Making free trials work: 3 tips

Lots of software-as-a-service (SaaS) companies offer free trials.  But in even the best cases, only about a modest portion of the free trialers actually convert into paying customers.

In fact, many times the free trialers don't even try the free stuff.

People download the trial, but then they get distracted.

Or they don't have the time to use it.

Or they don't have the data they need to get started.

Or they decide it's a hassle.

Or they lose interest.

Or whatever.

Totango calls these folks "accidental trialers:"  prospective customers who sign up for a free trial and then do nothing.

After a few weeks, the trial expires - a complete flop for both the prospective customer and the SaaS provider:

The prospect gains little experience with the product and misses the opportunity to see how it might be helpful.

The provider has little opportunity to convert the free trialer into a paying customer.   They've invested in finding and cultivating a prospect, but they can't close the deal.

How can SaaS providers avoid this?  How can they get prospects to actually try the free trial?

Tip 1:  Don't make the trialer work too hard

Just because your solution is free doesn't mean your prospective customer's time is free.  If you ask them to do lots of work - track down data, configure forms, set-up work flows - they're likely to bail out.

Instead provide completed templates, default settings and benchmark data already filled in.  The trialer, of course, can make changes, but they're not starting from a blank page.

Tip 2:  Don't overwhelm the trialer

You're proud of your solution - every bell and whistle of it.  And your paying customers may grow to love every bell and whistle too - eventually.  But your free trialers probably aren't yet ready to see every single feature and function, and they may be overwhelmed by a walk-through of the entire product.

At this stage, it's better to focus the prospect on accomplishing a few simple, common tasks.  Show them how easy the solution is to use and how quickly they can achieve worthwhile results.  Get them as soon as possible to an "Aha!" moment.

Tip 3:  Offer help

Even with the simplest, most intuitive solutions, the prospect might need some guidance.  These folks aren't dense; they're just busy.

Give them a guided tour through the trial, a step-by-step guidebook, a recorded tutorial, or one-on-one coaching.

Yes, helping free trialers can be expensive.  But remember, you've already spent time and money to get prospects this far in the purchase process.

Spending more to push them one final step - and convert them from trialers to buyers - might be a worthwhile investment.





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.

  
  
 

SaaS companies can't afford to sell

Most companies offering a software-as-a-service (SaaS) solution can't afford to sell it. 

I'm talking here about "selling" in the traditional sense:  finding prospects and convincing them to buy a product or service. 

In some cases that's done with experienced sales executives working their Rolodex (or its electronic equivalent).  Or it might be sold by a team of inside sales reps making cold calls from a purchased list. 

The best of these sales efforts may follow "solution selling," "SPIN," "customer-centered selling" or some other sophisticated technique.  But it still involves the vendor's salesperson reaching out to a potential buyer.

Selling is expensive

For most SaaS companies, however, these techniques are too costly. 

For one, those experienced salespeople are expensive.  Paying these folks to find and woo potential buyers, often with a sales support engineer in tow, means travel expenses, a decent draw, and a hefty commission. That's beyond the resources of many SaaS companies, who depend on future subscription revenues to pay for current sales expenses. (See "SaaS customer acquisition:  Feed it or starve it.")

(A notable exception to this would include SaaS companies like Workday, which offers talent and financial management solutions for large enterprises.  Selling these complex, enterprise-wide systems does indeed require experienced and expensive salespeople.  But unlike most SaaS companies, the large subscription fees can support that kind of sales model.)  (See "Customer acquisition spending: Lessons from Workday.")

Besides the cost, this approach - trying to find potential buyers, many who aren't really looking for a solution, and methodically coaxing through to purchase - just doesn't work as well as it once did.  With information so easily available, most prospective customers can do much of their research  before they even talk with a sales executive.  The sales exec comes in only near the end of the process, not the beginning.

Rely on "buying," not "selling"

So if SaaS companies can't afford traditional "selling" to grow their business,  they'll need a different approach.  They need to rely on "buying."  

That is, they need to attract prospects who are actively looking to buy.   The goal isn't to sell them your solution.  The goal is to attract them to buy your solution.

Perhaps an analogy can illustrate the difference.

"Selling" is like sending a brave hunter out onto the plains to stalk a large beast.  The hunter wanders for days or weeks over many miles, tracking the prey, and finally gets close enough to bring it down with a well-aimed spear.

"Attracting buyers" keeps the hunter in the village.  Instead of trekking for miles and days, he digs a water hole, provides a salt supply, and lets the wind carry the scent of this lovely feeding spot across the plains.  When the beasts gather around the watering hole, our brave hunter tosses a net over them.


Let prospects find you and move themselves toward a purchase

Attracting buyers means making your company and your solution visible to your prospective customers.  Build a watering hole where they can find you when they're searching. 

