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How To Calculate Cost of Customer Acquisition And 3 Ways To Improve It

Cost of Customer Acquisition: multiple people have to be involved.

Your cost of customer acquisition (CAC) is a critical SaaS metric to know. With this key business metric, you can make better decisions to increase monthly revenue. Without it, you have to rely on guesswork to hit the numbers on your business plan. Keep reading to find out how to calculate customer acquisition costs and ways to improve your scalability and profitability. When you know that you can spend $10,000 in a time period to generate $20,000 in total revenue, you will have a truly viable business model.

Calculating Customer Acquisition Costs

Your approach to calculating customer acquisition costs requires that you have reasonably robust data and then use customer acquisition cost formulas. Unlike cost of goods sold or payback period, customer acquisition cost keeps you focused on the cost to increase total revenue. When you know how much budget it takes to increase the total number of customers in your business in a given period, marketing planning becomes much more manageable. When you understand your customer acquisition cost, you’re much more likely to achieve your return on investment and payback period goals.

Example of Customer Acquisition Cost For A Monthly Time Period

Fancy SaaS App has a $500,000 marketing budget, and the marketing team has been working hard to acquire more customers. Last month, the company spent $50,000 on a marketing campaign to acquire 100 customers generating $100,000 in total sales revenue. In this case, the company’s customer acquisition cost was $500. They can use that number to evaluate performance in the current month and see if they exceed the industry standard. If they fall short, it might be time to make changes to their inbound marketing or review your acquisition strategy. For example, you might find that cost per lead has started to increase in your social media advertising campaign. In that case, you probably need to look at changing your sales process to include strategic partners and content marketing.

Successful companies never assume that their marketing staff has the final answer to lead generation. They are always looking for new ways to improve campaign costs, reduce cost per action, conversion rate, and improve cost per acquisition. Before you start to make changes to your operating expenses or sales costs, you need to calculate your current cost to acquire a new paying customer.

Formula for Customer Acquisition Cost For A Monthly Time Period: The Basic Version

As a starting point, consider the following customer acquisition cost formula, at its most basic, is a simple equation. You divide your total marketing spending by the number of customers you acquired. Finally, you also need to choose a time period for reporting, such as monthly or quarterly. That way, you can compare results in any given period over time (e.g., June 2020 compared to June 2019). If you have a self-serve business model, instead of a sales process with multiple meetings, where customers can buy online, this basic version works well.

For the formula to provide meaningful results, you must have high-quality data. For example, your marketing expenses need to be comprehensive – covering Google, Facebook, the effort to publish a blog post, other social media services, and everything you do to convert a potential customer to a paying customer. In the current month, you might find out that Google Ads has a far better return on investment than inbound marketing. In that case, you might ask for a larger marketing budget so that you can continue to grow your customer base.

Beyond tracking the cost of your marketing efforts, you also need to track the source of each paying customer. For example, are you getting customers from LinkedIn, email marketing, a blog post, or a specific landing page or some other advertising channel?  Without this information, it will be very challenging to grow your customer base predictably.

Tip: Running out of leads? You might need to explore some new SaaS marketing channels.

Formula for Customer Acquisition Cost: The Advanced Version Including Sales Expenses

If you run a simple, self-serve e-commerce business model, the basic customer acquisition cost formula is all you need. For example, if a customer can enter a credit card and buy the product from your website, your SaaS business is similar to an e-commerce business. However, many SaaS companies need advanced customer acquisition costs because they have a multi-step acquisition process.

Sometimes known as “fully loaded CAC,” this advanced approach to customer acquisition cost gives a more accurate picture of your total cost to acquire a paying customer. It is different from the basic version because it involves your total cost to get customers rather than just marketing spend. As a rule of thumb, fully loaded CAC includes the cost of the sales team, marketing spend (including the cost of inbound marketing), sales expenses, overhead costs, and all other marketing efforts like marketing salaries. By the way, make sure your sales costs calculation includes any expenses that your sales people spend, like sending gifts to potential customers.

By the way, calculating the cost of content marketing isn’t difficult. The important thing is to track it. If your marketing team handles blogging, publishing a podcast, and infographic creation internally, you need to use time tracking. Use a tool like Toggl and ask your marketing team to track how much time it takes to create each content marketing asset (e.g., 5 hours to create an advertising campaign, 16 hours per month for blogging, and so forth). Then you can analyze the cost of your marketing efforts in relation to the total new customers you attract in each time period.

Tip: HubSpot’s article on customer acquisition cost makes a great point that CAC should also include marketing and sales software, outsourced services, and overhead for marketing and sales.

A Key Lead Generation Question: Is Your Customer Acquisition Too High?

The best way to tell whether your CAC is too high is to measure it in relation to another metric. Specifically, we are going to look at customer acquisition costs in relation to customer lifetime value. If your CAC is less than customer lifetime value, you have a successful marketing and sales process. Congratulations! If customer acquisition costs are greater than customer lifetime value, there is a problem. If you have a small business, you will need to be more conservative in how much you spend because you may not have a free product available to attract the interest of your target audience.

There are two ways to improve your ratio of customer acquisition cost to customer lifetime value. Start by double-checking if your customer lifetime value amount is reasonable. For example, you may have a referral program where 20% of customers tend to bring in new prospects. In that example, there is a value in your referral that should be added to your customer lifetime value.

Next, take another look at your customer acquisition cost over time. If your customer acquisition cost has recently increased significantly, that situation may be acceptable. You might have decided to put more resources into high-quality customer success story videos in the past quarter. Creating those assets involves paying upfront while the resulting increased SaaS conversion rate will only appear later. What if you don’t have any long term marketing projects recently?

The most common other causes for high customer acquisition costs are poor tracking and ineffective marketing. In the case of poor tracking, you cannot track conversions. For example, your marketing may have generated 100 leads this month, but you only logged half of them. Improving the accuracy of your marketing and conversion tracking is the first area to improve. Finally, you have to face the reality that your marketing may have failed. That happens to many companies! It is especially common when you are first developing your go-to-market plan, launching a new product, or pitching to a new type of potential customer.

