Saturday, November 8, 2014

Acquiring Customers Ain't Cheap

It costs SaaS companies $1.07 in sales and marketing expense to acquire $1.00 in annual contract revenue.

So says excellent research on the experience of SaaS companies, prepared by David Skok along with Pacific Crest Securities. 

The SaaS companies included in their survey spent, on average, $1.07 on sales and marketing to win a customer that would be worth $1 in annual contract value.

Some might react with horror at that news.  “To grow a SaaS business to $100 million in annual contract value, I need to spend $107 million to acquire customers!!”

Not me. 

Spending $1 to earn $3 is a good thing

That ratio - $1.07 in customer acquisition costs (CAC) delivers $1 in annual contract value (ACV) - is great news.

Here’s what that number means.  If a SaaS business wisely invests $100 million in customer acquisition costs, they’ll earn nearly all of it back from customer revenue in the first year. 

And if they can hold onto those customers for a second year, they’ll earn another $100 million in revenue, and in the third year, another $100 million. 

In other words, the first $100 million in CAC earns nearly $300 million in contract revenues over three years.

With that kind of return, the SaaS company should put as much money into CAC as it can get its hands on.

Before folks bombard me with objections, let me be clear on a couple of points.  For one, I’ve made an assumption that the money spent on sales and marketing to acquire customers is spent efficiently.  (Call me if you need help with that.)

And second, for the sake of making a point, I’ve omitted the cost of retaining an existing customer.  The Skok survey shows that companies will pay 12 cents annually to retain an existing contract worth $1.00.    Factoring that in, the cost to acquire $300 million in contract value over three years is closer to $131 million.  Still not too shabby.

SaaS is a "pay now, collect later" model

So with such an impressive return, why the resistance to spending on customer acquisition?

It may come from a couple sources.

Perhaps there’s some misunderstanding about the SaaS business model.  SaaS companies spend money on customer acquisition in the present in order to generate revenue over the life of the customer.  (See "SaaS customer acquisition:  Feed it or starve it?")  It may take 2 or 3 years to recover the sales and marketing costs.  (If you need more than 3 years to recover CAC, let’s talk.) 

That’s a lot different than the traditional on-premises business model that charges large up-front fees for software, plus on-going maintenance fees.  In that scheme, companies might allocate 4, 5, perhaps 6 percent of annual revenues to marketing. 

Effective sales and marketing costs money


There might also be a misperception about how much sales and marketing really costs.  Companies should expect to pay well if they want it done well.  
  • It costs money to design and maintain an effective website.  
  • It costs money to prepare compelling content.  
  • It costs money to design an effective customer acquisition plan.  
  • And it costs money to execute effective search engine marketing and social media campaigns.  
The experts who do this work don’t do it for free.
Of course, companies should take advantage of newer sales and marketing tactics, like social media and inbound marketing.  These can get them in front of prospective customers much less expensively and more effectively than they could have done several years ago.

And for some solutions, building a viral component into their product can be a powerful way to gain customers. 

But even with greater efficiency, customer acquisition still isn’t cheap.

SaaS companies pay a lot for excellent developers and UX designers.  They should expect to pay a lot for excellent sales and marketing people too.

There’s a reason that sales and marketing expenses at even well-established SaaS companies account for their single largest on-going expense.  Workday’s sales and marketing expenses, for example, represented 56 percent of their annual revenue according to their most recent annual financials.

Instead of looking at customer acquisition costs as an expensive burden, people should be looking at them as an investment.  And with returns of 200, 300, maybe 400 percent, a fairly lucrative investment at that. 

Thursday, October 2, 2014

Your message should be boring

Why in the world would I want a box of business cards with a different design on each one?

In radio ads, I’ve heard a company that sells business cards promoting that very feature: “Business cards with a different design on each one.”

I’m sure they use some very nifty software to make this happen.  But why?
  • Do people expect me to hand over more than one card when I introduce myself? 
  • Are they comparing the card that I gave to them with the ones I gave to others in the room?
  • Are people collecting my business cards to have a complete set? 
  • Do they swap them on some secondary market?
Probably not. 

If they’re like me, they enter the info into their contacts app, put the business card in the stack of other cards bound by an elastic band, and stick them in a desk drawer.

So why tout "a different design on every card?" Here’s the only explanation I can come up. 

