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7 Unicorn Startup Questions Answered

Unicorn Startups

You’re probably wondering what makes a unicorn startup. The simple answer is financial: reaching a $1 billion valuation. You can reach that milestone through the public markets when you complete an IPO (initial public offering). Alternately, some unicorn startups achieve this special status while seeking funding from venture capitalists.

1 How is a unicorn startup valued?

That is the billion-dollar question!

There are two approaches to valuing a company. The best approach is to estimate a value based on earnings. This is the valuation approach used for publicly traded companies like Salesforce ($199 billion market capitalization), HubSpot ($18 billion market capitalization). Find out how Salesforce’s growth combines paid and organic marketing. Unfortunately, a large number of startups lose money, so there are no earnings to analyze. Further, the conventional definition of “unicorn startup” focuses on private companies that usually do not disclose their financial data, so we can’t use audited financial statements.

The alternate approach is to value a startup based on different factors such as investor willingness to pay for a share in these companies in the private market of venture investing. That’s why you often see headlines about Series A, Series B, and Series C transactions involving private capital articles announcing that a particular startup has a “valuation” of a billion dollars. Private market investors, in turn, base some of their decision on a company’s future prospects for growth and other factors like the quality of the startup founder’s vision. For example, if a startup is adding users at a high rate, it might be valuable.

2 How many companies are in the unicorn startups club?

CB Insights estimates that there are 518 unicorn startups globally, with a large amount in the United States. That means that unicorn status is a statistical rarity out of the thousands of startups founded every decade. In early 2021, the following companies joined the unicorn startup club:

  • MadeiraMadeira, a Brazil-based e-commerce company, has an estimated valuation of $1 billion. The company was established in 2008.
  • Lacework, a US cybersecurity startup, has an estimated valuation of $1 billion. Lacework was established in 2014.
  • Quantum Metric, a US data management startup, has an estimated valuation of $1 billion. The cybersecurity startup was founded in 2011.
  • Dremio, an American startup in data management and analytics, has an estimated valuation of $1 billion. Dremio was founded in 2015.

Did you notice a trend in the above examples? The average age of these companies is over five years. Chasing such a valuation might be a worthwhile long-term goal. However, it will not guide you on what to do this year or this quarter. Attaining a billion-dollar valuation is much easier if you have an engine of growth in place to bring more users and customers to your platform.

There are also “mega” unicorn startups like Airbnb and Uber, which were valued at tens of billions of dollars while still private companies. These firms are sometimes called decacorns (i.e., a valuation over $10 billion). Today, these companies are more concerned about their stock price because they’ve moved to the public markets.

3 What percentage of startups become unicorns?

You’re not going to like the answer. Please sit down and take a deep breath.

Startups have approximately a 1% chance of achieving a billion-dollar valuation, according to research cited by EJ Insight. Yes, it is true that TechCrunch has observed the total number of unicorn startups has increased in the 2010s in absolute terms.

Out of every 100 startups that are founded, outcomes may include:

  • 1% of startup companies achieve a billion-dollar valuation
  • 30% of companies exit through an initial public offering (IPO) or merger and acquisition (M&A) deal
  • 67% of companies “become self-sustaining” or “end up dead.”

I don’t know about you, but I would be happy with building a business worth tens or hundreds of millions of dollars. No law states you must aspire for a billion-dollar valuation.

4 What regions have the most unicorn startups?

San Francisco and California are home to the largest number of unicorn startups. Zooming out a level, the US remains one of the best places to create fast-growing technology companies. That said, I’d be remiss if I didn’t mention Shopify, a Canadian e-commerce software company, here.

There are also growing numbers of unicorn startups in China. CNN has reported that there are more than 200 such companies in China as of 2019. That means more competitors for investor time and capital.

5 Are there unicorn startups outside of California?

Yes, there are unicorn startups in other regions and countries. Here are some examples to prove it:

  • Checkout.com (United Kingdom) – reached a $15 billion valuation in fintech (i.e., payments)
  • Grab (Singapore) – reached a $14 billion valuation
  • Canva (Australia) – a graphic design software tool that has an estimated value of $6 billion
  • TransferWise (United Kingdom) – a payment technology company estimated to be worth over $5 billion
  • Pointclickcare (Canada) – this startup is worth over $4 billion. Pointclickcare also regularly makes headlines in Canada as one of the country’s fastest-growing companies.

Dozens of Chinese startups have reached a billion-dollar valuation.

6 Are there B2B unicorn startups?

Many of the best-known startups with a billion-dollar valuation are aimed at consumers. However, the tech industry also has plenty of successful B2B software startup companies worth billions of dollars.  Let’s take a look at some of the market’s most successful B2B startups

  • Klaviyo, a marketing automation startup firm, is worth over $4 billion
  • Freshworks, a customer service cloud startup, is worth over $3 billion
  • SentinelOne, a cybersecurity startup firm, is worth $3 billion

B2B software companies have a growth advantage. If you follow in the footsteps of companies with $100,000 annual contract value (ACV) like Braze and Lotane, it is much easier to reach $1 million and then $10 million in annual recurring revenue.

