Reducing CAC (Cost to Acquire a Customer) Building a Sales & Marketing Machine The new rules of Customer Acquisition

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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 Entertainment New Business Models Consumer Technology leads the Enterprise

5 Business Model Innovation: The Major Change Agents The Internet Google SEO/SEM Enables low-cost customer acquisition Web 2.0 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 $ With headcount costs $ 1,090.00

10 CAC for a Direct Salesforce Sales Sales Eng Inside Sales Team composition 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 Annual numbers 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 Touchless conversion Inside Sales Channels Strategic partnerships High Churn Rates Low customer satisfaction Cost to Acquire a Customer CAC) Monetization (LTV) Field Sales Outbound Marketing Recurring Revenue Scalable Pricing Cross Sell/Upsell Product line expansion Lead Gen for 3 rd 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

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15 Typical Customer Acquisition Funnel Suspects First Sale Repeat 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? Concerns - I don t have the time - I have higher priority things to focus on - I already have software that does this - I don t want to get spam - 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 overvalue the software they currently use by about a factor of 3 Software makers tend to overvalue the software they offer by 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

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25 Using Engineering for Marketing

26 Getting Customers to sign up for a Trial Concerns - I don t have the time - I already have software that does this - I don t want to get spam - 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

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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? Technical features? Price? Easy of download/use? Good support? Open Source fears Safe Choice? Quality? Scalability? Good support? Cost? Quality of support? Operations people: Safe Choice? Good support? Scalability & reliability? Fit with other datacenter tools? Cost? Quality of support? Value? Successful implementation Cost? Quality of support? How much did we use it? Value? J2EE Developer Hear about JBoss Download & evaluate JBoss Decision to use JBoss Purchase Training / Dev Suppt Put JBoss into Production Purchase Production Support Std-ize and Expand Renew support contract Price Easy to download and get started Recommendation Positive Review Price Architecture, Features, Performance, etc. J2EE certification References References Developer s providing support Price Production References Partners Leadership quadrant of analysts? Need for insurance References Value proposition (needs improving) Price Good support Perceived value 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

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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:

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 on-site trials) Free 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 Self-Service Light Touch Inside Sales Heavy Touch Inside Sales Field Sales with SE s

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

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

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59 The Balancing Act Viral effects Inbound Marketing Free or Freemium Open Source Free Trials Touchless conversion Inside Sales Channels Strategic partnerships High Churn Rates Low customer satisfaction Cost to Acquire a Customer CAC) Monetization (LTV) Field Sales Outbound Marketing Recurring Revenue Scalable Pricing Cross Sell/Upsell Product line expansion Lead Gen for 3 rd parties

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

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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: 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 address

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

66 Metrics: The End Goal Web activity scoring Telemarketing Telesales

67 Using the model to work backwards Web activity scoring Telemarketing Insidesales 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 Result 4 axes to drive pricing higher 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

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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