customer acquisition & monetizationy3x2w... · virality often hoped for ... $250 per month for...
TRANSCRIPT
Agenda
Business Model Innovation
CAC and LTV
Reducing CAC (Cost to Acquire a Customer)
Building a Sales & Marketing Machine
The new rules of Customer Acquisition
Increasing LTV (Lifetime Value of a Customer)
Conclusion: Lessons Learned
The New Model
Unmet Need New Technology
Entertainment New Business
Models
Consumer Technology leads the Enterprise
Business Model Innovation: The Major Change Agents
The Internet
Web 2.0
Social
Networks
Mobile Web
SEO/SEM
Enables
low-cost
customer
acquisition
Next Generation Web Innovation
Traditional Magazines go on-line Polyvore
E-Commerce Gilt, BuyWithMe, Swoopo
Traditional Software Open Source, SaaS
Job Ads Monster.com theLadders.com
Paper Ads Banner Ads Search, Lead Gen
Yellow pages on-line Yellow Pages Google Maps with GPS assisted search
A Common Theme
Business model disruption behind the innovation
Use the Web to acquire traffic, then monetize
Monetization strategies
Transactions
Subscriptions
Ads
Virtual Goods
Etc.
But – there’s a problem: Startup Killer
An out of balance Business Model
Monetization
(LTV)
Cost to
Acquire a
Customer
(CAC)
Entrepreneurs are over-optimistic
CAC for a Web driven business
Input Variables
Total Web Visitors 10,000
SEM cost per click 0.50$
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
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$
Annual
numbers
What we are looking for
Monetization
(LTV)
Cost to
Acquire a
Customer
(CAC)
A well balanced business model
The Balancing Act
Monetization
(LTV)
Cost to Acquire
a Customer
CAC)
• Viral effects
• Inbound Marketing
• Free or Freemium
• Open Source
• Free Trials
• Touchless conversion
• Inside Sales
• Channels
• Strategic partnerships
• Field Sales
• Outbound Marketing
• Recurring Revenue
• Scalable Pricing
• Cross Sell/Upsell
• Product line expansion
• Lead Gen for 3rd
parties
• High Churn Rates
• Low customer
satisfaction
My rules for CAC/LTV balance in a SaaS model
LTV > 3 x CAC
Recover CAC in < 12 Months
Required for Capital Efficiency
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?”
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 email
- It will be painful to switch
- Yet another data integration headache
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)
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
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 email
- I don’t want yet another password to remember
Re-think the process
Sign up Use Customer
Source: Josh Porter – Designing for Social Traction
Conventional Approach
Use Sign up Customer Immediate Engagement
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.
Customer Concerns and Motivations (JBoss Case Study)
J2EE Developer
Hear about JBoss
Download & evaluate
JBoss
Purchase Training / Dev Suppt
Put JBoss into
Production
Purchase Production
Support
Std-ize and Expand
Renew support contract
Decision to use JBoss
• Price
• Easy to
download and
get started
• Recommen-
dation
• Positive
Review
• Press articles
• Price
• Architecture,
Features,
Performance,
etc.
• J2EE
certification
• References
• Partners
• 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
• 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
implemen-
tation
• Cost?
• Quality of
support?
• How much
did we use
it?
• Value?
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
Visitors
Trials
Campaigns
to drive
traffic
Closed Deals
Conversion %
Conversion %
Overall Conversion %
Key Funnel Metrics
(by lead source)
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
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
on-site trials) Free 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
No Touch
Self-Service
Light Touch
Inside Sales
Heavy Touch
Inside Sales
Field Sales
with SE’s
Value
Product Complexity
Where I want to invest
No Touch
Self-Service
Light Touch
Inside Sales
Heavy Touch
Inside Sales
Field Sales
with SE’s
Value Complexity
SaaS versus Enterprise Software
No Touch
Self-Service
Light Touch
Inside Sales
Heavy Touch
Inside Sales
Field Sales
with SE’s
Value Complexity
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
Others: JBoss, LogMeIn, Constant Contact, Salesforce.com, etc.
52% operating margins
The Balancing Act
Monetization
(LTV)
Cost to Acquire
a Customer
CAC)
• Viral effects
• Inbound Marketing
• Free or Freemium
• Open Source
• Free Trials
• Touchless conversion
• Inside Sales
• Channels
• Strategic partnerships
• Field Sales
• Outbound Marketing
• Recurring Revenue
• Scalable Pricing
• Cross Sell/Upsell
• Product line expansion
• Lead Gen for 3rd
parties
• High Churn Rates
• Low customer
satisfaction
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 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
Phone
Call
Lead
Nurturing
Inside
Sales Web
Leads
Web
Scoring
Enterprise Rollouts Suspects Closed Deals
Using the model to work backwards
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)
Web activity scoring
Tele- marketing
Inside- sales
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?