof the Ledgers? No thanks! Bookkeeping Boss ManBig Chief Beancounter Historical Cost Head Honcho Trial Balance Top Dog Lady of the LedgerKing of the Counters Double-Entry Daddy Numerate Nobleman Penny President Bookkeeping Big Cheese Sir of the Spreadsheets Ruler of ResultsCFO Nicknames Source: Zazzle.com & the-alternative-accountant.com
- 4. 4 A monster ofa company – 20X sales – at scale Source: Yahoo! Finance
- 5. 5 A roadmap fora 20X sales (!) valuation Sustainable com- petitive advantage Network effects Predictability Switching costs Gross margin Marginal profitability Customer concentration Partner dependence Customer acqui- sition efficiency Growth! Source: Bill Gurley’s Above The Crowd Blog, 2011 (bit.ly/jX4nB0)
- 6. 6 A partner formaximizing big picture ROA Cash Talent Customers Reputation * * * Highly leveraged!
- 7. 7 CAC and LTV:Customer Profitability What we want to see! Source: David Skok’s ForEntrepreneurs Blog, 2010 (http://bit.ly/bZpMfB) LTV = ARPU x Average Lifetime of a Customer – the Cost to Serve them (COGS) CAC = Total cost of Sales & Marketing / No of Deals closed
- 8. 8 Advocates drive customerprofitability Source: David Skok’s ForEntrepreneurs Blog, 2010 (http://bit.ly/bZpMfB)
- 9. 9 CAC: Customer advocatesgenerate better leads & drive the most efficient buying process Source: Eloqua data, Sirius Decisions
- 10. 10 LTV: Second orderrevenue effects are huge and should be modeled explicitly Source: Jason Lemkin’s SaaStr Blog, 2013 (http://bit.ly/14fYjiF) Total revenue from customer Base Base Base Upsell Upsell 0 10000 20000 30000 40000 50000 60000 Year 1 Year 2 Year 3 Total First order Champion Change Word-of- Mouth Total second order
- 11. 11 LTV CAC LTV EV EV 2X Business Model -Today Business Model – with Advocates A high ratio of LTV to CAC drives profitability – and enterprise value CAC LTV 4X
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- 13. 13 $0 $10 $20 $30 $40 $50 $60 $70 Week 1 Month1 Year 1 Subsequent years Customer Onboarding First experience First month First year Subsequent years How to build advocates? Create a massive customer value surplus Customer value surplus Value to customer Cost to customer ≈ cust. expectations Critically important that early interactions offer a very high degree of surplus
- 14. 14 Product Management shouldforecast value, and backtest to ensure value is delivered Source: Influitive data SUM Close New Revenue/Pilots Retain customers, convert pilots Competitive Differen- tiation Strategic Investment Platform Improve- ments Improves Advocate Experience Embeds 11 2 2 3 2 2 Community 9 3 2 3 1 Maven 9 2 1 2 3 1 Referrals 11 2 3 2 1 3 Employee Advocates 7 3 2 2 Reviews 9 3 2 2 2 AdvocateHub API 6 2 3 1 Event Streaming 3 3 Admin Stuff 2 2 • 4% conversion of embedded display to completion • 40% of completes join the advocate program • 80% would recommend process to a colleague Assumptions: Backtest every quarter
- 15. 15 CS analytics tofocus time on renewal saves and upsells in creating customer value surplus Value received by customer* AnnualSubscriptionRevenue($) Source: Scout Analytics Categorization Explanation Retention risk These customers pay significant $ but fail to receive much value today Up-Sell These customers receive significant value in excess of payment Cross-Sell These customers receive good value for the money
- 16. 16 Advocate mobilization capabilityallows more investment in customer value surplus Source: Influitive data Marginal cost Marginal benefit Total investment in customer experience Marginal cost/value Status Quo: Invest in CX so that marginal benefit = marginal cost …raising the optimal level of spending on CX Advocate mobilization increases marginal benefit to investing in CX....