The company thinks that a person gets bored looking at the same, same, same business card every time they hand it out.

Boredom can be a good thing

Maybe people do get bored. 

But here’s some news:  They should be getting bored.  They should be getting tired of showing the same thing every... single... time.

When it comes to your business card, boring is OK.  In fact, whenever you're talking to someone about what your business does, boring yourself is actually a good thing.

You should be saying the same thing over and over and over.

Note that I said “boring yourself,” not “boring the other person.”  Just because you've delivered the same message a thousand times doesn't mean you can't muster some passion.  This is your business after all.

Stick with the core messages

Once you’ve figured out the core value proposition and messages - who should be buying your solution, what problem does it solve, and why is it better than alternatives - you should tell that same story... every time, everywhere.

Why? 

Because the folks who you want to hear your message are hearing lots of other messages along with yours.  They’re positively bombarded with messages.

Repeating your message consistently is the only way that your value proposition can possible get through.  It's the only way people will remember it.

They should see it on your website, your blog posts, your presentations, your demos, your ad campaigns, and yes, even your business cards.

Staying on script improves impact, saves time & money

Believe me, I’ve been doing marketing for a long time and I understand the urge to step out, go off script, get a little crazy. 

And by the way, it’s perfectly OK to be creative.  There are ways to present the same fundamental message in different ways.

But if you wander from the basic message, you’re losing impact and squandering resources. 

If every time you want to prepare a video, a press announcement, a white paper, or any other kind of marketing material, you need to figure out the basics - who’s the audience, what’s the problem, how do we solve it, why should you buy from us - you’re going to waste a lot of time and money.

That’s bad for all companies and especially bad for software-as-a-service (SaaS) companies.  They have no time and no money to waste.  (See "SaaS customer acquisition:  Feed it or starve it?")

SaaS companies are much better off developing a compelling value proposition and message... and sticking to it.

Sure, the same message every time can get boring to you.    But you are not the person you’re talking to.

Tuesday, September 2, 2014

A Free Trial Isn't Really Free

Free, free, free. 

It sure is a powerful word.  Which probably explains why “free trial” is used so often by software-as-a-service (SaaS) marketers.

Lots of SaaS solutions, whether they’re for business or for personal use, let prospective customers use the solution for free.  And then after 15 days, 30 days, maybe 60 days, they ask them to actually pay for it.

(For now, I’ll focus on free trials.  I’ll leave the subject of “freemium” or “free forever” for another day.)

Here's one reason free trials are so common:  they work.  They can attract lots of users, and even lots of paying customers, if they’re done properly.

I’ll let you in on a secret about free trials, though.  They’re not really free.

Not free for solution providers

Free trials cost money for the SaaS providers.

There’s the cost of developing, hosting, and maintaining the solution. 

There’s the cost of supporting the solution if you offer help to the  trailers.

There’s the cost of attracting prospects to the free trial in the first place.  Search engine optimization, pay-per-click, email, PR, or whatever other tactics you’re using to drive people to find your free trial cost time and/or money.

And then there’s the cost of trying to convert the free trialers into paying customers.  Whatever you’re doing, it’s not free. 

If you’re not doing anything to convert trialers to paying customers, we should talk... soon.

Not free for the customers

Free trials aren’t really free for prospective customers either.

It takes time for them to find the solution and figure out if it’s something worth trying.

It takes time to register and then download the solution.

It takes time for trailers to learn to use the solution

And then it takes time for them to input some data and actually work with the solution enough to see
any value in it.

None of these activities are costing customers cash out-of-pocket.  But their time isn’t free.  

These prospective customers evaluating your solution are busy folks.  They've got a long list of things to take care of during the course of a day.  If they want to use the free trial, they’ll need to make time to do that.

By the way, if the folks using your free trial have all the time in the world, you might wonder whether they have the authority and budget to eventually make a purchase.

Think before you go free

If you offer a free trial, or you’re considering one, keep the costs in mind… both the costs to you and to the customer.  Ignoring them usually leads to failure... namely, high costs and low revenues.

Free trials, done well, can be effective.  But they’re not really free.

Monday, August 4, 2014

The human touch wins SaaS customers


Lots of smaller software-as-a-service (SaaS) businesses are tempted to try to sound “corporate” or
hide their real personality when they talk to prospective customers.

They act impersonal, like some alien borg.

