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
Google
SEO/SEM
Enables
low-cost
customer
acquisition

Web 2.0
Social
Networks
Mobile Web

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 theres a problem:

Startup Killer

An out of balance Business Model

Entrepreneurs are over-optimistic

Cost to
Acquire a
Customer
(CAC)

Monetization
(LTV)

CAC for a Web driven business

Input Variables
Total Web Visitors
SEM cost per click
Conversion to Trial %
Trial conversion %
No of Sales & Marketing Staff
Cost per employee per month

Flow
Total Paid Web Vistors
Trials
Customers

10,000
0.50
5%
10%
3
16,500

Qty.
10,000
500
50

SEM Marketing Spend

Total Headcount Costs

$
$

5,000
49,500

Cost of Customer Acquisition

Without headcount costs
With headcount costs

$ 100.00
$ 1,090.00

Conversion %
5%
10%

CAC for a Direct Salesforce

Team composition
On target earnings
Salary Cost
Salary + Overhead

Sales Sales Eng Inside Sales

1
1
0.5
$ 230,000 $ 140,000 $ 90,000
$ 230,000 $ 140,000 $ 45,000
$ 310,500 $ 189,000 $ 60,750

Total Team Cost

Avg. team Failure Rate
Adjusted Team Cost

$ 560,250
25%
$ 747,000

No. of Marketing people

Average cost per person
Marketing Programs Spend
Total Marketing Costs

0.5
$ 200,000
$ 150,000
$ 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

A well balanced business model

Monetization
(LTV)

Cost to
Acquire a
Customer
(CAC)

The Balancing Act

Viral effects
Inbound Marketing
Free or Freemium
Open Source
Free Trials
Touchless conversion
Inside Sales
Channels
Strategic partnerships

High Churn Rates

Low customer
satisfaction

Monetization
(LTV)

Cost to Acquire
a Customer
CAC)

Field Sales
Outbound Marketing

Recurring Revenue
Scalable Pricing
Cross Sell/Upsell
Product line expansion
Lead Gen for 3rd
parties

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

Suspects

First Sale

Repeat
Business

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?

Theres a clear pattern:

Failure to align your

process with the
customers motivations

In other words

You are hoping your

customers will do
something that they are
not motivated to do

Get inside your Customers Head?

Concerns

I dont have the time

I have higher priority things to focus on

I already have software that does this

I dont 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 dont have the time

I already have software that does this

I dont want to get spam email

I dont want yet another password to remember

Re-think the process

Conventional Approach

Sign up

Use

Customer

Immediate Engagement

Use

Sign up

Customer

Source: Josh Porter Designing for Social Traction

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 dont 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)

Is JBoss a
market leader?

J2EE
Developer

Hear about
JBoss

Technical
features?

Operations
people: Safe
Choice?

Price?

Good support?

Easy of
download/use?

Safe Choice?

Good support?

Quality?

Cost?

Open Source
fears

Scalability?

Quality of
support?

Download &
evaluate
JBoss

Good support?
Decision to
use JBoss

Scalability &
reliability?

Purchase
Training /
Dev Suppt

Fit with other

datacenter
tools?

Price

Easy to
download and
get started

Architecture,
Features,
Performance,
etc.

Developers
providing
support

Production
References

Press articles

References
Partners

Quality of
support?
Value?

Need for
insurance

References

Positive
Review

Cost?

Purchase
Production
Support

Price

J2EE
certification

Quality of
support?

Put JBoss
into
Production

Price

Recommendation

Cost?

Partners
Leadership
quadrant of
analysts?

References
Value
proposition
(needs
improving)

Successful
implementation
Std-ize and
Expand

Price

How much
did we use
it?
Value?
Renew
support
contract
Good support
Perceived
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

Key Funnel Metrics

Campaigns
to drive
traffic
Visitors
Overall Conversion %

Conversion %

Trials
(by lead source)
Conversion %

Closed Deals

Brainstorming Topics

Bottlenecks

Conversion rates

Why cant we quadruple the throughput?

Cost of Customer Acquisition

Creative ways to increase these for each stage

Throughput

Where are we failing to move people successfully?

Why? & What can be done about it?

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:

What is the new process?

Annoying to your customers

Expensive
Increasingly less effective

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)

HubSpots 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

Old world

Give things away to optimize spread

Large Footprint of customers = Great brand value
Price low to get fast decisions

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

Value

Product Complexity
No Touch
Self-Service

Light Touch
Inside Sales

Heavy Touch
Inside Sales

Field Sales
with SEs

Where I want to invest

Value

No Touch
Self-Service

Complexity

Light Touch
Inside Sales

Heavy Touch
Inside Sales

Field Sales
with SEs

SaaS versus Enterprise Software

Value

No Touch
Self-Service

Complexity

Light Touch
Inside Sales

Heavy Touch
Inside Sales

Field Sales
with SEs

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

Remove Complexity from closing the Sale

Simple product
Free versions, Free Trials, Open Source

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

52% operating margins

Others: JBoss, LogMeIn, Constant Contact,

Salesforce.com, etc.

The Balancing Act

Viral effects
Inbound Marketing
Free or Freemium
Open Source
Free Trials
Touchless conversion
Inside Sales
Channels
Strategic partnerships

High Churn Rates

Low customer
satisfaction

Monetization
(LTV)

Cost to Acquire
a Customer
CAC)

Field Sales
Outbound Marketing

Recurring Revenue
Scalable Pricing
Cross Sell/Upsell
Product line expansion
Lead Gen for 3rd
parties

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

The problem:

email registration in front of download reduces

conversion rates significantly

The Solution

But none had given their names

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

Closed Deals

Suspects

Web
Leads

Web
Scoring

Lead
Nurturing

Phone
Call

Inside
Sales

Enterprise
Rollouts

Metrics: The End Goal

Web
activity
scoring

Telemarketing

Telesales

Using the model to work backwards

Web
activity
scoring

Telemarketing

Insidesales

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)

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
2005
2006

$11m
$26m
on plan to do $65m

JBoss Summary

Business Model disruption

Low CAC

Leveraged free and virality to acquire non-paying customers

Sales & Marketing Machine

Gave the product away entirely free

Monetized support & management

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

Look for the breakthrough techniques

Think Inbound versus Outbound

Free products / services

Use R&D as a marketing tool
Free Trials

Look for the next evolution in the business model

Dont just think web-enabling of current ways

What does the web let me do that I cant 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