Importance of Customer Acquisition Cost: It’s One of The Best SaaS Metrics

In sales and marketing, customer acquisition cost (CAC) is one of the most exciting metrics to track. By tacking this measure, you can make better marketing budget decisions. You can add another $10,000 to a specific marketing channel with a high level of confidence of a good return. Further, a robust understanding of customer acquisition cost means you can have better conversations with lenders, the sales team, funders, and management.

Since there are some measurement difficulties involved in customer acquisition costs, make sure you understand your data. I wouldn’t want you to make irresponsible promises about growth based on a $1,000 CAC! When in doubt, I suggest taking a conservative approach where you assume that marketing costs will increase over time. This assumption is grounded in the reality that almost all marketing channels, especially pay per click advertising, have shown higher costs over time. If customer success plays an active role in growing total revenue, then including customer success costs into customer acquisition cost makes sense.

Since customer acquisition cost is usually calculated based on a monthly or quarterly time period, there is a time lag. That’s why you should also keep track of a leading indicator like cost per lead as you manage week by week.

Improving Customer Acquisition Cost: Your Top 3 Steps

There are multiple proven strategies to improve your customer acquisition. You have already learned a few of these methods. Use this section as your to-do list to get more conversions at a lower cost.

1. Improve your conversion tracking accuracy

Start by checking your website analytics to ensure that tags are in place. After that is confirmed, check that you have correctly set up goals. For those of you using Google Analytics, use this resource to set up a goal.

For LinkedIn Ad conversion tracking, consult this official article, “Set Up LinkedIn Conversion Tracking.” For Facebook Ad conversion tracking, use the following resource: Facebook conversion tracking.

2. Define and reduce the sales cycle

The amount of time sales take to close is an essential factor in your customer acquisition cost. For example, let’s say that you have a 30-day free trial. Most customers sign up for a paid account after 25 days. Coincidentally, your email marketing system sends out a message on the 24th day of the free trial telling users that their free account is about to expire.

In this example, you can reduce your sales cycle by changing your email marketing. Specifically, attempt an experiment where you send more emails in the second and third weeks of the free trial. This approach may cut your sales cycle down by a week or more.

3. Identify low performing marketing channels for reduction

Optimizing your customer acquisition costs also requires taking a look at costs. Put on your CFO hat for a moment and ask yourself if your marketing channels are generating results. For example, you might have tested Instagram for 60 days to see if you might diversify your SaaS marketing channels. Unfortunately, you saw almost no new leads or traffic from Instagram. Assuming your conversion tracking is correctly set up (see tip one above), it might be time to cut your losses on Instagram or reduce your time investment on that platform.

Redirecting marketing budget from low performing marketing channels to higher performing channels is one of the best ways to improve your customer acquisition cost.

What Should You Fix Next In Your SaaS Marketing

I recommend improving your SaaS conversion rate as the next step in boosting your total revenue without increasing your advertising budget. With a better conversion rate, you can increase the number of leads you get from each landing page, you can reduce your cost per lead over time. A better conversion rate in your upsell process us another way to grow total revenue from your existing customers is another great area to develop.

Why Email Marketing Is Important To Your Digital Marketing Success

why email marketing is important

You’re about to find out why email marketing is important to the success of your business. I’ve built a 6,000 subscriber email list and used it to sell products. If you want to grow your email list with less marketing effort, you’ve come to the right place.

Why Email Marketing Is Important: It’s All About ROI

Whether you run a small business or a significant corporation, email marketing consistently delivers robust results. Why is that the case? Effective email marketing is based on trust. A potential customer permits you to send them an email message whenever you want. Assuming your email list is well aligned with your target customer profile, you have a list of people who are ready and willing to hear from you regularly. The fact that people have given permission for you to contact them makes email different from every other digital marketing channel.

In terms of numbers and studies, the following studies and research show why email marketing is so crucial to the success of your business.

Social Media vs. Email Marketing: Why You Should Put More Effort Into Email Marketing

Social media platforms are appealing in many ways. They already have a large number of users. The digital advertising options offered by LinkedIn and Facebook are exciting. So, why not put all of your efforts there? There are a few reasons why email marketing should be your top priority in your marketing plan.

Avoid Digital Sharecropping In Your Digital Marketing

Imagine you are a farmer. Would you rather buy your own land and farm it or rent somebody else’s land to farm? Everything being equal, it is always preferable to have your land. By building up a list of followers on social media platforms, you are renting land in somebody else’s fields. With email marketing, you are much closer to owning a relationship with a customer. That means you don’t have to struggle to keep up with changing rules.

Higher ROI: Email Marketing Is The Number One Marketing Channel

When you compare email marketing and social media from a return on investment perspective, email marketing tends to win. Take note of the following findings to see the difference:

“ROI from email marketing now stands at just over £42 for every pound spent; a rise of almost £10 since the previous study. B2B organisations collectively report just under £36 ROI, but a lower proportion are measuring, compared to B2C organisations we surveyed — which score an average return of nearly £48.” – Marketer email tracker 2019, The Direct Marketing Association (UK)

“Email is 40 times more effective at acquiring new customers than Facebook or Twitter.” – McKinsey research cited by Campaign Monitor.

If your small business is ever struggling on where to invest your next marketing dollar, choose email. It remains the fastest path to increased revenue.

Reduce Dependence on The Digital Marketing Giants (Facebook and Google)

Social media companies like Facebook have come under fire over the past several years. For example, there is a sad reality that these platforms have had a negative effect on political discourse. Further, these platforms have also had a negative effect on

Email Marketing: Four Metrics To Track To Improve Your Mailing List Conversion Rate

Whether you are sending email newsletters or promotional emails, you need a few key metrics to track your results. First off, start with the bottom line. Did your email generate sales? If not, did it move the needle in another metric linked to sales (e.g., engagement with our sales cycle)? If nothing is happening in terms of revenue, it is time to look at a different email measure. In case you’re unclear, we’re focused on sending promotional email from a service like Mailchimp or ConstantContact rather than using your personal inbox to send messages.

1) Response Rate Per Email Campaign

If your business relies on sales calls (or demo sessions to showcase enterprise software), tracking response rate or reply rate is the right email marketing metric to track. Email tools like Mailchimp can track replies automatically. If you have a small list of 100 email subscribes, counting replies manually works as well. As a benchmark, aim for a 3-5% response rate. That figure should be much higher if you are sending a promotional email to repeat customers.

