The document discusses business model innovation focusing on customer acquisition costs (CAC) and lifetime value (LTV) in startups, emphasizing the need for a balanced approach. It highlights the importance of understanding customer motivations, effective sales and marketing strategies, and the shift from traditional outbound marketing to inbound methods. The document also outlines key lessons learned from successful companies, such as leveraging free offerings and viral marketing to achieve low CAC and high LTV.

2. 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

3. Anatomy of a Startup
Unmet Need New Technology
The Old Model

4. The New Model
Unmet Need New Technology
New Business
Entertainment
Models
Consumer Technology leads the Enterprise

5. Business Model Innovation:
The Major Change Agents
The Internet
Google
SEO/SEM
Enables
low-cost
customer
Web 2.0
acquisition
Social
Networks
Mobile Web

6. 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

7. 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

8. An out of balance Business Model
Entrepreneurs are over-optimistic
Cost to
Acquire a
Customer
(CAC)
Monetization
(LTV)

9. 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

10. 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

11. What we are looking for
A well balanced business model
Monetization
(LTV)
Cost to
Acquire a
Customer
(CAC)

12. 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

13. My rules for CAC/LTV balance in a SaaS model
 LTV > 3 x CAC
 Recover CAC in < 12 Months
 Required for Capital Efficiency

15. Typical Customer Acquisition Funnel
Repeat
Suspects First Sale
Business

16. 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?”

17. Why?
 There’s a clear pattern:
Failure to align your
process with the
customer’s motivations

18. In other words…
You are hoping your
customers will do
something that they are
not motivated to do

19. 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

20. Understand what Motivates them
Concerns Motivation

21. 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)

22. 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

25.  Using Engineering for Marketing

26. 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

27. Re-think the process
Conventional Approach Sign up Use Customer
Immediate Engagement Use Sign up Customer
Source: Josh Porter – Designing for Social Traction

29. Getting to Executive Decision Makers
TechCrunch for
Insurance Claims

30. 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

31. 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

32. 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.

33. Diagram their buying process

34. Add the steps to address the buying process

35. Define the Actions to move them through funnel

36. 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

37. 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

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

39. 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

41. 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.

42. 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

43. HubSpot: Inbound Marketing

44. 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

45. 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

46. 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/

47. The Low Cost Sales Model
 Web & Inbound Marketing
 Free product, or Free Trial
 Insides Sales
 Examples
 SolarWinds
 Constant Contact
 LogMeIn
 JBoss
 HubSpot

48. The Touchless Conversion
ZenDesk Web based Help ticket system for
customer service
 Extraodinarily scalable
 Extremely low cost

49. 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

50. 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

51. Old World evolving to a New World
Charge for
everything
(including Free Trials
on-site trials)
Free Product
Monetize a Fraction of Custs

52. 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

53. 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

54. Where I want to invest
Value Complexity
No Touch Light Touch Heavy Touch Field Sales
Self-Service Inside Sales Inside Sales with SE’s

55. SaaS versus Enterprise Software
Value Complexity
No Touch Light Touch Heavy Touch Field Sales
Self-Service Inside Sales Inside Sales with SE’s

56. 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

57. 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.

59. 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

60. Recurring Revenue
 Benefits
 Predictability – highly valued by Wall St
 Future revenue and cash flow for an acquirer

62. 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

63. The Original Brainstorming Session

64. 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

65. JBoss - Sales & Marketing Machine
Enterprise
Suspects Closed Deals
Rollouts
Web Web Phone Inside
Leads Scoring Call Sales
Lead
Nurturing

66. Metrics: The End Goal
Web
Tele- Tele-
activity
marketing sales
scoring

67. 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)

68. 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

69. The Results
 Before venture financing
 2003 $2m
 Early 2004 – venture round closes
 Revenue Growth:
 2004 $11m
 2005 $26m
 2006 on plan to do $65m

70. 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

72. 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

73. 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?

74. This is all obvious
 Vision is easy
 Execution is the hard part
 All comes down to hiring great teams

75. For More information
 Visit my blog at www.forEntrepreneurs.com