7 Are you building a real business model?

Chasing unicorn status is tempting. After all, it is one of the best ways to get media coverage in outlets like Tech Crunch. That’s not all. Unicorn status may help you recruit talent from other businesses and impress venture capital funds. However, a “growth at all costs” mindset may lead you to develop unhealthy habits like discounting your product. Ultimately, you might fail to build a sustainable business.

Building a business that hits the $1 billion valuation mark is difficult. However, the single-minded pursuit of “unicorn startup status” is unhealthy. After all, you could achieve that milestone by spending hundreds of millions of dollars on your cost of customer acquisition. Or you might reach unicorn status by telling a good story about your startup.

Ultimately, my definition of a real business model comes back to the fundamentals. First, does the product add value or solve problems for real people? Second, can the company operate at a profit? Profitable software companies like Oracle, Microsoft, and Salesforce pass those tests.

Aspiring Unicorn Startups: Do This Next

Tech companies cannot assume rapid growth will happen automatically. Sure, charismatic leadership and ideas helped WeWork to grow. However, the company’s pursuit of growth and leadership problems contributed to its collapse. If you want to build a more valuable business over time, it is vital to invest in marketing to create value. Yes, hiring a small army of sales professionals will help you to attract customers this quarter. However, you also need marketing to inspire people to contact you. If you want more inbound leads, contact me to discuss your marketing goals.

How To Use The Freemium Model To Get Customers

The freemium model is a proven model to boost customer acquisition. Instead of asking customers to imagine using your product, you let them use it for free. Once they see the value, they will happily pay more for added features. Last year, I briefly used Duolingo in the freemium version before paying for the premium version to remove ads and access a better learning experience.

Freemium Model: A Simple Definition

Also known as the freemium business model, the freemium model is a digital spin on one of the oldest marketing ideas: the free sample. For more than a century, businesses have given away free samples of their products to attract customers. The logic is simple. Sidestep the discussions of price and risk of loss and let a customer directly experience the product. Once a customer sees the basic version’s value, they are more likely to be open to paying more for a premium edition.

In the tech and start-up world, there are many different kinds of freemium business. Older readers might remember the days of “shareware” in the 1990s. The modern freemium model has deep roots. If you’re still skeptical about its merits, multiple high growth companies have used this model successfully.

For further reading on the free as a business model’s fundamental principles, I recommend reading “Free” by Chris Anderson. I recommend picking up the book at an airport bookstore years ago, and it made quite an impact on me.

Which Companies Succeed With The Freemium Model?

There are multiple software and start-up companies currently using the freemium model. My favorite example is Mailchimp, which offers a free email marketing plan. Mailchimp’s freemium strategy has helped it become the default choice for many email marketers. Other marketing automation companies like Yoast SEO, HubSpot, and Yesware have used the freemium model to attract attention.

The freemium model has exploded in popularity in part for economic reasons. Thanks to cloud computing resources, the marginal cost for one more simple user account is close to zero. On the other hand, the value of acquiring a customer (i.e., converting a free user to a paying customer) is high. To demonstrate the value of the model, check out these examples.

  • Evernote. The note-taking app used multiple strategies to achieve tremendous growth. One of the company’s most successful strategies focused on acquiring free users. In a 2010 article in Fast Company, Evernote CEO Phil Libin said, “the easiest way to get 1 million people paying is to get 1 billion people using.” Later on, Evernote developed multiple tiers where users can pay for additional features.
  • Dropbox. The cloud storage company’s growth is legendary. One aspect of the company’s growth lies in referrals – the company rewarded users with more free storage for each new user they brought to the platform. However, that referral engine worked so well because Dropbox offered a free user account that provided real value.
  • Mailchimp. Best known as an email marketing platform, Mailchimp has grown fast, thanks partly to its decision to offer free user accounts. Mailchimp’s strategy is to limit the free account in terms of volume (i.e., a maximum number of subscribers) and access to advanced features (e.g., want to send advertising postcards directly from Mailchimp? You’ll need to pay for the premium version of the product).

From Freemium to Revenue: The Key Marketing Challenge

Giving away a basic product is a starting point. It is not enough to establish a business. At a certain point, customers need to pay you, or you will not cover your costs. Let’s look at some of how software companies have developed a premium service to grow their customer base. Pay careful attention to the presentation of different features, users, and volume restrictions. A user on a free account needs to experience some value and satisfaction certainly. However, there also needs to be clear benefits to upgrading to a premium plan.

Notion’s Freemium Model

Free Plan: the free plan is named “Personal,” and it is limited to sharing with “5 guests.”