2) Open Rate Across Marketing Campaigns

By aiming to achieve a higher open rate on the email you send, you stand a greater chance of achieving increased revenue. Let’s illustrate this metric with two examples:

Email 1 has a 10% open rate to 100 email subscribers. That means only ten people in your email database saw the marketing message. This is a terrible open rate, likely caused by a boring subject line.

Email 2 has a 25% open rate to 100 email subscribers, so 25 people in your email database saw your promotional email. You have a much greater chance of achieving increased revenue.

If your open rate is falling over time, there are two fixes to consider. First, look at the subject line that you use in your email newsletters. If they are boring and fail to offer a clear benefit, you will need to do better. If you need inspiration for email subject lines, check out this analysis, I wrote: Marketing For A 8 Million Member Loyalty Program: Shoppers Drug Mart Email Marketing Case Study.

3) Your Email Campaign Unsubscribe Rates

You should expect an unsubscribe rate above zero from your email users. After all, most subscribers are window shoppers rather than potential customers. Some people may join your list and decide that they don’t like your content or even your email template. It happens! The key to this measure is to track the trend. If unsubscribe rates were historically around 1-5% and they suddenly spike, then you have a problem on your hands.

4) Mobile Device Performance

According to a 2015 TechCrunch article, 75% of Gmail users access email on mobile. Since then, the mobile usage number has probably increased.

That is critical to know because the mobile device screen is small. Further, mobile device bandwidth is typically more limited than a full computer. Therefore, you should track performance (e.g., open rate and clicks) on mobile devices vs. computers. Your marketing tool should make it easy to preview your marketing email on a mobile device. If not, send a test message to yourself and open it on your mobile device.

Email Marketing Is One Of The Best Ways To Execute Tour Marketing Strategy

Your marketing strategy covers big picture questions like pricing, target customer profile, and positioning. You can use email marketing to execute your marketing strategy and to refine your marketing strategy over time. Here are some ideas to get started

Fine Tune Your Marketing Strategy With Market Research

In the digital marketing world, we have so many tools that it is easy to imagine that we know what potential customers will buy. With email marketing, we can ground that confidence in real data from your email users. For example, run one or two marketing campaigns by email to test which price point has the best conversion rate. Based on that information, you can verify which price converts best.

Go Deeper Than Brand Awareness

In your marketing strategy, you may make some assumptions about brand awareness, such as “3,000 people know about our brand.” Or perhaps something more refined like “our customers value our marketing automation app because it integrates with HubSpot. By running some marketing campaigns via email with a survey, you can see what your current and potential customers think. Based on that insight, you can update your email template, digital marketing messages, and spend your marketing budget more effectively.

Optimize Your Customer Acquisition Process

In digital marketing, there are many paths to a sale. You might be used to selling a SaaS product by offering a demo on a sales call. What if your small business customers prefer a free trial instead? Rather than changing your website copy, send an email message to your list and offer them a free trial (or a low priced free trial like the $7 trial used by marketing tool Ahrefs). You may find that this is a more cost-effective way to improve your customer acquisition instead of using sales calls.

Promotional Offers In Email Marketing: The Key To Increased Revenue

Yes, you can sell products and services directly through email. The key is to strike the right balance between sharing relevant content and sending offers regularly. As a general rule, at least 20-25% of your email messages should contain a clear call to action to buy something. The rest of the time, you can focus on sharing valuable content like links to new blog posts, podcast interviews, and tip sheets.

What About Email Automation For Customer Acquisition?

Once your email list is up and running, you may be wondering about email automation. Instead of doing everything manually, email automation rules can help you to sell more. Here are some of the ways that you can use email automation to get better results from your customer base.

1) Onboarding: Guide your customers through a welcome marketing campaign

Your past content marketing effort probably contains a wealth of resources. You might have published a great interview in the past like my interview with David Woodward at ClickFunnels (From $0 to $70 Million: Inside The ClickFunnels Marketing Machine). At the bare minimum, each subscriber should receive a welcome email. Your welcome email will usually give people access to a lead magnet and tell them what to expect. For example, will you send a weekly email newsletter? If so, set those expectations early so that your target audience knows what to expect from your email content.

2) Use Marketing Automation To Send Different Types of Email Content

As your email list grows, you can start to use marketing automation to improve your email marketing results. For example, set your marketing automation to tag email users that open five or more promotional emails. That level of engagement with email content signals that the user may be ready to buy. Consider direct response marketing tactics like sending a coupon code to get them to subscribe.

3) Use personalized marketing in your email content

While GDPR has made personalized marketing more challenging in some ways, personalization is one of the best ways to improve your email marketing results. At its most basic, collect the customer’s first name so that you can address them by name in the email. In B2B email marketing, experiment with gathering more data over time, such as company name, job function, and company size. Based on this information, you can segment different groups of potential customers. Whether you are the business owner or a marketing automation specialist, personalized marketing is one of the best ways to improve your results.

Improve your digital marketing in the next two hours

If you already have website visitors and a growing mailing list, there are a few ways you can get better results like a better click-through rate and increased revenue without increasing your marketing budget. Set aside your brand awareness goal for a while and get faster results for the business owner with these tactics.

1 Write a follow up email – a simple tactic for more profitable email marketing

A single email message does not make an email campaign! You need multiple messages to test different marketing ideas. When you send an offer, a coupon, or another call to action in your email marketing, write a follow up message. In many cases, adding a follow up email to your marketing campaigns will improve your results more than anything else.

What if your digital marketing efforts are aimed at multiple types of potential customers or buyer personas? In that case, pick the top three types of customers you want to focus on. Then, write a follow up email that suits each of them. Save these emails into your preferred email service provider so that you can easily use it to improve your results daily.

2 Send a referral request email to your repeat customers

As a business owner, referrals are probably your favorite way to get more customers. However, there is usually no referral strategy or process. We’re about to change that! Take some time today to write an email to a repeat customer (e.g., a SaaS customer who has been a paying subscriber for at least two months) and ask for a referral.