Make it easy for them to find you, and you won't need to rack up mileage or pound the phones trying to find them.

Once the prospects do find you, don't sell them; educate them.  Help them understand how to make an informed decision.  Be a resource.  Make them smarter. 

Earn credibility and trust.  Let them see what value your solution can deliver for them.  Show them how others have used it successfully.

And then provide a way for the prospect to "buy."  Give them an easy way to move themselves toward a purchase at their own pace. 

With certain more complex SaaS solutions, a salesperson may be needed to negotiate pricing, work through terms, or configure the precise package of services.  But in many cases, the prospective customer can take those steps without much help.

There's no need to push, no need to cajole, no need to "sell."




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.

SaaS customer acquisition: Feed it or starve it?

If you manage a software-as-a-service (SaaS) company, at some point you'll be forced to make a tough decision about your customer acquisition process:  Feed it or starve it?

Should you pony up the money to feed a full-blown sales and marketing effort?  Or should you starve the process and keep the cash in your piggy bank?

Because of the way the SaaS business model works, if you feed the customer acquisition process, you hurt profits and burn cash.  In fact, the more customers you acquire, the more money you lose, and the more cash you burn… at least in the short term. (David Skok of Matrix Partners calls this the "SaaS Cash Flow Trough.")

And if you starve customer acquisition, you improve profits and save cash.  The downside: you might actually kill the company.

Faster growth = lower profits

The problem is timing.

To acquire customers, you pay money now - for sales people, marketing people, tradeshows, pay-per-click campaigns, search engine optimization, direct mail, or whatever else you do to attract paying customers. 

But those customers don't pay you money now, or at least not all of it.  They pay you over the life of the subscription.

Earlier I've described this as the "Wimpy effect" after the Popeye cartoon character who promises "I'll gladly pay you on Tuesday for a hamburger today."

Here's how that looks on an income statement:  costs are higher than revenues.  Profitability goes down and cash flows out. 

In fact, the faster you grow and the more customers you acquire, the more the costs exceed revenue, the more profitability goes down, and the faster cash flows out.

So here's where that critical decision - starve it or feed it - jumps out at you.

The "starve it" option

You could choose the "starve it" option.  Cut sales and marketing headcount and scale back spending on customer acquisition programs. 

The good news is that you post higher profits and burn less cash.

The bad news is that you don't attract many customers.  That means you're giving up revenues, both in the short term and in the long term.

And if you're in a very competitive market, it's likely that you're losing market share.  The prospects you're not attracting are adopting somebody else's SaaS solution and they're lost to you.

At the end of the "starve it" route, you'll have a better looking income statement and more cash on hand.  But you'll also have a smaller company with fewer customers that's losing momentum, having a tough time competing, and dimmer long-term prospects.

The "feed it" option

Or you could choose the "feed it" option.  Put more money into sales and marketing and ramp up your customer acquisition programs.

The bad news is that you hurt profitability and burn more cash.

The good news is that you attract more customers.  There's more revenue now and lots more revenue over time.  And you're gaining momentum and market share.

Making the "feed it"option work

If you want to succeed in the long term, it seems that the obvious choice is to feed the customer acquisition effort, not starve it.  But a few things need to be in place to make the "feed it" option work.

1.  It requires enough capital to pay for the "feed."  The cash you're using to pay for sales and marketing needs to come from somewhere.

2.  The "feed it" option requires you acquire customers cost-effectively.  Every dollar you put into sales and marketing needs to generate more than a dollar in revenue over the life of the customer.  In fact, as a rule of thumb, every one dollar spent on customer acquisition should actually yield at least three dollars in long term revenue. (Commercial interruption:  SaaS Marketing Strategy Advisors can help you build an efficient customer acquisition machine.)

3.  This option requires patience and courage.  Spending money to lose money in the short term is not for the faint of heart.

4.  And finally, making the "feed it" option work requires a deep understanding and confidence in the SaaS business model.  After all, it runs counter to the common wisdom:

In the short term, every new customer costs you money.  

But with a well-run SaaS business, over the long term, you actually do make it up in volume.

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.

Customer Acquisition Spending: Lessons from Workday

According to a business adage, you need to spend money to make money.

According to a SaaS business adage, you need to spend a lot of money to make money.

Workday recently made public its S-1 filing in advance of an initial public offering. The document reveals what it takes to succeed in a market dominated by Oracle and SAP. Specifically, it illustrates the need for software-as-a-service (SaaS) companies to spend money - lots of it - on customer acquisition.

In its early years, Workday spent well in excess of its annual revenues on sales and marketing. In 2008, it spent 2.5 times more on customer acquisition than annual revenues, and in 2007 it spent nearly 18 times more than annual revenues.