Premium Plan Difference: the company offers three premium plans, including “Personal Pro” ($4 per month), Team ($8 per user per month), and Enterprise (pricing on request). Aside from the premium plans offering better collaboration options, the distinction between the free and paid plans on the pricing page could be better. For example, the Team plan offers “advanced permissions.” Why is that valuable? It is unclear. As a result, the company’s limited presentation of its premium features may reduce the number of users who upgrade to premium.

freemium model for Notion

Mailchimp’s Freemium Model

Free Plan: the free term is labeled “Free,” and it has both volumes (i.e., 2,000 contacts) and features limitations.

Premium Plan Difference: there are three paid plans: $9.99 per month and up to $299 per month. The Mailchimp pricing page does a great job explaining the differences in features and volume limits that distinguish between the different tiers. Bonus points for using “New” to highlight recently added features to each plan.

freemium model for Mailchimp

Freemium Plan: 5 Key Growth Challenges To Solve

Like any customer acquisition strategy, there are risks associated with using a freemium plan, even though it is a popular model. It is critical to understand these risks so that you can manage them effectively.

  1. Analytics. Before you can answer questions about acquisition cost and your pricing strategy’s effectiveness, you need analytics—specifically, the ability to track free users and their conversion to paying customers. In the long term, you will have enough data to evaluate Tactic A (e.g., send an email sequence) vs. Tactic B (e.g., ask customer success to offer one on one help to free users) to see which measure grows your customer base faster.
  2. Cannibalization. The risk that customers will use your free product to achieve their goals and never pay you for anything. This risk can be managed in a few ways, such as making a clear value distinction between free and premium plans (e.g., limits on the number of users, data volume, reporting, automation, or support)
  3. Conversion Rates. Converting a free user to a paying customer is a crucial challenge for a freemium business. Without a conversion process, the economics of the freemium strategy doesn’t make sense. Hope is not a strategy for your freemium acquisition model. If you’re unsure what to try, I suggest using a volume limit (e.g., free account limited to 100 records while a premium account is unlimited). For more guidance on SaaS conversion rates, see my article: How To Increase Your SaaS Conversion Rate: 7 Practical Ideas.
  4. Customer Success. If a million people sign up for your freemium product, should you celebrate? It depends on whether you have a conversion process to transition those users to paid plans. There are multiple problems to solve here. Start with the first step – getting users to log in to the product and use it to complete a task. There are an entire customer success and onboarding challenge involved to help new users successfully onboard. Hands-on training from customer success can quickly get expensive. If you are funneling hundreds or thousands of customers through your free to the paid conversion process, choose carefully where you apply customer success attention.
  5. Email Marketing. When new users sign up for your freemium product, they are probably excited to solve problems. However, your users have plenty of other activities and habits already in place. Therefore, it is essential to use best practices for email marketing to engage new users. Even if a free user isn’t paying you yet, there is still a marketing challenge at play. Email marketing is the best approach because it can be customized (e.g., one email sequence for free users and one email sequence for your entry-level premium plan and so forth).

By the way, you can use other marketing assets like your Facebook posts or a new blog post in your email sequences. The content you published last year as part of your organic search marketing campaign can be repurposed to help free users get to know the product.

Growing Your User Base With Referrals and Affiliates

Once you have a proven process to convert free users to paying customers, you need to get as many free users as possible. That’s why so many freemium software products include referrals and affiliate options. These programs give your current users a reason to spread the message. You could offer a financial reward like Freshbooks and ClickFunnels. Alternatively, you can take a page from Dropbox that offered additional product access (i.e., additional free storage) to customers who referred other users to the platform.

What To Do Next

You’ve learned the fundamentals of making the freemium model work. However, this model is just one part of a successful customer acquisition strategy. You also need content to attract the right people to your brand. Contact me today to discuss your content marketing strategy.

The Three Engines of Growth

With so many ways to acquire customers and hit your growth goals, simple models are helpful like building an engine of growth.

In his classic book, The Lean Startup, author Eric Ries describes three engines of growth. Whether you have a fully defined B2B SaaS marketing plan or not, this three-part model will help you.

engine of growth

1) The Paid Engine of Growth

Definition: Get customers through marketing and sales. This is the traditional ways that all businesses use to hit their growth goals. Ultimately, every startup has a paid engine of growth to some degree. For example, if you outsource “growth hacking” or other tactics to a content marketing consultant, you have a fee to pay. If you are paying sales and marketing employees to create content, make cold calls, and prospect, then you are paying for that as well.

Advantages:

The main advantage to the paid engine of growth is that it is a proven and predictable way to grow. It is also a useful engine of growth when you are starting from ground zero. When in doubt about customer acquisition, this is the best way to go. The key metric to track here is your customer acquisition cost. If you use traditional advertising, aim to use direct response methods to see which advertising grows your user base. Finally, this growth engine lends itself easily to fit into a marketing strategy.

Disadvantages:

The disadvantage of this growth engine is achieving sustainable growth. With a sales team, you will need to manage your sales staff effectively and optimize staff productivity. If you sell your product directly online like Mailchimp or ClickFunnels, you will have to monitor your advertising and marketing performance. In the early days of building your paid engines of growth, there will be many trial and error to find tactics that work.