SaaS North Day 2 Notes: Positioning, SaaS Models & Marketing Beyond Google and Facebook

SaaS North 2020 continued to deliver fantastic value on day 2. Here are my notes and screenshots from some of my favorite sessions.

Session: Positioning for Advantage — Reaching Your Best Customers in Noisy Crowded Markets by April Dunford

Striking a perfect blend of pop culture references and business tips, Dunford’s presentation was excellent. Specifically, I found her tips on how to position against an established company fascinating.

For example, Dunford presented the “donut” content metaphor that LevelJump Software used – Sales Tech Explained Using Donuts – to illustrate its positioning:

Tip: For example, emphasize niche fit for your product (e.g., “CRM for investment bankers”), which makes you a better choice than a general-purpose CRM used by many different companies.

Tip: Worried about losing to giant companies in your industry? Look for other ways to describe them. For instance, instead of describing them as “established,” why not describe them as “legacy”? This subtle change in positioning is not going to win the sale, but it may be enough to open the door for a conversation.

If you want more about Dunford’s strategy, take a look at her website or her book: Obviously Awesome.

Session: What the future of SaaS means for your product strategy

With 17 years of experience in the SaaS industry, Hiten Shahh shared several great lessons. As a student of history, it was great to see that he drew lessons from historical organization charts. Shah makes the argument that “SaaS ate the org chart.”

Bottom line: “your marketing department now requires less headcount because of SaaS.” Hmm… I’m not sure if that is the case, but it is a fascinating claim. When you look back over the last decade, the explosion of marketing technology companies (from 150 in 2011 to 7000+ in 2019) support the view that marketing departments can accomplish much more than they could in the past.

The rise of All-in-one SaaS solutions.

For example, Mailchimp has significantly grown. It might be best known as an email marketing tool, but they have more services, like landing pages. We see the same trend occur with Google’s G Suite, which has multiple product offerings

Five ways to build a $100 million SaaS business

Are you charging $100 per month? That is a tough, long road to build $100 million ARR SaaS. If you want to make it to that $100 million in annual recurring revenue, your pricing needs to reflect that fact.

Power users are a critical SaaS market

This is a fascinating argument. It is a great point. Just think about all of the courses, books, and additional software for Microsoft Excel. There is probably a market of more than one million power users for Excel. For example, Hey and Superhuman are SaaS products for email power users. These types of power users tend to use these SaaS products in their work.

Introducing SaaS Remixes

Bundling and unbundling has been one way to build SaaS products. In Shah’s view, the bundle and unbundle strategy is mostly played out. Instead, he advocates looking at Asana as an indicator of the future. For example, take a look at products like Monday.com and ClickUp that offer an increasing number of task and project management capabilities.

Session: Sell Like A Marketer

Presented by Hana Abaza (Shopify), Dev Basu (Powered by Search), and Riaz Sidi (Sidi.io).

In this section, I’m blending rough notes from the speakers and my observations.

In the opening poll for the event, lead generation and conversion were the top concerns for marketers attending this session. Overall, lead generation and conversion are getting more complicated. It’s good to question whether there are deeper problems in your offering – is your product a nice to have or a must-have? It’s an excellent time to revisit the fundamentals like SaaS marketing channels and SaaS conversion rate. It’s effortless to gloss over fundamental questions in marketing when problems come up.

When in doubt for lead generation, look for bright spots that are working well and put more resources into those areas.

Change how to think about analytics. It is more than reviewing data in a Google Analytics dashboard. Make time to speak with your sales staff. Add a voice of customer widget to your website that gathers feedback from website visitors without a lead generation objective. Qualitative insights from these conversations add depth to your marketing analysis.

What are some marketing traits that SaaS sales professionals can adopt? Review demo call recordings using recordings from Gong.io or similar tools. Salespeople can adapt to the ongoing conversation much faster than a website. If you try to send a prospect directly from ad to a demo form, they are likely to bounce. You need more steps to the process.

As a marketer, apply the same bright spots filter to the insight you get from sales representatives. If low performers on the sales team complain about lead quality while the sales stars have other feedback, then you may not have a lead problem.

 If marketers get the negative feedback from sales about leads, question why that is the case. For example, you might have a lead that is not ready to buy. Also, it is helpful for sales staff to understand the levers that marketers can pull. For example, we can adjust targeting (e.g., you are getting small business leads vs. sales team wanting enterprise leads).

Eighty percent of SaaS companies have struggled to get through 2020 successfully, while a handful like Zoom and Shopify have done well. So, what can those companies do? Start with empathy better and listen to the problems they have. If a company laid off have of their employee base, your advertising strategy might need to change. Instead of thinking about prospects in a buy vs. not buy, focus your marketing on building email lists and retargeting audiences.

Session: End Your Marketing Reliance on Facebook & Google’s Duopoly

Presented by marketing expert Rand Fishkin, this was a fascinating exploration of the downsides of trying to win with Google and Facebook. In less an hour, the presentation covered plenty of fascinating points. Here are some of the highlights:

  • GDPR has had the result of strengthening Facebook and Google’s marketing strength by locking in their advantages. That’s one more good reason to look for alternatives to the digital marketing duopoly.
  • Use a market research tool like SparkToro or Similar Web to discover websites. Based on the presentation, I started a free account at SparkToro to research what websites SaaS companies are using.
  • 5 Step process to expand beyond Google and Facebook in 5 steps

This is marketing 101. The twist? Exclude Google and Facebook-owned properties from the list.

1 Figure out who your customers are

2 Find the messages that resonate with them

3 Uncover the sources that influence them

4 Discover where those audiences engage

5 Amplify messages that work in places they pay attention to

  • Social media marketing tip: content that keeps people on the platform tends to do best. Instead of asking for a retweet, Fishkin recommends asking people to leave a comment. Adding links to bring people to your website and away from the social media platform might not do as well.

Want to learn more insights from the SaaS North 2020 conference? Check out my notes from Day 1: 2020 State of SaaS: Notes from the SaaS North Now Conference (Sept 9, 2020).

2020 State of SaaS: Notes from the SaaS North Now Conference (Sept 9, 2020)

I was excited to join about two hundred people at the SaaS North virtual conference today. Here are some of the quick notes from the Sept 9, 2020, sessions. The conference series started five years ago, and I was pleased to attend the opening event. To get up to speed quickly, check out the SaaS acronyms article.