They think that “sounding bigger” makes them more credible.

It's a bad idea that usually doesn’t work.


How can I trust you?

It’s hard to gain the trust of prospective customers if the provider is faking it.  People usually see through that.

And it's hard to sell SaaS without trust.

When customers buy a SaaS solution, they’re not buying a product;  they’re buying a promise.  They are relying on the vendor’s promise to deliver certain functionality and service over the life of the subscription. 

Which means that before they subscribe, the customer needs to trust the provider.   They need to believe that the SaaS provider will deliver as promised.


Instead of faking it, SaaS companies would be better off acting naturally.  If a company is smaller, friendlier, and can treat customers with a more personal touch than its larger competitors, it should flaunt it, not hide it.


The buyers are also the users
 
The prospective customers care about the kind of people they'll be working with over the life of the
subscription.

Whether they're in HR, sales, marketing, finance, or somewhere else in the organization, the people that are evaluating the SaaS solution before its purchased are often the same people who will actually be using the solution after its purchased.  There’s often no “intermediate buyer” in IT or procurement.

What that means is that the people making the purchase decision will also be considering the “personality” of the SaaS provider.  Besides thinking about features and functions, they’ll be asking themselves, “Are these the kind of people I’m going to want to work with if I subscribe to this solution?”

In most cases, they'll prefer friendly, personable experts over an impersonal, corporate borg.

Sunday, July 6, 2014

SaaS Marketing is Not a Numbers Game

"If we just dump enough names in the top of the funnel, some paying customers are bound to come
out at the bottom of the funnel!"

Wrong.

This approach to customer acquisition - sucking in as many suspects as possible - is costly and inefficient.  In other words, it's a very bad fit for software-as-a-service (SaaS) companies.

For one thing, collecting all those names isn't free.  Adword campaigns, website optimization, list purchases, or any other tactics you might use to attract possible leads cost money.

And then cultivating those contacts - qualifying and nurturing them into legitimate opportunities - costs even more money. 

Working on bad leads actually costs money; it doesn't make money.  (See "When Lead Generation is a Bad Thing.")

Low yield doesn't work for SaaS

This "strategy" - pull in as many names as possible and then hope that at least a small percentage of them eventually convert to paying customers - creates a tremendous strain on the SaaS business model.

On the expense side of the equation, it means substantial sales and marketing costs that are incurred up front.

On the revenue side, it means small and uncertain income collected over a period of time.

Relative to expenses, revenues are too low and too slow.

Timing vs. quantity
 
The goal is not to get as many names into the top of the funnel as possible. 

Instead, companies should be trying to get the right names into the funnel and move them through it as quickly as possible.

SaaS success requires turning "suspects" into paying customers as quickly and efficiently as possible.  The goal is to shorten the conversion cycle.

SaaS customer acquisition is actually a timing game, not a numbers game.





Tuesday, June 3, 2014

Accelerating the SaaS Purchase Process

Inbound marketing can be very cost-effective, but it can also be slow.

Inbound marketing relies on prospective customers making contact with vendors.  That's the other way around from traditional marketing, where vendors try to make contact with potential customers.

What that means is that by the time the vendor engages with a prospective customer, that prospect is already fairly far along in the evaluation process.  They're already familiar with the vendor and the solution.  In other words, they've qualified themselves.

That’s perfect for software-as-a service (SaaS) vendors.  They can focus their sales and marketing activity on well-qualified prospects.  

That fits well with the SaaS business model which demands that companies spend their sales and marketing resources wisely.  (See "SaaS companies can't afford to sell")



Finding customers in the short term

But it’s not so perfect for SaaS vendors in a hurry.

While inbound marketing makes sense - and the process usually works over time - it can be a long journey.  The prospective customers move at their own pace, not the vendor's pace. 

If you're a SaaS vendor that needs to close business in the short term, you need to add in some other tactics.  Inbound marketing may not have the instant impact you need.

Friends & family

There’s a reason most vendors’ early sales are to friends & family.  These folks already have some connection to the vendor.  They might be a previous employer, an investor, or former colleagues, for example. 

Vendors looking to quickly sign on some early customers should focus their efforts on these friends & family. 

These folks are already familiar with the vendor, which means they’ve already passed through the early stage of the evaluation and purchase process.  They're more likely to buy the solution in the short term.