- 17. 17 To mobilize advocates,you need an advocate marketing program
- 18. 18 1. Part ofthe Team What motivates advocates? 1
- 19. 19 2. Measurable Impact Whatmotivates advocates? 2
- 20. 20 3. Social Currency Whatmotivates advocates? 3
- 21. 21 500% increase in award submissions 26customer videos captured in 2 days 17 positive product reviews on Quora #1 search result in Google! Integrated advocate marketing at Source: Influitive data
- 22. 22 >150 super highquality new referral leads per month from integrated referral program 100X higher survey response from advocates Advocate marketing at Source: Influitive data
- 23. 23 Influitive advocate engagementmetrics Source: Influitive data
- 24. 24 Influitive advocate retentionmetrics Cohort Analysis measuring engagement over months. Source: Influitive data
- 25. 25 Advocacy impact onCAC 231 referrals 4.1 activities per visit 13 visits to VIP per month 90% Cust. Advocacy rate* Sales Conversion Marketing program costs High Cost Sales Touches Personnel costs 33% 10% 47% Advocacy Metrics CAC Metrics CAC CAC 27% * Percentage of total customers who have engaged in advocacy for Influitive during a quarter Source: Influitive data
- 26. 26 Advocacy impact onLTV 26% Advocate Conversion 73% Advocate Monthly Retention Rate* 2108 Total Activities Advocacy Metrics LTV Metrics LTV LTV 48% MRR Churn Rate ARPU Cost to Serve (13%) 11% 4% * Cohort Analysis for June 2013 Source: Influitive data
- 27. 27 Integrated advocate marketingto drive lower CAC OutboundInbound Advocate WOM 1. Expanded referral program yields targets 4. Use advocate testimonials, case studies and references to rapidly close. 3. Add to nurture track. Tele-prospect to targets that show interest in content 2. Sponsored content appears in prospects’ social media feeds Example integrated campaign v
- 28. 28 Integrate advocates intoaccount management process to drive higher LTV Demand / Value received AnnualSubscriptionRevenue By asking your happy customer to do a reference call with your unsatisfied customer… …you can often get the unsatisfied customer to understand how to drive more value from your product… …and you might even get your satisfied customer to upsell into a more appropriately- priced product offering Source: Scout Analytics
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- 31. 31 Marketers are nolonger in control of the buying process 0% 10% 20% 30% 40% 50% 60% 70% 2006 2010 2014F Dependence on knowledgeable peers in the buying process (B2B software buyers) Initiates process Initiates contact Purchase complete 75% of buying process complete before B2B buying interacts with company! 75% 25%
- 32. 32 Experience is poorfor advocates today What advocates seek: Status Recognition Career value Connections Part of the team Reputation Perks Feedback What advocates get: Neglect + Abuse = Annoyed Leads to Advocate disengagement
- 33. 33 Experience is alsopoor for B2B companies today No self service solution Weak integration and analytics Data is all over the place
- 34. 34 Our current payingcustomers include many leading software and technology companies
- 35. 35 AdvocateHub has trulychanged the way some of the best B2B companies run their businesses “Without hyperbole, I literally could not do my job without Influitive.” –Fred Bals, Customer Relations Manager, Ektron “Whether in a presentation, as a reference, or through a referral, no voice is more powerful than that of a satisfied customer, and our Influitive AdvocateHub, O- Zone, helps us amplify that voice.” –Frederick Kerrest, COO & Co-Founder, Okta “After Act-on launched our Influitive AdvocateHub, our motto became: I have a marketing initiative, how can Influitive help?"” –Jeff Linton, Sr. Product & Field Marketing Mgr., ActOn “Mobilizing 1,000 advocates with a few simple key strokes is pure genius.” –Deena Zenyk, Marketing Mgr., SMART Technologies
Editor's Notes
- #3 Influitive is the advocate marketing company. Our AdvocateHub app makes it easy for marketers to recruit, mobilize and recognize an army of customer advocates that support marketing campaigns, refer new clients and help close deals faster. Previously I was CEO of Eloqua, one of the pioneers in marketing automation software which recently both went public on the Nasdaq and was purchased by Oracle for around $900M.
- #4 I found these nicknames from a shirt sold on Zazzle, and some of them are pretty funny. But if you have any of these nicknames I would be worried. As a high growth tech CEO, I’m looking for a partner to help me build a legendary company and create enormous amounts of wealth for everyone. And the cues for building such a company are rarely found in the General Ledger. Choosing the right metrics are often key to dominating an industry:Moneyball – runs, not RBIMy experience at Eloqua – early adoption of NPS and then profit per service person hourWe are going to discuss metrics, particularly customer profitability metrics, in a few minutes. But first, let me paint a picture of what victory looks like.
- #5 This is the kind of company that I want to build! What has really grabbed my attention is the ludicrously high Price to Sales. Is LinkedIn fairly valued at 20x sales and 800x earnings? It’s tough to say but there is no doubt that that this is a highly valuable franchise, the stuff that dreams are made of. Why might the market be valuing this company at such a rich price? Let’s take a look at some of the drivers of high valuation for some clues.