Opening Presentation From L-Spark

At the start of the event, L-Spark shared a few comments on the state of investment in the SaaS industry. There are some notable changes, like a growing interest in venture debt. It’s helpful to remind ourselves at the successes from earlier in the year like ApplyBoard that won $55 million in investment. For Canadian SaaS companies looking for investment, make sure you check out the screenshot below about the most active Canadian investors in Saas.

Nathan Latka’s Presentation on The Fastest Growing SaaS Companies of 2020

Nathan Latka’s presentation on the fastest growing SaaS companies of 2020 and how they did it was one of my favorite parts of the event. Out of all of the screenshots, Latka’s presentation on new hybrid SaaS models was especially impressive:

What if you’re not quite ready to change your business model? In that case, get back to the basics of using SaaS marketing channels to acquire more customers.

ZenBusiness – Professional Services + SaaS for higher net dollar retention

they grew from just over $1 million to more than $17 million in 2020. They have more than 70,000 customers in 2020. The company is focused on net dollar retention, a SaaS metric typically only considered in larger companies. According to Latka, selling services is an excellent way to boost net dollar retention. That makes sense to me when you think about the business model used by some of the largest technology companies in the world, like HubSpot. Boost net dollar revenue by selling services!

Rock Content – they grew 85% year over year with a marketplace plus SaaS model

They’ve gone from $3 million in 2018 to more than $24 million this year. The company makes $10 million through its marketplace (i.e., 40% of total revenue). In contrast, the company makes about $14 million in traditional SaaS subscription revenue.

Kovai – 12% year over year growth as a bootstrapped company

This company stood out because they built the company on a bootstrapped company. The company is like Loom in that it offers a freemium company. In the case of Loom, the company got 3% of free users to buy a paid account.

ClickFunnels – 180% year over year growth

I interviewed ClickFunnels before on the blog (From $0 to $70 Million: Inside The ClickFunnels Marketing Machine), and it was fascinating to see the company’s growth strategy. Specifically, the company can achieve an instant payback period. In the case of ClickFunnels, they sell books and other products, which helps them to recover their advertising cost right away.

Session: How COVID-10 is Messing With Metrics

By comparing April 2020 to August 2020, SaaSCan research found some surprising results in the SaaS industry. Companies with a monthly billing model generally did better than SaaS companies that require an annual contract. The panelists also commented that many customers shifted toward to monthly plans. Companies that fail to offer month to month plans generally had worse actual net dollar retention.

The story in actual logo churn is a bit different. Slightly over 50% of respondents had no logo churn. One side of the coin, company factors like industry vertical and billing model, had a significant impact on churn. That’s part of the story. It also matters what your company does! Many companies reported investing more resources into customer success, which led directly to improved churn. In other cases, SaaS companies have improved their results by changing the product (e.g., adding a use case directly related to the pandemic). Fundamentally, the value of your product drives retention even in times of economic turmoil.

Retention and churn measurement – everybody measures these factors, right?

Alas, the researchers found a surprising story here. Nearly half (44%) of companies are not measuring net retention. They also found that 24% of companies are failing to measure logo churn. Both of these measures tell critical facts about the health of the SaaS company.  

Session: Adjusting your marketing toolkit for the new economy, your new budget, and an all-digital world

Marketing in a post-pandemic world, are we there yet? IT was fascinating to hear how Gong has evolved because I’ve written about Gong’s content marketing experience (see the details here: 4 Lessons From Sales TO’s Sept 2019 Event). Here are a few of the quick notes I took from the fireside chat with Udi Ledergor, CMO at Gong.

Act Quickly.

Gong received some guidance from Sequoia, one of their investors. The companies that act quickly in a downturn tend to do the best. Within a week, Gong had a new strategy for sales, marketing, customer success, and product.

Changing the narrative.

Deal intelligence was a focus for the company in early 2020, and that was abandoned. The company also wholly changed their content calendar. They also completely changed their event calendar. The company had completed a multi-city roadshow in early 2020. The sales team was having difficult conversations such as CFOs at customers getting involved in discussions. For example, Gong’s typical use case had focused on onboarding new sales staff. Instead, the company showed how Gong is a productivity tool to increase results from your current staff.

Changing website headlines.

Early in the pandemic, the company changed its website copy from emphasizing “revenue intelligence” to “remote sales.” In this two-week website experiment, they had a 12% lift in conversion rate. That’s one of the best examples I’ve ever seen about the value of changing headlines!

Focus on what you can control

Gong didn’t have complete information about anything as the pandemic took hold. Just one or two factors in marketing. Specifically, the company focused on experimented with changes in the narrative, website messaging, and updating slide decks for the sales team.

New product features

In 10 days, Gong produced a new feature to monitor their sales teams remotely. This feature helps remote sales managers to understand what their remote sales staff are doing. This is an excellent example of adjusting the product to resonate better.

Sharing customer success stories in a different way

In the past, the company would take weeks or months to film video, edit it, and travel to customer offices. That approach to creating video customer success stories wouldn’t work. Instead, the company took a streamlined approach. Specifically, the company recorded some video interviews and took video from other sources to produce a video! It may not be the HD video that you’re used to producing, but it is worth it.

Virtual events are here to stay

Right now, it looks like Gong is committed to virtual events. What stood out to me is that Gong had great success early in the spring. After that event, they attended more than ten events to observe the different types of events, speakers, and platforms. As a result, the company launched a major virtual event in July 2020. Instead of doing one major traditional event per year, Gong is moving toward running four major virtual events per year.  The sales team loves this format of having multiple virtual events per year because they get a more consistent stream of leads. Gong also found that including more 1-on-1 networking space in virtual events.

That’s it for today’s report on the SaaS North conference. If you liked this post, please share it online!

SaaS Acronyms: The 12 Terms You Need To Know

SaaS Acronyms

In the software as a service (SaaS) industry, there are many SaaS acronyms to know. You don’t want to look uninformed in a meeting by asking for a basic definition. Use this article as a resource to understand the key SaaS acronyms that define the software and cloud computing industries.

