Wednesday, September 9, 2009

How to Cut Customer Acquisition Costs

  • How much should we spend on tradeshows?
  • Should we spend more on search engine optimization, or pay-per-click?
  • Are webinars worth the cost?
As a marketing adviser, I suppose I should charge a hefty fee to address these inquiries. But I'll share the answers with you right here, right now, for absolutely nothing:

I do not know.

That may not be something you often hear from an expert, but it's the best short answer I can honestly offer.

Here's a longer answer:

I don't know which specific programs will be cost-effective for your business and which ones you should eliminate, but I do know how to figure out the answer.

Articulate the goals for your particular organization

Know what you need to achieve with your sales & marketing efforts and be specific. How many deals do you need to win to hit your revenue targets? Work backwards from that number to calculate the number of opportunities you need, and then work further upstream to calculate the number of interested prospects required. (More on understanding this funnel later.)

I've actually managed marketing for a company that sold to a handful of large mobile phone makers: we didn't need to generate leads at all. Lead generation programs would have been a waste of money, so we focused exclusively on building market awareness and sales support tools.

Measure the value of each program

Track the number of leads, qualified opportunities and wins generated by each program. Then use the overall cost of the program to calculate the cost per each lead, cost per opportunity and cost per win. There are certainly flaws in this method - notably in designating a single program as the appropriate source for a particular prospect - but it's better than guessing.

A prerequisite for measurement is an agreement between sales and marketing on the precise definition of a "lead," a "qualified opportunity," and a "win." Further, they should agree on a process for moving prospects from marketing over to sales. Marketing's dumping unqualified leads onto sales is a sure way to waste money, besides creating ill will all around.

Understand the funnel

Know how many leads are required to generate one qualified opportunity, and know how many qualified opportunities are required to generate one win. Once you know these "conversion ratios," you can figure out precisely what's needed to make each stage of the sale process productive. You won't pay for leads you don't need, or sales people you can't feed.

Understanding the funnel can also help you identify where prospects are getting stuck. A low yield of leads-to-opportunities requires a different fix than a low yield of opportunities-to-wins.

It's not only about lead generation

Remember that in addition to generating leads, the marketing task typically includes two other important tasks: building visibility in the market and providing sales tools. Establishing thought leadership and winning the trust of prospects is especially important in marketing and selling SaaS solutions. (See "Lead Generation... ad nauseam.")

Cost-effective marketing is especially important for SaaS

Most SaaS companies will find that their customer acquisition costs (sales & marketing) will account for the single largest portion of their expenses. And under the SaaS business, sales and marketing expenses can often exceed one-third of subscription revenues. There is no margin for wasteful spending. (See "Hyper-Spending on Customer Acquisition: The Wile E. Coyote Effect."

Though I wish it might be otherwise, I don't believe there is an easy answer on how to cut your customer acquisition costs. Or least not an easy answer that's accurate. As H.L. Mencken put it, "There is always an easy solution to every human problem - neat, plausible and wrong."