- #6 If you look at the 10 features of an ultra high value business that Bill Gurley has highlighted on his excellent Above the Crowd blog post, entitled “All Revenue is Not Created Equal”, you can see that LinkedIn scores a perfect 10. Let’s take a look at each one:- Competitive advantage – very powerful. Hard to imagine another player being able to replace, as there is no value to a new user of another system, and that’s mainly because of #2:Network effects – as more users join, there is more value for every user. Powerful network effects.Predictability – most of their businesses are SaaS with high renewal rates. The ad business is not but ad budgets are reasonably predictable an companies are only increasing their online portion of the mix.Switching – it’s not technically difficult to switch, but there is no real alternative for their proprietary data.Gross Margin – 85%Marginal profitabiilty – increasing steadily, the company is scaling. Operating margin now 24%, up from 20% last quarter and 18% the quarter before that.Customer concentration and partner dependence – weak to noneCustomer acquisition efficiency – I have yet to see a LinkedIn superbowl ad or billboard. LInkedIndoesn’t have to buy a lot of traffic. They grow mostly through word of mouth.Growth – Over 100% per year.We all want to build a business like this. A bunch of these things we don’t have power over, but I will submit to you that you can help dramatically improve the value of your business and being a true partner for your CEO by making your customers more profitable, and the best way to do that is to turn more of your customers into advocates, and then get those advocates mobilized. Four that directly get impacted by having a lot of advocate participation in your business include Gross Margin, Marginal Profitability, Customer Acquisition Efficiency and the one everyone watches, Growth.So how should CEOs and CFOs work together to build an ultra-valuable business?
- #7 I have a pretty simple model for the CEO-CFO partnership. Not everyone agrees with it, and there are exceptions, but here it is: It’s my job as CEO to make sure that we have lots of valuable assets in the business, and it’s the CFOs job to get the most value out of those assets. Now, we’ve probably all heard that job 1 is not to run out of money, and I think that is true, a CEO should make sure that there is enough cash in the business to achieve the plan. But the really valuable assets are the ones that get increasingly more difficult to quantify – the talent, our partners and customers, brand and reputation. That’s where the real leverage is. The keys to a 20x valuation is found in getting the most of these assets and we will talk about some of them in the slides ahead.
- #8 Now many of you are starting to look at 2 of the metrics that I think are most some of the most important when looking at customer profitability – the cost of acquisition and the life time value. The reason why I think these are so important is that they are becoming standardized so that we can understand how we are doing relative to benchmarks. Define CAC and LTV – source from David Skok’sForEntrepreneurs blog, and encourage everyone to check out the SaaS metrics blog post. I personally feel that what is even more important to look at are the trends in these metrics, at Marginal LTV and Marginal CAC, but again knowing your numbers is great so you can compare to benchmarks.An LTV of 3x CAC is considered healthy, but I would shoot for something higher – at Eloqua it was over 5 while I was CEO.The time element is also really important, ideally you would recover your cost of acquisition in 6 months, which is about what mine was. Of course it depends a lot of what you put in the numerator – what we do is estimate a proportion of overhead and other departments that should be considered sales and marketing and go with that.
- #9 Let’s take a look at how advocates drive customer profitabilityARPU – when your customers generate new customers, you generate more revenue per user. Cust Lifetime – advocates are more tolerant of service misstepsCost to Serve – Fred Reichheld has shown in numerous studies that loyal, advocating customers find ways to reduce their cost of service through customerization.Deals closed – advocates are effective at all phases of the sales funnelCost of sales and marketing – word of mouth and other advocate activity is low cost conversion.
- #10 We took a look at advocacy while I was running Eloqua and I found that there was a massive improvement in buying process efficiency. Especially in the sales cycle, which is a killer for B2B software companies. For B2B, I’ve estimated that 80% of the potential cash flow of the business is tied up in no-decision. The customer is fearful of making a mistake, that they will not get the desired return on investment, so they dither. Advocates reduce this fear and thus speed up the sales cycle.The most interesting aspect of the value of advocates is that new customers that are sourced through the advocacy channel are much more likely to advocate themselves. Advocacy is like a beneficial virus, making it socially acceptable to advocate – it’s part of the culture.