With only $455,000 in revenues in 2007, Workday funded a direct sales force and a professional marketing effort costing more than $8 million. I saw first-hand the company's significant presence at that year's HR Technology conference, where the company's booth and a front stage presentation by co-founder Dave Duffield made for an impressive coming out party.

Sales & marketing costs still represent the single largest expense for Workday. It's selling a critical solution via an expensive direct sales force to large enterprises, and usually competing against well-entrenched competitors. A typical sales cycle can extend over 6-9 months.

Though the cost of customer acquisition relative to annual revenues has declined steadily, on-going customer acquisition expenses will continue to keep Workday in the red for some time. According to the S-1, "we do not expect to be profitable for the foreseeable future."

So what is Workday getting for its money?

What's the payoff from this significant and on-going investment in sales and marketing?


High growth: Workday's revenues grew at a compound annual growth rate in excess of 300 percent from 2007 through 2011. The company has attracted about 325 customers over that period, mostly large enterprises with thousands of employees.

Strong customer lifetime revenues: Most of Workday's customers are on 3-5 year contracts. And in addition to the subscription fees, many pay for implementation, training and other professional services. (It would be helpful to calculate the average customer acquisition cost relative to customer lifetime revenue, but the S-1 filling doesn't appear to provide the required data.)

Visibility and credibility: Its high marketing spend has established Workday as a leader among SaaS ERM providers. When large enterprises consider potential solutions, Workday is usually on the short list.

Success requires funding, courage and patience

Here's one important lesson we can all take away from Workday's experience:

SaaS companies that want to grow need to spend money, sometimes a lot of it, on customer acquisition.

Often SaaS companies will need to commit to high sales & marketing costs even at the expense of profitability, at least in the short or medium term. Companies with an effective customer acquisition plan in place, however, can generate high, sustainable, and eventually profitable growth.

To put a sharper point on this lesson:

SaaS companies without the funds, courage or patience to pay for a well-functioning customer acquisition effort over a sustained period will have a difficult time growing their business.

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.

Subscription price and customer acquisition costs

Here's an inquiry from the SaaS Marketing mailbox:

Dear SaaS Marketing guy,

Do software-as-a- service (SaaS) solutions with a high subscription price per customer have a better chance of success than solutions with a low subscription price?

Sincerely,

Earnest, but Confused SaaS Solution Developer


Dear EbCSSD,

Here's the good news: Whether your solution carries a high subscription price or a low subscription price, either one can succeed.

Here's the bad news: Either one can fail.

Companies like Carbonite and Dropbox have been successful selling lower priced subscriptions at high volume. And others like Taleo or Workday have been successful selling higher priced subscriptions to large corporate accounts. There's even a third group of SaaS providers like Salesforce that have been successful selling low-priced solutions to small accounts and high-priced solutions to enterprise accounts.

Subscription cost by itself is meaningless

The key to success with any of these approaches isn't the price of the subscription. It's the subscription price relative to the cost of acquiring customers. Or to be more specific, it's the revenue derived from the customer (a function of price, number of subscribers, and length of the subscription) relative to the cost to acquire and retain that customer.

For most SaaS companies, the customer acquisition costs will be the single largest on-going expense for their business. Once the product has been launched, success will depend largely on efficiently building visibility, attracting prospective customers, converting them into qualified opportunities and buyers, and retaining them as long term customers. (See "Three deadly SaaS marketing mistakes.")

The subscription price by itself - whether high or low- doesn't mean much. It's useful only in relation to costs, especially customer acquisition costs.

Different prices means different acquisition costs

Different prices do tend to require different approaches and customer acquisition costs vary accordingly.

Low-priced solutions that are simple to understand and easy to purchase generally require lower customer acquisition expense. Customers can quickly evaluate them on their own, perhaps even try it out with a free trial, and use a credit card to make a purchase. No need to interact with a sales person at all.

Solutions carrying high subscription prices, by contrast, tend to require higher customer acquisition costs and longer sales cycles. Because of its price and its strategic impact, the prospective customer is likely to scrutinize the potential purchase more carefully. The SaaS provider may need to present in-person demos, run pilots, negotiate terms and conditions, and make other substantial investments.

Matrix Partners' David Skok, who has provided excellent insights on this topic, maintains that as sales complexity increases, customer acquisition costs increase exponentially. A direct sales model, relying on highly-compensated account executives and field sales support professionals, could be 1000 times more costly than a "no touch" sales model that requires no sales people at all.

Build what you know

Though it's critical to match subscription costs to CAC, I'm not certain that SaaS developers should make "high price" or "low price" the very first consideration in deciding what kind of application to build. They're probably better off focusing first on a problem that they understand very well and a market where they know there's an opportunity.