SaaS Acronyms: Business Models

These terms describe entire categories of technology products. As such, you may have a lot of debate about these terms in your office. Some concepts like annual recurring revenue are relatively straightforward. In contrast, customer acquisition cost (CAC) is more challenging to measure because there are so many different tactics and strategies to attract potential customers

1 The SaaS Acronym That Started It All: Software As A Service (SaaS)

Software As A Service is a business model that describes how software is distributed to the customer. It is usually defined in contrast to on premise (“on prem”) software. In on premise software, a customer would purchase a copy of the software product and install a copy directly onto their hardware. From a consumer perspective, on premise software meant you had to install software from a CD, DVD or a download.

In contrast, Software As A Service (SaaS) products usually do not require any kind of installation. A large percentage of SaaS products run from a web browser instead. In the enterprise software world, Salesforce is one of the best known SaaS companies. Older companies like Oracle and Microsoft also offer enterprise software products in a SaaS model as well.

From a revenue perspective, SaaS products are typically sold based on an ongoing subscription rather than a one-time license fee. By using a recurring monthly or annual billing fee, customers spend more money on SaaS products over time. That is way SaaS companies are concerned with reducing churn.

2 Infrastructure As A Service (IaaS)

As a consumer, you probably use SaaS products through your web browser daily or weekly. Infrastructure as a Service (IaaS) is a bit different. It is more commonly purchased by companies to help them increase performance gains or cost savings in their technology department. If you are outside of the development team, you probably don’t need to worry much about IaaS.

Infrastructure does not let an end user accomplish anything on their own. Instead, infrastructure supports your accomplishment of other goals. For example, a road through the countryside does not create value on its own. It is only valuable when people use the road to travel.

Some of the most popular Infrastructure As A Service services include Microsoft Azure and Google Compute Engine.

3 Storage As A Service (STaaS)

Have you used Dropbox? That is one of the most popular examples of storage as a service. In a sense, storage as a service is best seen as a subset of infrastructure. Instead of buying and installing your own hard drives and data centers, you buy digital storage capacity as required.

In addition to Dropbox and similar services, Amazon’s S3 (Simple Storage Service) has become one of the most popular options for storage. Pricing for storage as a service products varies depending on multiple factors including access (i.e. do you want 24/7 instant access?), security (i.e. what level of security do you need) and other factors.

4 Platform As A Service (PaaS)

Related to infrastructure as s service, Platform As a Service is more complex. Let’s say that you want to build a photo optimization software app that cleans up poor lighting conditions in photos. Editing photos at scale requires significant resources. Therefore, you might buy computing capacity from a Platform As a Service to run your applications. Generally speaking, Platform As A Service (PaaS) would only be purchased by companies or those seeking capacity to run products.

Financial Performance SaaS Acronyms

Your finance department can produce these measures and metrics along with others like average cost.

5 Annual Contract Value (ACV)

This acronym is used to describe the financial value of a paying customer over a year inclusive of all revenue. For a company that offers a simple $100 per month monthly recurring revenue model, annual contract value would be $1200. In other cases, ACV may be higher. For example, if you sell professional services align with software, include those services as well.

For enterprise software grade software products, ACV can reach into the six figure range. To find out more, read my other article about these highly successful companies – SaaS Churn Metrics: Insights From 16 Companies with ACV Over $100,000.

Related terms: Total Contract Value

6 Monthly Recurring Revenue (MRR)

Widely measured in the SaaS industry, this measure summarizes how much revenue you bring in each month from subscription software licenses. If your company generates other types of revenue (e.g. training products or professional services), such revenue is typically excluded from MRR. If your company uses an annual payment plan, then you will probably use annual recurring revenue (ARR) instead.

Some SaaS provides include usage charges (e.g. you pay additional fees based on minutes used). In those cases, analyze these figures separately. Usage charges tend to vary considerably while traditional recurring subscription revenue is relatively fixed.

7 Customer Lifetime Value (CLV)

While measuring revenue on a monthly basis has value, there are other ways to look at revenue. With CLV, you estimate the approximate revenue that a customer will generate over their time period as a customer. For instance, if you generate $1,000 in monthly subscription revenue per customer and customers typically stay with you for a year, then your customer lifetime value would be $12,000.

Based on a $12,000 customer lifetime value, you make better decisions about marketing costs and what SaaS marketing channels to use.

8 Average Revenue Per User (ARPU)

I first encountered this term in the cell phone industry. For example, take Rogers, one of Canada’s largest cellular phone providers. According to a report on Q4 2019 results: “Rogers’ Average Revenue Per User (ARPU) for the quarter, which assesses the company’s operating performance, was reported at $55.26, a 65-cent decrease year-over-year.”

This measure also applies to the SaaS industry. It is helpful to look at revenue at a user level because it provides a health check on the business. For example, if the sales team keeps offering large per user discounts to secure larger customers, ARPU may decline for a period of time. On its own, a declining ARPU is a yellow flag. You will need to understand why it is falling and whether there are good reasons to accept that fall. For example, if you negotiate a lower deal that gives you a lower ARPU and get to add 5 of the Fortune 500 as case studies to your pricing page, it may be an acceptable trade off.

Sales and Marketing SaaS Acronyms

The marketing team needs to know these figures to measure their effectiveness and increase net profit over time. The sales team also needs to know certain metrics to evaluate whether or not they are making progress. If your service model emphasizes professional services revenue, I suggest tracking and reporting those revenue items separately.

9 Customer Acquisition Cost (CAC)

How effective is your company at connecting with potential customers? To answer that question, you need to understand marketing costs in detail.

Customer acquisition cost describes the total cost you incur to acquire a new customer. For a self serve SaaS product where customers buy right away, CAC may be little more than paid digital advertising costs. For a more complex product sales cycle, include other costs such as the cost of the sales team and the marketing team. You may also need to factor in sales cycle factors. If customers take an average of three months to make a purchase, your customer acquisition cost calculation will need to take this timeframe into account.

Failing to calculate CAC accurately is a major problem. It can lead you to make wasteful decisions like creating unreasonable sales quotas. Pressuring the sales team or marketing team to chase after impossible goals based on a flawed CAC doesn’t make any sense.