- #11 A lot of the value of a new customer, especially in the early-going, is when they help generate new customers for you, but yet this is not generally modelled by most SaaS businesses, and I think that this is a huge mistake. For a lot of B2B SaaS businesses, the best source of leads is when their happy customers move to another company – this is what we call Champion Change. Word of mouth is especially powerful. At Influitive we do model this and in fact we report on referrals every day. We let everyone in the company know, that we expect a lot of advocacy from the customer base. We pay increased sales commissions for new logos that actively advocate. And we also let our prospective customers and current customers know that advocacy is an important part of our culture and is our expectation from happy customers. Of course we do everything we can to make that advocacy more fun, rewarding and efficient.
- #13 So, in short – Stay Calm, and Carry On. Build Advocates, and mobilize them. If you focus on this, you will make your business a lot more valuable. There is no reason why the CFO can’t take this project on!How do you do that? Well, you need an advocate program. I will take you through the key components of an advocate program in a few minutes.First, how do we generate advocates? Well it starts by driving a ton of value for customers.
- #14 The value surplus is your fuel for advocate growth and a high value business. A rule of thumb that I’ve used is that you should shoot for a 10x measureable potential return for customers. But what I’ve seen is that the early part of the relationship is critical for driving high advocate activity. That starts off things right in the relationship. You want to have surprisingly high value. To do that, the late purchasing process and onboarding needs to be perfect. Who drives this? In my company it’s product management and customer success, and those are the areas where I think it makes sense for the CFO to dive in and ensure that they are doing everything possible to drive remarkable, measurable value.
- #15 PM’s job in my book is to be the faithful messenger for the market. They are doing their job when they drive a delightful experience for customers and users with the right features, positioning, and pricing. If they are doing their job right, there should be minimal waste in engineering, the vast majority of code should be in use and delighting customers.Here’s how we do it at Influitive:Strategic objectives on the top. You’ll see that “improve advocate experience” is important to us and we want to ensure we are always building features to help drive this, in addition to other important categories like generating revenue through new pilots and pilot conversion. Let’s take a look at how embeddable challenges, the item on the top, helps drive strategic objectives Forecast the metrics we expect to see in 3-6 months, for example – 4% conversion of embedded display to completion, 40% of completions join the advocate program. By documenting assumptions and making a forecast, even if we are off, we will know why and update our model of how the business works.
- #16 Customer success also has a vital role to play. You need to have an amazing product which delights customers, but in many cases these customers don’t realize the full potential without some help from a dedicated customer success team. We’re a big fan of customer success analytics systems in B2B like Totango, Gainsight and Scout Analytics, to help focus the attention of the CS professional. You can see some of these analytics here. On the X axis, estimates of value received by customer. IN this case, we’re looking at the activity spent by users inside of our app, and not all of that activity is the same – the activity correlated with higher retention and upsells are valued higher. On the Y axis, the value of the account. The red dots are in the danger zone – where customers are not generating sufficient value from the solution. CS should do whatever they can to get these customers back on track – proactively. The green dots represent high customer value surplus, and these customers should be approached for possible upsell opportunities and to advocate. The blue dots are not an urgent issue, but still important. Over time, more an more of the blue dots should be converted to upsells and advocates.
- #17 The CFOs that I’ve worked with in the past have had an instinct to reduce investment in customer success to help the business “scale” better. But I would give you another way to look at it. The power of advocacy just cannot be underestimated, especially in this social buying era. So rather than look to make that operation as efficient as possible from a cash perspective, instead I would want to optimize around generating more value. The way to feel comfortable in investing more in customer value is to develop the capability to mobilize advocates. This sets up a positive feedback loop of happier customers, more advocates, and is the route to victory in my opinion.
- #18 Advocate programs have some standard components: Challenges, or tasks, which can range from referrals to references to case studies, social media participation and some off-beat but still valuable items like great jokes so that the CEO can be more exciting in giving keynote speeches.You’ll also see levels, points and leaderboards which encourage competitionRewards for advocates that perform well, focusing on non-financial rewards. You want to drive the soft factors which we will talk about in a minute.Let’s take a deeper look at a referral challenge in our AdvocateHub product, featuring suggested referrals and automatic feedback that tells the advocate how the referral is progressing.It’s very possible to build an advocate program without using our technology – in fact most companies that we work with had a system created using spreadsheets and CRM before we helped automate more of it, and make it more advocate-centred and self-service. Whether you work with us or set up your own homegrown system, I strongly encourage all of you to create an advocate program. Usually the best department to run it is in marketing, and as long as you are providing executive support and are driving the metrics, can be run by a relatively junior person. The executive support is important because great advocate programs aggregate all the different activities that advocates do in one place – so you’ll have a lot of activities, processes and metrics to aggregate. We’ll go some of the key metrics later on in this presentation too.So, I hope that all of you are convinced that you should be considering an advocate program, and that it’s completely acceptable to bring this up with your executive team. One of the questions you will likely get asked is “what motivates advocates?” Well, I’ve interviewed literally hundreds of advocates in an attempt to answer this question, and I have a simple framework that you can use to think through this.
