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

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

Google

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

Typical Customer Acquisition Funnel

Repeat Business Suspects First Sale

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?

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

Understand what Motivates them

Concerns Motivation

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

Using Engineering for Marketing

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

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)

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

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

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 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

Phone

Call

Lead

Nurturing

Inside

Sales Web

Leads

Web

Scoring

Enterprise Rollouts Suspects Closed Deals

Metrics: The End Goal

Web activity scoring

Tele- marketing

Tele- sales

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?

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