If you add marketing channels like direct mail, make sure you include tracking codes (e.g. include a potential client for a free consultation). This type of tracking makes it easier to determine whether a given direct mail campaign has produced a sales qualified lead or not.

Note that CAC and CLV are related SaaS marketing metrics. As a general rule of thumb, you want to a CAC lower than your CLV. For example, if you incur $1,000 in expenses to acquire a customer with a $12,000 customer lifetime value, your SaaS business is doing very well indeed! Assuming you have a repeatable sales process, you are going to have no problem getting more venture capital.

For more guidance on calculating CAC, read Calculate & Reduce Customer Acquisition Cost (CAC) for SaaS.

10 Return on Advertising Spend (ROAS)

SaaS companies that use online advertising effectively tend to get excited about ROAS. Spend $1 and get $3 in revenue? Who wouldn’t like that? ROAS is not always relevant for every SaaS company. It is most relevant to self-serve SaaS products that can be bought online by credit card. If your sales process involves a demo and multiple meetings, calculating ROAS effectively will be more challenging.

You might decide that online advertising is not your preferred focus. Don’t worry. You have plenty of other options available. Find out about your options for SaaS Marketing Channels.

11 Click Through Rate (CTR)

This marketing metric has different meanings depending on your context and the platforms you use. Platforms like Facebook, LinkedIn and Google Ads display a variety of data including CTR. First, you will need impressions (e.g. 1,000 impressions) which means the number of people who see your advertisement. You will also see the number of people who clicked your ad (e.g. 50 clicks. In this example click through rate would be 5%.

12 Customer Retention Cost (CRC)

Like customer acquisition cost, customer retention cost has different definitions. Ultimately, you are aiming to strike a balance between two factors. First, providing the required customer success and service support to help paying subscribers get value. Second, keeping an eye on profitability. Your business process to optimize customer retention cost will have several elements.

  • the cost of your customer success department
  • the cost of account managers to oversee customers
  • the cost to resolve tickets when customers raise questions or complaints
  • the cost of gifts and customer recognition programs

In general, it is a smart move to spend more time and effort to retain existing customers whenever possible. When you successful retain customers, reaching your scalability goals becomes much easier. If you have a fixed contract term, spread your customer retention efforts throughout the customer life cycle. If customers see that you only lavish attention on them a few weeks before the contract term expires, the effort is less likely to make a good impression.

What To Do Next With Your Understanding of SaaS Acronyms

A basic understanding of SaaS acronyms is table stakes to have meaningful conversations in the SaaS industry. Your next step is to make efforts to improve your marketing results by improving your SaaS conversion rate.

How To Increase Your SaaS Conversion Rate: 7 Practical Ideas

You need to improve your SaaS conversion rate. It is one of the greatest marketing optimization opportunities available. Keep reading to find out industry benchmarks for SaaS conversion and how you can improve your results.

What Is Your SaaS Conversion Rate Anyway?

Conversion rate is a marketing metric that means how many people take the desired action. For example, if you cold call 100 potential customers and 2 become qualified leads, then you have a two percent conversion rate. The enterprise sales may focus on “Did we get another paying customer today?” as their conversion rate goal. In the SaaS industry, there are typically three multiple types of conversion rates.

Website Conversion Rate: Conversions From Your Homepage

Your website conversion rate is the percentage of site visitors who take the desired step after visiting your website. Ideally, you want to measure how many site visitors become qualified leads. That could mean a “hard conversion” like signing up to use your product for a trial period. Alternatively, you might track the number of “soft conversions” such as site visitors who view your pricing page. You might also measure the number of people who visit the homepage and respond positively to a call to action (e.g. signup for demo).

As a general rule, it is best to focus on a single website conversion goal. This level of focus means it is easy to tell if you are meeting your SaaS conversion goals and growing recurring revenue.

Tip: If your homepage is not producing enough conversions, revise your headlines and copy after every thousand site visitors. Communicating your value proposition in a concise headline isn’t easy, so keep testing different copy until your conversion rate increases.

Free Trial To Paid Subscriber Conversion Rate: The Key To Getting Your Next Paying Customer For Self-Serve SaaS

A free trial user is significantly more valuable than a site visitor! This person has taken action to use your product and become an active user. If you have a reliable customer success process and onboarding email sequence, this person is likely to become a paid subscriber instead of remaining stuck in “potential customer” limbo. After all, investors and reporters are no longer fooled by companies vaguely boasting about their active user metrics. Ultimately, the total number of customers matters much more than the total number of site visitors or active users.

Tip: After a free trial user completes the signup for a paid plan, ask them for a referral. Systematically asking for referrals will decrease your customer acquisition cost.

B2B Enterprise Conversion Rate: Get Ready For A Longer Sales Process To A Paying Customer

SaaS conversion becomes more complicated when you are your business model is focused on selling enterprise products. For example, if your annual contract value is over $100,000, you cannot rely on your website to do all of the selling for you. Instead, your conversion rate optimization efforts will focus on producing qualified leads for the sales team (i.e. lead generation). For example, you may use a lead scoring system to identify leads who have opened four marketing emails. Whenever that lead score happens, your marketing automation platform then moves people to sales or invites them to signup for a webinar.

In reality, there are multiple B2B enterprise software conversion rates to consider. You will need to consider tracking marketing qualified leads (MQLs), sales qualified leads (SQLs), and other metrics.

SaaS Conversion Benchmarks: How Does Your Company Compare?

Now that we’re clear on the meaning of SaaS conversion let’s answer the million-dollar question. Is your company’s SaaS conversion better or worse than the industry average? The following chart summarizes a few answers to that question.

SaaS Free Trial Conversion Rate Benchmarks

Let’s start with the free trial conversion rate benchmarks. My research indicates that 25% is a reasonable number to aim for.

-26% average conversion rate for free trials that require a credit card at sign up (source)

-“ A Free Trial conversion rate of less than 25% for anything but the most horizontal, low-end, commodity B2B products is something that should warrant immediate attention.” (Sixteen Ventures)

However, you may find that some or many site visitors are not ready to sign up for a free trial right away. In that case, you will need to optimize for website conversion.