- #19 First, is that advocates want to feel like part of the team. They identify with your company and your products. They do not want a wall between themselves and your company, because they think of themselves as an extension of your team. Our customers have given their program an identity, and an identity for their advocates as well – just like The Leafs Nation from my hometown hockey team. They want to be consulted on everything from product design to marketing campaign ideas – feedback has drug-like effects in the brain and advocates just can’t wait to give it to you – so give them a forum.
- #20 Second is measurable impact. Advocates want to understand the positive effects that they have on your business. When they give you a referral, they want to know that it’s in demo phase, that it closed in 45 days. When they provide you with data for a case study, they want to know how many people have read it, and have provided positive comments on it. We humans – and indeed, all organisms – are hardwired to receive feedback, so make sure that you provide it.
- #21 Third is social currency. Advocates may claim that they are altruistic, but I don’t believe it. We humans are powerfully motivated to improve our situation, to make sure that we can put food on the table. Advocacy helps us do that, by building a reputation for being knowledgable, for having connections, for driving successful transactions. We want to be mavens and are rewarded for doing so. That’s why industry awards, like those EloquaMarkies back there, for ranked awards like top X under Y are so popular. Status, recognition, social currency, helps advocates differentiate and get ahead. So use your advocate program as a way to drive that.Want to see some results? I’ll talk through some of our customer results and then get into some of our metrics at Infuitive.
- #24 Some of the key metrics that we track on our advocate program are engagement and frequency metrics. Challenges per session completed and visits per month are effective metrics. We average more than 4 challenges completed per session, and more than 12 visits per month, so that works out to >48 tasks completed per month! That is a lot of really valuable activity. Referrals have a special place in my heart because they are so valuable, so we have extra emphasis on those.
- #25 Advocate retention and churn are also tracked. We look at the advocate funnel the same way that you would track a prospect funnel. We want to understand how we are doing in creating highly active, rock star advocates. We convert roughly one in four new advocates into highly engaged advocates. One area where we need to do better is in our advocate churn, which may be headed in the wrong direction, even accounting for the slower summer months. Between 3 and 4 advocates stop participating in the subsequent month after they join. We are constantly innovating in this area, creating programs that make it appealing for advocates to come back to the site to see what is new – new challenges, rewards, people to meet, contests – keeping it fun and interesting is the way to get continuous engagement.
- #26 Let’s look at the effect of advocacy on CAC. This is Influitive’s data for 5 months ending July 31.
- #27 Let’s look at the effect of advocacy on LTV.
- #28 Finally let’s look at some integrated, cross-departmental approaches on how you can use advocacy do drive down your customer acquisition costs. Once you have a culture of advocacy, once you are tracking your advocacy metrics and surface them, and you explicitly model how they impact your CAC and LTV metrics it helps spur on the creativity of your team. Here is one of the more interesting campaigns that we are doing that goes across the marketing and sales departments:
- #29 Advocates are helpful in so many aspects of the business – pretty much every key metric you can name can be improved when you get advocates involved. Veteran SaaS CFOs have learned to shine a light on net churn metrics – renewal and growth of accounts. Can advocates help there? Absolutely. If you are not already forecasting possible churn, you should. We have companies who pair up forecasted churn accounts with the right happy customers, and those advocates help to ensure that those churn possibilities renew, and even grow through upsells.
- #32 In today’s connected world, the last person your buyer is going to talk to is your sales rep. They’re going to talk to your customers – so it seems kinda crazy to leave those conversations to chance! Advocate Marketing is a discipline that puts your best customers at the center of your marketing and sales efforts – where they can sell on your behalf. It involves tools and best practices that are proven to accelerate revenue growth and offer a better buyer experience. What are the benefits of advocate marketing?People trust their peers more than salespeople. Tapping into trust can benefit your business in so many ways:Faster sales cyclesBetter buy experienceBetter brand recognition & reputationMore high quality referral leadsHigher customer lifetime valueBigger deal sizes Lower lead generation & sales costsSimpler management & mobilization of customer referencesHigher customer satisfaction
- #35 Influitive is the advocate marketing company. Our AdvocateHub app makes it easy for marketers to recruit, mobilize and recognize an army of customer advocates that support marketing campaigns, refer new clients and help close deals faster.