Tactics

  • Start with outbound growth. Outbound methods like sending cold emails or making cold calls have a place in every company’s growth engine. If you use these methods, it is essential to track your numbers over time. I recommend Close.com’s blog post for insight on this front: Sales Benchmarks: The 30/50 rule for cold emailing & cold calling.
  • Enhance further with inbound growth. The dream of having leads come to you is real! Whether you use a content marketing consultant, a full-service email marketing agency, or an in-house team, inbound growth is valuable. Keep in mind that it can take a year or more to establish inbound growth. However, the long term benefits of inbound are fantastic. A high-quality ebook or blog post you publish today can continue to attract traffic and leads for years into the future.
  • Launch small experiments with online advertising. When you enter the world of online advertising, it is straightforward to spend money fast. That’s why I recommend starting with a small budget of $500 or $1000. Marketing author Russell Brunson likes to test new marketing offers with 1,000 clicks (i.e., 1,000 people). That’s a reasonable advertising idea. Unfortunately, today’s cost per click prices for online advertising means that you may end up paying several thousand dollars to get one thousand clicks.

2) The Sticky Growth Engine (i.e., the customer retention model)

Definition: Many of the world’s most successful subscription businesses like Netflix and Amazon rely on the sticky engine of growth. The focus on this growth engine lies in optimizing customer loyalty and engagement. Managing for low churn rates is critical for this strategy. If your business model involves recurring revenue, this method is vital to achieving a sustainable business model.

Advantages:

The advantage of this strategy is that it encourages long-term thinking. To retain customers on a subscription basis, the overall customer experience (or customer success in the SaaS context) becomes critically important. Customers will not keep paying if the product doesn’t work for them. Second, this growth engine also encourages companies to focus on making the product excellent continuously.

Disadvantages:

This engine of growth assumes that you have a customer base in place already. If you are just getting started, you will need to use the paid engine for growth and understand your SaaS marketing channels. The other disadvantage of this model is that it may discourage innovation to a degree. This engine encourages you to take steps to keep current customers happy and engaged.

Tactics

  • Measure and improve churn rates for exponential growth

To grow through retention effectively, you will need a clear understanding of your churn rates. For the best results, consider measuring churn in more sophisticated ways (e.g., cohort analysis – how do customers acquired in 2017 perform with customers acquired in 2019?). Further, it may be helpful to increase the frequency of churn monthly. When customers leave, it is critical to understand why and act on that knowledge.

  • Develop a referral program to increase your rate of growth

Word of mouth is great! Unfortunately, too many companies rely on word of mouth referrals accidentally. That would be like putting fuel in your vehicle only occasionally and then wondering why it is difficult to go anywhere. The better way is to build a referral program that rewards customers for growth. Rewards could be monetary (e.g., the Freshbooks affiliate program) or take other forms (e.g., get a free month of access).

  • Invest in customer service, customer success, and training programs.

Many of the world’s largest technology companies have something in common. This common feature isn’t product or staffing. Microsoft, Google, IBM, Salesforce, and Cisco all offer training programs on their products. In some cases – like Cisco’s legendary advanced certifications – the certifications become an essential contributor to the brand. By equipping your customers to develop a high level of proficiency in your products, they may be less inclined to seek alternatives elsewhere.

Tip: Track product usage as well so that you can determine which features attract the most attention.

3) The Viral Engine of Growth (i.e., the viral growth engine)

I’ve saved this engine of growth until last for a reason. It is exciting, but it tends to be the most difficult to develop. Yes, there are success stories like the major social networks. Yet, the industry is littered with far more attempts to “go viral” than successes. That all said, it is still worth understanding this engine of growth.

Definition: the viral engine of growth is a situation where other people spread the word about your product. This is how I first learned about the Google search engine – a favorite high school teacher told me about it.

Advantages:

When it comes, viral growth can be almost magical! Each customer then comes into the business can bring more. My favorite example of the viral engine of growth is Hotmail. The company included a link to joint Hotmail in every outgoing message. At the time, free webmail was a relative novelty as well. Therefore, Hotmail was positioned to stand out as a novel offering and use a viral mechanism.

Disadvantages:

Of all the growth engines, the viral engine is the most difficult to design and build. It tends to be most common in consumer-facing products like social media platforms. To a degree, you might consider Slack – acquired by Salesforce for billions of dollars in 2020 – as a B2B example of viral growth. If you are running a B2B startup, the viral growth engine probably should not be your focus.

Tactics

  • Go back to the basics of your target audience.

To have any hope of triggering a viral growth engine, knowing your target audience inside out is vital. For example, a B2B startup founder might think through the levers of influence outlined in “Influence: The Psychology of Persuasion” by Robert B Cialdini and choose authority. In that situation, your marketing strategy will focus on getting reviews in Capterra and recognition from Gartner. You might also make some targeted purchased of banner ads to increase brand recognition.

  • Track and measure your viral coefficient.