The early adopters

In most markets, there is usually a cadre of early adopters, folks that are actively looking for innovative solutions. To gain a competitive advantage and bolster their credentials as market leaders, they are more willing to try technology solutions before they become mainstream. 

If you're looking to close business in the short term, seek out these early adopters.

Where do you find them?  Look at the press announcements for vendors selling solutions that are
complementary to yours.  See who’s speaking at relevant conferences.  Find out who's publishing a blog that describes their experience using new technologies.   

Leverage the early adopters

One of the reasons early adopters want to be out front is that they like being known as innovators.  They want others to take their advice and follow their lead. 

So once you've secured one of these folks as a customer, enlist their help to find others.  They tend to have a wide sphere of influence.  They post, they speak, they network.  And they’re often willing to help.

Don’t abandon inbound marketing

Do keep one thing in mind:  While you’re focused on closing a few deals in the short term, don’t forget about inbound marketing.  That's what you'll need to attract the prospects that will fill your sales pipeline over the medium and long-term. 

These are the customers that will get you “across the chasm” and help you establish a sustainable revenue stream. 

Yes, it may take them some time for these prospects to get to know you, assess their needs, and evaluate how well your solution fits their requirements and budget.  (See "Winning SaaS customers requires patience.")

But when they do eventually get there, they’ll be well-qualified and ready to seriously evaluate your solution.  You just can’t rush the process.





Creative Commons License

This work by Peter Cohen, SaaS Marketing Strategy Advisors is licensed under a Creative Commons Attribution 3.0 Unported License. Images obtained via iCLIPART.com.









Monday, May 5, 2014

What makes junk mail junky?


The junk email I get about replacement windows, oil change coupons, and life insurance doesn’t really bother me.

Somehow I got on a list of millions of people who own a house, own a car, and can still fog a mirror. 

These emails go out in bulk and luckily my spam filter traps most of them. 
 
Are you talking to me?  Really?

What does bother me though is the inappropriate email I get that isn't sent out by the millions.  It's the ones that come out from a real person who somehow thinks I'd really be interested.

I get several of these every week from PR people who want me to talk with their client who’s been named “something or other of the year,” or who thinks I ought to do a blog post on “Promotional Products Work! Week,” whatever that is. 

A few weeks ago, someone sent me a press announcement about changes to tax law in Idaho.  Huh?

These emails are friendly enough, and I’m certain that a new tax law in Idaho is very interesting to someone… but not to me.

Anyone who's spent any time trying to figure out what I would really be interested in would know that.

I’m not asking folks to do a lot of work here.  Thirty seconds on my website or LinkedIn profile will tell you everything you need to know.

Junk email is bad for SaaS marketing

So other than a rant about junk email that finds its way to my inbox, what does this have to do with software-as-a-service (SaaS) marketing?

For one thing, this kind of inaccurate marketing costs time and money.

Some marketing or PR person spent at least a little bit of time putting together the note... though obviously not enough time to figure out whether I’d really care about whatever it is they're promoting.

And if they follow up the note with a phone call, it’s even more time-consuming and more expensive.

If you're using poorly targeted email to market a SaaS solution, you're wasting time and money.  And the SaaS business model doesn’t leave much room for that. (See "SaaS customer acquisition: Feed it or starve it?")


Junk mail costs trust

The bigger cost though is credibility and trust.  And for SaaS businesses, that means a lot.  

Remember, SaaS marketers are selling a promise, not a product.  They are promising to deliver some benefit over the life of the subscription. 

Before they buy anything, the prospective customer needs to trust that the vendor will deliver on that promise.  (See "Winning customer trust.")

Establishing that kind of trust first requires that the vendor spend a little bit of time finding out about the prospective customer.
  • What kind of tasks are they responsible for?  
  • What challenges do they face?  
  • What kind of solution might help them succeed? 
How do you find that out?  Ask.  (See "Listen to your SaaS customers," March 2014)

Wrong mail to the wrong person = wrong result

When a SaaS marketer sends out an email to a prospect before they know anything about the prospect, they’re off to a bad start.  It’s tough to start a relationship with someone when you haven’t bothered to find out anything about them.

All you’re likely to do is waste time and money and annoy the prospective customer. 

Rather than respond to your email, the prospect is likely to wonder:  “What in the world was this person thinking?!”