TWIS#8- This Week in SaaS number 8
TWIS #8- Events
As I’ve said before- the SaaS University is one of the only places to actually learn about the business of SaaS and there are some fantastic people presenting– so if you’d still like to attend, the discount code for this group is “SAASGROUP100” and today is the last day of the Early Bird Discount. A BIG thanks to Rick Chapman for donating the pass. Rick also publishes Softletter- which is one of the only sources of SaaS data. Take part in the survey to get a free summary of the results.
If you want to promote your conference to over 15,000 SaaS people with a competition for our members- email me firstname.lastname@example.org
After a couple of sparse weeks- lists, look back at lists etc, now all the goodness that people were stewing over the holidays has been shared and it is a big week! I’ve got a headache just writing this. Anyway- enjoy!
Continuing the theme of Actionable Insight- I’ve been banging on about Product/Market Fit for weeks now and I think it’s about time I gave you some actionable strategies to help you grow your SaaS business.
So just to remind us- this is what a good SaaS business model should look like:
David Skok of Matrix Ventures wrote a brilliant post- Startup Killer: the Cost of Customer Acquisition and this sort of sentiment is becoming remarkably familiar to readers of TWIS:
A common scenario is an entrepreneur that has dreamt up a cool new service that they can offer via the web. As a VC, I have sat through many presentations like this, and in most cases the service is actually interesting and compelling. However in the majority of these presentations there is little or no focus on how much it will cost to acquire customers. As I ask questions to understand the thinking, what usually comes out is something vague along the lines of web marketing, and/or viral growth with no numbers attached. (Emphasis added Ed.)
…Far more common is a need to acquire customers through a series of steps like SEO, SEM, PR, Social Marketing, direct sales, channel sales, etc. that will cost the company significant amounts of money. What shocks and surprises many first time entrepreneurs is just how high the numbers are for CAC using these kinds of techniques.
Some examples of CAC calculations
For example, if you are using Google Ad Words to drive traffic to your site, take a look at the following interactive spreadsheet. This example shows a cost per click of 50 cents, and the resulting website visitors converting to a trial at the rate of 5%. Those trials are then shown converting to paid customers at the rate of 10%. What the sheet shows is that each customer is costing you $100 in just lead generation expense. For many consumer facing web sites, it can be hard to get the consumer to pay more than $100 for the service. And this cost does not factor in the marketing staff, web site costs, etc.
One of the more interesting things that this model shows is how rapidly cost of customer acquisition climbs If your leads require human touch to convert them, (compare cell B23 with cell B22.) This human touch can be as light as email follow ups, or as much as inside sales people doing multiple sales calls and demos. I have seen this cost vary from around $400 to $5,000 per customer acquired, depending on the level of touch needed.
[iframe http://sheet.zoho.com/publish/davidskok/cost-of-customer-acquisition 500 631]
Another shocking computation is to look at the cost of a direct field sales force:
[iframe http://sheet.zoho.com/publish/davidskok/direct-sales-force-cost 500 625]
This shows is that it is not unusual for the cost of acquiring a customer to be as high as $100,000. This number is heavily dependant on the productivity of your sales teams. In the model above, this was set to 10 deals per year per team. Given the need to cover R&D and G&A costs, the average gross margin on a deal needs to be at least $150k.
Expensive! This is an excellent diagram for visualising the effects various factors and their effects on CAC:
So let’s focus on Actions:
Because a number of smart entrepreneurs realized the importance of lowering CAC, they created new business models such as Open Source, SaaS, Freemium, etc. that directly tackled the problem of acquiring customers. Some of the early B2B pioneers in this space were companies like JBoss (story here), SolarWinds, ConstantContact, HubSpot, etc. Once others started to see the success these companies were having, they started copying the techniques.
These new business models focused heavily on how buying behavior has changed because of the power of the web. Think about your own behavior: if you are like me, you hate having to deal with sales people, and greatly prefer to do your own research starting with search engines, and leveraging free trials, on-line videos, blogs, reviews, and your social network. To adapt to this, the new business models make use of a variety of techniques described below:
- Extensive use of the web to drive lead flow. In particular, the best practices include using Inbound Marketing to build traffic, instead of paying for traffic with search ads. (Read Get Found using Inbound Marketing to find out more.)