If someone has deep knowledge of the construction of aircraft carriers, for example, and the passion to build a solution that makes the process more effective, go for it. I'm assuming that a solution like this would require a high subscription price and would involve a long and expensive customer acquisition process. But if that's the market the developer knows, don't dismiss the idea out of hand.

Once they've determined that they can build a better solution for an unmet need, then they can work through the process of matching the subscription price to CAC.

Or better yet, as they build the application, think about simplifying it in order to reduce the complexity, speed up the sales cycle and reduce CAC. In other words, build-in a lower CAC from the start. (See "If it's hard to use, it's hard to sell.")

Tip of the hat to Justin Pirie and Nadim Hossain for their insights on this topic.




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.

When lead generation is a bad thing

Most marketers are fixated on generating leads. It's not uncommon, in fact, that their compensation is related to how many leads they bring in.

This fixation on leads is particularly true for us software-as-a-service (SaaS) marketers. Cost-efficiency and a high return on marketing expenses are critical to a successful SaaS business model. (See "Ten Essentials of SaaS Solution Marketing.")

But generating leads isn't always a good thing. You can get too much of a good thing. Here's how:

Unqualified leads

Leads that consist of people that are unqualified - that is, they have no real need for your service - aren't worthwhile leads. The fact is these leads don't make you money; they cost you money.

Think about it. You're spending money on SEO, pay-per-click, PR, webinars, or other marketing programs that bring people to your door. But if those people have no need for your service and no compelling reason to purchase anything, the money you spent to attract them has been wasted.

That's not to say that 100% of leads should convert into actual buyers. But most leads should at least be potential buyers.

One clear sign that you're generating unqualified leads is a low ratio of qualified opportunities-to-leads. It indicates that few leads convert into real opportunities and eventually paying customers.

Here's a second sign. In an organization that sells through a sales force, you'll hear about "worthless leads" loud and clear from the sales people. You won't even need to check the ratios!

Leads that get stuck in the pipeline

If you've spent all your money and effort bringing leads in the door, much of it will be wasted if there's no process in place to nurture those leads into opportunities and paying customers. Those leads get stuck in the pipeline.

To get them "unstuck" requires building a system that moves prospects through the complete acquisition process - from initial interest to lead to qualified opportunity to purchase to renewal. Generating leads is only the first step.

Again, tracking the leads-to-opportunities-to-paying customers ratios is one way to identify a pipeline problem.

Remember: Generating leads isn't the goal; paying customers is the goal.




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

SaaS acquisitions: It's about money and genes

Another week, another software-as-a-service (SaaS) acquisition.

To be more accurate, it's really "another week, another four SaaS acquisitions." Software Equity Group reports that in the first quarter of 2012, 64 SaaS companies were acquired.

Among the more prominent purchases, Oracle bought Vitrue, following its acquisitions of Taleo and RightNow.

Keeping pace, SAP purchased Ariba for $4.3 billion, while it's still digesting its earlier multi-billion acquisition of SuccessFactors.

Besides the usual suspects - CRM and talent management solutions - the purchased companies offer anything from cloud-based education and engineering solutions to security and web analytics.

What are they buying?

When they purchase SaaS companies, part of what the buyer gets is a revenue stream. Better yet, it's a consistent revenue stream, driven by subscriptions. It's one of the more attractive features of the SaaS business model.

Buying DNA

In addition to the revenue stream, though, the acquiring companies are getting an infusion of SaaS experience and knowledge. They're buying a different perspective on how to run a software company. They're getting the benefit of people who understand how the SaaS business differs from the on-premise model... people with "SaaS genes."

This SaaS DNA applies across every function of the business:

Development: People with SaaS genes know how to run a product development group that delivers frequent enhancements to the solution. They understand the need for a solution that's easy to learn and easy to use.

Operations: People with SaaS genes know how to run an operation that ensures that the solution is secure and reliable, capable of supporting many users with heavy usage at peak hours.

Customer support: They know that customer support goes beyond providing help; It's critical to renewals, upsets and retention. (See "Customer Support is Actually Marketing")

Marketing: These people in the acquired company understand the unique challenges of marketing a SaaS solution - the faster pace, the different target markets and messages, and the need for ultra-efficiency. (See "SaaS Marketing Essentials")

Finance and Legal: People with SaaS genes understand the particular financial and legal requirements of the SaaS model. (See "Getting Deals Unstuck from Legal and Procurement.")

As traditional on-premise software application providers move toward offering a SaaS solution, they will need an infusion of these SaaS genes. They will need to quickly absorb the notion that SaaS requires a new approach across the entire business, and they need people who know how to think and act like SaaS people.





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