For a viral engine to work, you need a way to track it. Indeed, traditional SaaS metrics, like customer acquisition cost (CAC), will help. However, the viral coefficient tells you how well your customers are spreading the news about your product.

The viral coefficient is the average number of customers each customer brings you. If you achieve a viral coefficient of two, each current customer will bring you two more customers. To get these answers, train your sales team to ask customers how they heard about your company. If you have a self serve product, encourage current customers to use tracking links through an affiliate program.

  • Build a viral factor in the product

Your customers are not interested in your rapid growth goals. Therefore, you cannot expect them to hunt for ways to share your product with other people. That’s why I suggest looking for ways to build a viral factor or network effects into the product. For example, a social media platform or communication platform like Slack becomes more valuable as more people use it. In addition, consider offering free invite codes.

What To Do Next

At this point, you’re probably considering two questions.

1) Which engine of growth is right for my B2B startup?

2) How do I increase the effectiveness of my customer acquisition and marketing?

You might continue your research further by reading up on SaaS marketing channels. Or you could do yourself a favor and contact me today to discuss your marketing needs.

Optimizing Your Business Model For SaaS Success: 11 Levers To Pull For Hypergrowth

Developing a business model for SaaS is easy when you know the recipe. Use these ideas to fine-tune your SaaS business model and grow your recurring revenue over time. Each of these strategies is critical to increase SaaS revenue and get more users on your applications.

If you hit income growth challenges, use this article as a resource to give your sales teams and marketing team a boost.

1) Software As A Service: Offer Software By Subscription (i.e. The Core Business Model)

The foundation of your business model for SaaS is to create a software as a service or a similar technology offering (e.g., platform as a service or infrastructure as a service). You can leverage cloud computing from Google and other companies to build it. Instead of emphasizing downloading and installing the product once, the customer relationship involves a monthly revenue stream. A potential customer needs only to enter payment details and start to use the product right away.

With a monthly revenue stream coming in, you will have more resources to invest in improving the product’s impact. You might build an integration with Slack or Salesforce or boost your marketing to get more customers. If you’re not interested in growing through an integration, you might decide to apply your revenue to recruiting new talent.

2) Recurring Revenue Billing: Customers Pay You Each Month Is Critical To Business Model

A successful business model for SaaS requires that your customers pay an ongoing revenue stream. Assuming you manage churn rates successfully, you will automatically see growth in your revenue stream month after month. You can use a service like Stripe to process payments for you.

There is a downside to having customers pay you every month. Like it or not, your customer will see those charges come in and wonder if they should keep paying for the product. That means you have to invest resources into improving the customer relationship by offering training, top-notch customer service, and constant product improvement.

3) Customer Acquisition: Predictably Acquire New Customers Every Month

Growing your software company ultimately comes down to your ability to pull in new customers. You can use email marketing best practices to convert site visitors to paying customers. In addition, your approach to social media and Google needs to play a role in attracting your target audience over time. Finally, you need to have a process to convert free uses to a monthly subscription. Finally, your sales team must be disciplined about using outreach, retaining your existing customer base, and finding out more about customer needs.

Tip: Make sure you are spending enough to stay competitive. A 2017 CMO survey found that companies spend a minimum of 11% of company revenue on marketing. If you have $1 million in SaaS revenue, you need to be spending $100,000 to keep up with other Internet companies.  

4) Achieve Real SaaS Scalability: It Is More Than Using Web Services

Adding a new customer should not break your company’s infrastructure. Instead, using web services like Amazon Web Service to maintain your software company’s stability. Scaling in terms of technology tends to be the first point that founders consider. No doubt, it matters!

However, what if you are worried about meeting your investor’s expectations for growth? You might have promised that you would reach a billion-dollar valuation within five years. To have any hope of reaching that goal, your scalability ambitions have to go beyond fancy ways to use a cloud service.

The next part of the equation is to find a predictable way to get more customers. Start by figuring your customer acquisition cost. For example, do you have a solid onboarding plan so that your customers can achieve quick wins? If not, achieving scalability will become quite challenging.

5) Pricing Strategy: Thinking Creatively About Margins and Value

If you are a small business owner used to buying software with a credit card, you need to think bigger. I have found multiple software companies that charge customers over $100,000 per year for software in my research. Even better, charging a high price doesn’t mean you will lose customers either. For more insight on this point, check out my past article: SaaS Churn Metrics: Insights From 16 Companies with ACV Over $100,000.

To reimagine your pricing strategy, use these questions:

  • What could we provide to customers if we charged ten times more than we charge right now?
  • Can we offer a self-serve option (i.e., pay with a credit card) for smaller accounts?
  • Do we have enough customer success stories to win attention from larger companies?
  • Does our inbound marketing compare well to the software industry’s giants like Salesforce, Microsoft, and HubSpot?
  • Could we offer a new time-based pricing tier (e.g., buy the annual plan and save 10% vs. the monthly plan cost)?
  • Should we have a different price for each operating system?

If you can improve your user pricing model, developing a more profitable customer acquisition cost will be much easier.