- Use of a free product or service to attract web visitors, and aim for a viral spread as they tell their friends. Examples of free products include Open Source software, services like HubSpot’s Website Grader, free versions of a SaaS service that have limited, but still valuable, feature sets, etc. For more info on this topic refer to The power of Free.
- Use of a free trial, where the customer can easily download, or use a SaaS version of the full product to see if it works for them.
- Leveraging the power of your customers’social networks to get viral growth where possible.
- Use of the touchless conversion to convert trials to paying customers.
- Using low cost inside sales when the touchless conversion is not possible.
- Extensive use of software to automate all processes such as SEO, SEM, social networking, lead scoring, lead nurturing, CRM, etc.
- Metrics on all aspects of the customer acquisition process to find out what can be improved.
These techniques are frequently referred to as the Low Cost Sales model, or as Sales 2.0.
Enough of David’s post check out the rest for yourself.
One of my favourite SaaS companies Balsamiq – both for their product and attitude – has just released their 2009 figures.
Here are a few charts for your enjoyment. These all show data since we launched, 18 months ago:
Great to see a SaaS company, with a great product being so open about their numbers. While creating the link to share with you- I noticed that link has been clicked an enormous 4605 times! Who says that openness doesn’t pay???
Another post that caught my eye this week was Google’s use of data in shaping product-One of Marissa Mayer’s “Nine Notions of Innovation” is “Don’t politic, use data”. She discourages the use of “I like” in meetings in preference of hard data. A/B testing methinks…
I liked this 37 Signals post- What’s the suckage to usage ratio?
The price of shipping is imperfection. If you wait for your product to be perfect, you’ll never finish it. Fortunately you can decide which features should be closer to perfect and which can slack off a little. The Kindle DX is a good case in point. Reading and flipping pages on the Kindle is a wonderful experience. On the other hand, using the keyboard is painful. The keys are hard to press. The modifier keys are confusing. Mistakes are easy to make, slow to spot and hard to correct. Yet despite all these problems, I still love the device. (Emphasis- Ed.)
Find out what your users value most and make it lovely!
Tim Kastelle wrote a great post Innovation and the Value Network which made me think again about how ideas spread:
Today I will tell you why it is so hard for you to get your innovative new idea to spread quickly. Well, one of the reasons, at least. It’s because the economy is so interconnected. This is a bit counterintuitive – after all, I was just telling you how we can use networks to spread ideas. The good side of networks is that they can make it easier for ideas to spread. The problem with networks is that to get people to actually adopt your new idea, you often have to get them to break links within their existing network, and this can be very difficult. That is why it is important to understand how to build a position within the value network.
Apart from understanding better how ideas spread (read your SaaS product) I think it’s interesting because he goes on to describe and diagram the two value networks of iPhone and Android- the two most important mobile platforms for SaaS:
Apple has chosen to control everything within the circle – in other words, everything! Even the application developers don’t have full autonomy, since every new app has to be approved before it shows up on iTunes. The advantage to taking a position like this in the value network is that it is easier to coordinate the system. Because Apple controls nearly everything, every time they have a new idea, it is relatively easy to decouple the existing value network, insert the innovation, and move along. The disadvantage is that having such tight control over the value network limits the scope of the innovations that can emerge.
In contrast, look at the position within the value network that Google has taken with Android:
They have taken almost the exact opposite approach, controlling only the operating system directly. This greatly increases the range and number of innovation opportunities within the value network. There are two big downsides though. The first is that they are at the mercy of the other players within the value network. One of the reasons that there are very few Android phones here in Australia is that all of the handsets using it so far have been lousy. The second problem is that with less control over the network, all of the innovations within this network take longer to diffuse as there is no central coordination. (Emphasis added- Ed.)
So when looking at Android vs. iPhone- the key difference is how innovation is controlled and the effects it has on distribution and adoption.
In other news:
- A geeks geek looking back at the top products and features of 2009
- Mike Dunham continues educating the world on how to do SaaS properly
- @ruv predicts a Global Market for compute– how long before Amazon starts selling other peoples?
- More evidence for why Lean Startup works – and it’s not just for startups!
- Amazing post on raising Venture Capital
- Google launches their first phone hardware– I almost forgot to put this in ‘cos I’m so bored of the story
I hope you’ve had a great first week back.