Website Conversion Rate Benchmark

Website conversion rate optimization can take various forms. You might direct people to sign up for an email list or fill in a contact form. Within those options, there are variations. I have seen B2B sign up forms that require a prospect to fill in 10 fields while others only ask for name and email. Due to all of this variation, it is much more challenging to provide a meaningful average. That said, it is helpful to have a minimum standard to aim for.

-Overall Website Average: 2.35% (If your website is converting less than this, you have some severe conversion rate optimization problems!) – WordStream

-Overall Median Conversion Rate For B2B: 2.23%

What Conversion Rate Do The World’s Best Websites Achieve?

Let’s make this a bit more ambitious, shall we? Wordstream helpfully also provides top 10% conversion rate averages. For B2B, the figure is 24.48%, while the figure for “all accounts” sits at 11.45%. As a result, reaching a 2-3% conversion rate is simply the starting point for digital marketing.

Take these industry benchmarks with a large tablespoon of salt, however. Some SaaS companies have large marketing budgets to spend so that they can run multiple conversion rate optimization experiments every month. Ultimately, I suggest referring to industry benchmarks a few times per year. Ultimately, it is more valuable to measure your SaaS conversion rate today with the results your company achieved in the past.

Strategies for Improving Your SaaS Conversion Rate

There are multiple strategies to boost your SaaS conversion rate. Here are some of the variables that you can use to get more paying subscribers.

1 Increase Your Signup Rate By Using More Social Proof

Social proof helps people feel more comfortable about making a decision. It is why we make a shortlist of products based on what we see on review sites. Ask the sales team to regularly contact one paid subscriber each week to ask for feedback. If the feedback is positive, ask the customer for a testimonial. This approach helps you to understand your existing customers better. If they have a problem with the software, do what you can to solve that problem.

Whether you call it reviews, customer references or case studies, more social proof makes every SaaS business model more effective. Your existing customers already know, like and trust your company so reach out and listen to their feedback.

2 Use Different Marketing Channels To Get Better Leads

If one million site visitors came to your pricing page from a country where the average income is low, your conversion rate would suffer if you have a high priced product. Likewise, if you attempt to market an enterprise sales software product to college students, conversions will be incredibly hard. Some of you will assume these are obvious points. Yet, I see these mistakes happen again and again!

Go back to the basics of your B2B SaaS marketing plan. Don’t worry about the latest and greatest social media platform. Instead, find one or two marketing channels where you can affordably reach your customers. Your customer acquisition rate will go up if you attract more qualified leads at the top of your marketing funnel.

3 Make The User Experience Easier For Potential Customers

Crafting the user experience and onboarding process is one of the most important ways to get more paying subscribers. One of the best ways to improve results lies in going small. Think of the smallest win you can provide for a customer. Remember how Twitter encouraged users to follow a handful of users? They intentionally kept this step small so that new users would be

Tip: If your product is more complex, involve customer success in the development of your onboarding process. This point is especially critical if you are using a low priced trial offer. After all, you have a paying subscriber on your hands and need to treat them accordingly.

4 Restructure The Trial Period For Potential Customers

For years, it seemed like there were only a handful of ways to organize a trial period. Some people were passionate advocates for long trial periods like 21, 28, or 30 days. Others preferred shorter periods. By all means, start with these orthodox trial period options. However, consider different options as well.

For example, why not give users two or three “bonus days” to a free trial user if your analytics show that they are using your product? That additional time to tinker with your product may help them see more value.

5 Experiment With Your Pricing Page

Changing your pricing page might sound scary. After all, you spent time with focus groups, and your investors may have signed off on the pricing options. Yet, an unattractive pricing page may be a fundamental cause of low conversion rates.

Conventional wisdom dictates that SaaS pricing pages have a set structure. Usually, a paying subscriber can choose between a monthly plan or an annual plan. Next, they can choose between different tiers of the software.

For example, lemlist’s pricing page with three pricing plans:

SaaS Conversion Rate - Pricing Page Example from Lemlist

While this pricing structure is popular, there are other options. For example, have you ever offered a Black Friday sale? Uploadcare used Black Friday sales, along with other strategies, to double their revenue in 2019.

6 Get On The Phone To Help With Onboarding

If you have less than $1 million in ARR or less than 1,000 customers, getting on the phone with customers matters. After all, quite a few people will let their trial period expire without doing anything at all. When you get on the phone, seek to understand the problems your customer is trying to solve. Once you understand that information, you can help them to achieve an easy win with your software.

By the way, make sure you take note of any substantial technical problems. Outstanding sales and marketing efforts cannot paper over a dysfunctional product!

7 Improve Your Email Marketing Conversion Rate

During the trial period, your customers are starting from scratch in learning how to use your product. That’s why it makes sense to send useful content. Popular options here include short videos that provide a step by step tutorial on how to achieve a given task in the product.

By the way, a reasonable email marketing conversion rate requires more than excellent copy. You also need to take steps to increase deliverability. For email deliverability tips, read Neil Patel’s article: 12 Ways to Improve Email Deliverability.

Three Conversion Rate Optimization Experiments To Run

Before we conclude, let’s look at three simple conversion rate optimization experiments.

1) Change your marketing channels

Reaching your SaaS conversion goals is more straightforward when you use the right channel. For example, if you offer a powerful software solution to increase sales productivity, you need to connect with sales leaders rather than marketers. Find out more about the nine SaaS marketing channels available to you.

2) Add scarcity and deadlines to your offers

If an offer is not producing conversions, you can increase your SaaS conversion rate by adding a deadline. For example, you might offer a temporary sale promotion by offering a deal on AppSumo. That’s exactly how I was persuaded to buy Frase recently. Don’t get me wrong – offering discounts is not the only option.

You can also offer additional bonus features for a limited period. Whether you call it a Labor Day sale or drive traffic to a live webinar event, describing a deadline to drive action is a proven way to increase your success.

What to do next to raise your SaaS conversion rate

Attracting highly relevant prospects to your website is an excellent way to increase your SaaS conversion rate. Picture this: a prospect searches for an answer to a question, they find your website and read a fantastic answer. If you present invite that prospect to sign up for a free trial or join your email list, they are likely to convert. I help companies attract leads through content marketing. Contact me today to discuss how we can use content to drive more conversions, leads, and sales.