6) Does Your Freemium Model Have A Clear Value Proposition?

“Use our product for free for 14 days!”

You see this type of freemium model every day in the software industry. The thinking is simple. If a customer can achieve something for free, they might be more inclined to pay for access. One of the best-known examples of the freemium model is Mailchimp

Giving away their product with a freemium model has been a winning business model for SaaS. Don’t believe me? Look at Mailchimp’s business’s size – they have reached approximately 700 million dollars in revenue, which makes them a bit larger than HubSpot.

In the case of Mailchimp’s approach to freemium, you can use most of the product’s core functionality for free. Specifically, you can get subscribers and send emails to them without a paid plan. Even as you use the free version, the product introduces you to other parts of the value proposition like:

  • Remove Mailchimp branding. That’s attractive because it means you can reinforce your branding on all of your emails.
  • Get more than 2000 subscribers. This feature is appealing because you might be planning a big advertising push to grow your email list.
  • Run Facebook Advertising campaigns right from Mailchimp. If you prefer to work inside the Mailchimp interface, this feature is helpful.

If you are experimenting with a freemium model, take lessons from the Mailchimp approach to acquire more customers. Ultimately, offering a freemium is also an excellent way to position upsells to your core value proposition (e.g., Mailchimp’s product with 2000+ subscribers).

7) Use The Business Model Canvas To Improve Your Business Model

There are two broad ways to improve your business model for SaaS. First, you can make incremental improvements, like tweaking your pricing strategy. Second, you can make wholesale changes! When you need the inspiration to make a more significant change because your growth plans are going nowhere, the business model canvas can help.

At its simplest, a business model canvas is a template document that gives structure to your business model brainstorming. Thanks to Wikipedia, you can see a screenshot of a business model canvas below:

For example, did you see the section on channels? Your growth might be stalled because you’re using the wrong channel. Maybe your account executives and sales development representatives love to cold call. However, they may find that they can’t get a chief financial officer on the phone after making 1000 cold calls. In that case, the solution may lie in using other SaaS marketing channels. You can also think about channels in the form of distribution partners – Microsoft and Salesforce both use third party firms to sell their software and offer related professional services.

Further Reading: To dive more in-depth information on the business model canvas methodology, take a look at the business model canvas website or the book that started it all: “Business Model Generation: A Handbook for Visionaries, Game Changers, and Challengers.”

8) Do You Have A Project Management Method In Place?

For a mature stage SaaS company, project management is a critical capability.

Project management? You might be surprised to see that here. After all, software as service companies has a “move fast and break things” reputation. Here’s the nuance. Once you get your software product off the ground and have customers, you will enter a new phase to manage your set of SaaS products.

Each day, tech support will receive a constant stream of bug reports. Customers will ask for new features. The sales team will pass along suggestions. Further, your engineers and programmers probably have plenty of ideas to make the product better. Your customer support team may have ideas to make more people happier with your product features (e.g., offer the product UI in French and Spanish). You may even get comments on your WordPress blog demanding new features!

Let’s assume that you have a relatively straightforward product strategy, and you have chosen five features to build. Now, you need a system to manage those projects. If you are a software enthusiast, you probably immediately thought of using an app like Asana or Basecamp to manage your project tasks. Those tools will help. Even more important, you should choose a project management methodology like agile so that everybody is on the same page and increase collaboration effectiveness.

9) Use An affiliate program to reward your customers for referrals

Everybody dreams of getting more business through referrals. If you are a salesperson, you can use books like “Endless Referrals” by Bob Burg to get more referrals. When a sales representative gets a handful of new referral leads, the business can grow faster. Getting customers to sell for you via an affiliate program is a fantastic way to make your SaaS model more attractive to investors.

There is another way to get referrals that can be even more powerful – using an affiliate program. In this model, you pay a commission to a third party when they bring you a new customer. For instance, FreshBooks, a cloud accounting tool, currently pays $10 for trial signup. That’s just the start! Affiliates can earn up to $200 if those free trials convert to a paid plan. By paying money directly to affiliates, you encourage them to keep bringing you, new customers.

There are multiple ways to run affiliate programs. If your affiliates are a strategic focus in your business model, I recommend reviewing the ClickFunnels affiliate program. They pay an ongoing commission for new subscribers. Further, the company offers special rewards (e.g., a cash bonus to pay for an affiliate’s car) for higher performance levels.

Whether you want to pay a simple upfront commission like FreshBooks or offer a more complex program like ClickFunnels, an affiliate program is well worth considering. This type of reward is a good option if your software company sells to individuals or small businesses. If you sell to larger corporations like the Fortune 500, sales teams are the better method to reach your hypergrowth goals.

Offering an affiliate commission to a marketing manager at a large corporation like Wal-Mart is less likely to work. Corporate employees are often prohibited from receiving special compensation or benefits from vendors. However, you might be able to reward them with a different set of benefits like a free month of product access when they bring you a new customer. In this case, there is no monetary cost to your business, and the corporate professional still has benefits to show to their colleagues.

Tip: Use testing to improve your affiliate program over time. Some affiliates might prefer a large upfront payment. If those acquisitions are profitable, update your venture capital presentations with this additional cost element.

10) Increase Customer Lifetime Value To Reach Hypergrowth

Recently, I read Netflix’s Q2 2020 earnings report, which came out in October 2020. The consumer company reports a wealth of customer data in the entertainment niche. I found it interesting to see that the average revenue per subscriber is gradually going up across their different geographic segments. Netflix’s success reminds me of a simple way to boost your revenue stream: increase your prices annually. Such a move will help you to maintain stable profits.

After all, how many subscribers will care if their monthly subscription goes from $8 to $10? For happy customers who spend an hour or two using the service each day, a small price increase doesn’t matter. When you add up those price increases, its overall revenue model and income start to look better.

The Netflix data also suggests that the company is doing very well in terms of retention rate. Minimal price increases and continually releasing new content helps. That said, don’t copy everybody Netflix does. Their cost structure includes spending billions on product development (i.e., new TV shows and movies).

11) Social Media: Choose Your Platform Carefully

Whether you use are building a low touch SaaS or relying on sales teams for growth, social media should be part of your SaaS business model. Specifically, I recommend viewing social media as a way to feed your marketing funnels with new leads. If you need to look for a new potential customer, you can almost always find those prospects on social media. People are constantly checking their social streams for new distractions, and you can attract some of their attention by publishing engaging content.

Start by publishing your new educational content to your content management system of choices like your resource center or WordPress. Afterward, post part of that new content to a social media platform. For example, avoid merely posting a link to a blog article on LinkedIn. Instead, copy and paste a few paragraphs of the content into LinkedIn to promote your company.

Regardless of the social media you use, there are expenses to keep all of these status updates coming. A mature stage company might have a dedicated marketing employee for social media. A smaller company might rely on outside talent for social media. If you find that social media doesn’t help you get new customers, don’t write it off yet. It might play an essential role in customer retention.

Want more profits in your SaaS business model?

Contact me to request a review of your marketing funnels, content, and email marketing. I’ve been in the Internet marketing field for years, and I love working with companies in the SaaS industry.

Churn Rates: What It Is And How To Use It To Boost The Bottom Line

High churn rates can hurt your business growth

Churn rates are crucial to monitor, especially in a recurring revenue business model. If you cannot keep your existing customer base happy, growth will become very hard. Before you find out how to reduce customer churn, let’s get clear with a churn rate definition.

Understanding Churn Rates

There are ways to define churn rate – as a concept and as a metric. Let’s cover both of these quickly as a starting point.

A churn rate is the percentage of customers that cancel their subscription in a certain period. If 50% of your total customers cancel their annual contract, you would have a 50% churn rate. A 50% churn rate will make it very challenging to grow your company even if you have a fantastic SaaS conversation rate.

Your churn rate as a business metric should be calculated regularly (e.g., monthly) if you have monthly plans or annually if you sell contracts with an annual retention rate.

Use this formula to calculate your churn rate so that you can improve your retention rate.

1. Choose a time period for your churn rate schedule (e.g., monthly, quarterly, or annually) . Let’s say it is an annual time period.

2. Count the total number of customers acquired in this time period through your customer acquisition period. Example: Your customer acquisition plan is working well, and you signed up 1,000 customers in your ideal customer segment.

3. Measure your customer churn number (i.e., number of customers who canceled their account) in the same time period. For example, you lost 250 customers because of bugs in your company’s mobile app.

4. Do your customer churn math: divide the total number of lost customers by the number of acquired customers. For instance, 250 divided by 100 equals 0.25.

5. Multiply that number by 100 to determine your customer churn rate (i.e., 25%).

Find Your Path To A Lower Churn Rate With These 5 Questions

No company dreams of losing a customer. Yet, some amount of revenue churn is inevitable in business. Deciding whether you have a severe annual churn or revenue churn problem requires you to consider a few questions.

1. How does your annual churn compare to other companies in the industry?

Churn rates vary considerably. For instance, B2B SaaS companies observe that churn tends to be higher in the small business segment than the enterprise customer segment. Still, it is helpful to review a few churn benchmarks:

  • The average annual churn rate for SaaS companies is 3.73% (voluntary churn) and 1.06 (involuntary churn), according to Recurly’s churn rate benchmarks.
  • “When looking at churn based on the size of the company, you’ll notice that churn only loosely correlates with a company’s monthly recurring revenue with wide interquartile ranges that fluctuate between 5% and 16% gross revenue churn on the low end of MRR and 2% to 8% on the high end of MRR.” – Profitwell on churn rate benchmarks

Now, you’re probably wondering when you should get worried and take action to improve churn. Baremetrics shares the following perspective on SaaS churn:

“A typical “good” churn rate for SaaS companies that target small businesses is 3-5% monthly. The larger the businesses you target, the lower your churn rate has to be as the market is smaller… For an enterprise-level product (talking $X,000-$XX,000 per month), churn should be < 1% monthly. Most early-stage SaaS companies I’ve observed typically have churn around 10-15% for the first year as they work out exactly what their product needs to do, then they’re able to reduce it pretty quickly.”

After you get past your first year or two of business, your SaaS churn better get under 10%. If you consistently have a higher churn rate, you have a problem! You will need to take a closer look at your customer retention process and use cohort analysis to determine which customers are staying and which are leaving.

Above-average churn rates are going to make it more challenging to get funding. It is an essential factor that investors may ask you about when you seek out finding. After all, who wants to pour water into a leaking bucket?

2. What are you learning from churned customers?

Whether you call them churned customers or lost customers, there are important insights you can learn from this group of customers. As a starting point, use a survey to ask customers about their plans and what they plan to do next. For example, when I canceled an Aweber account, I was asked if I was switching to another provider. I had switched to another email marketing platform – Mailchimp. By analyzing this type of customer attrition, Aweber may find ways to improve their SaaS conversion rate.

3. Are you analyzing credit card issues to lower churn?

If your business model relies on credit card billing, pay attention. There are proactive steps you can take to lower churn. Start with expiration date management. When customers pay by credit card, find out when their card is going to expire. Once you have that information, reach out to them two months in advance and ask them to update their credit card.

In a small business, the sales team or business owner should take on the work of reaching out to customers with expiring credit cards. Likewise, you should also develop a process to identify declined credit card payments and contact customers about that problem.

Tip: If your credit card management becomes overwhelming, transfer this responsibility to customer support and give them a tool like Zendesk to manage this activity.

4. Reach out to lost customers regularly

There are several ways to look at churned customers. You could take their loss personally and refuse to speak to them again. Or you could review their customer dissatisfaction comments as an opportunity to improve. For example, if your lost customers complain about a lack of Shopify integration, your development team may eventually solve that problem.

Once you have solved a cause of customer dissatisfaction, ask your sales team to contact lost customers again. Tell your lost customers that you have improved the product and invite them to take another free trial. With this practice, your overall growth rate will improve over time.

5. Analyze the impact of seasonality on your business

Seasonality patterns sometimes play a role in your annual gross revenue. For example, retailers tend to have higher revenue in the final few months of the year due to holiday shopping. You might find that summer is a slow season in the enterprise market because decision-makers are unavailable.

Detecting seasonality in your business takes a few steps. Start by making a list of the lost customers. Next, look at the cancellation dates. If you find that many of them are canceling in the same month, you can make a probability cancellation about churn rates (e.g., customers cancel in the summer months). Instead of accepting seasonality as natural attrition, you can plan.

Over the next 12 month period, set up a field experiment to engage customers before seasonal patterns cause them to cancel. For instance, consider organizing a webinar or a virtual event in May to create new excitement about your product before the summer vacation season arrives.

Reduce Your Churn Rate: 3 Evergreen Techniques To Use

Once you understand the business drivers for your churn rate, you need techniques to improve this figure. If you keep improving, you might reach the promised land: negative churn!

1. Are you using pricing tiers to reduce churn?

If your customers only have one way to pay, canceling becomes much more attractive. That’s one reason why pricing tiers are so popular in the SaaS industry. Your annual gross revenue should have customers switch from a $1,000 per month plan to a $500 per month plan rather than canceling entirely.

Adding a lower-priced version to your business model lets your customer save money and prevents customer lifetime value from crashing.

2. Offer a better deal to retain customers

There are several ways to improve customer satisfaction so that you can keep your monthly revenue high. Start by finding out the customer’s desired outcome with your product. For example, are they buying a marketing automation app to double their marketing efforts on social media sites? Your customer may not reach their desired outcome because your onboarding process was too complicated to figure out.

Offer a better deal by creating a customized onboarding process for the customer. Empower sales reps to spend more time on customer happiness and your churn rates will come down over time.

3. Are you improving your onboarding process every month?

The onboarding process plays a significant role in guiding your customers to achieve their desired outcome. For example, take the Quickmail onboarding process as an example. Rather than relying on sales people, customers sign up for a free trial. To achieve results, Quickmail sends a series of emails that strike the right balance between inspiring users to send emails and learning how to use the product’s features.

9 Key Questions To Ask Before You Start Working With An Email Marketing Agency

An email marketing agency makes it possible for you to grow your email list, sell more products through promotional email, and stay consistent with your monthly newsletters.

Email marketing agency: 9 questions to ask

1) How Can A Full Service Email Marketing Agency Help You?

When you work with a full service email marketing agency, you can expect a menu of services. They will start by reviewing your current marketing strategy, the most effective email campaign, and the overall digital marketing situation. Before creating a single email campaign, they will probably also look at your company’s presence on Facebook, traffic from Google, and ask you questions about your target audience.

By gathering all of this information, you are more likely to achieve better results, including an acceptable return on investment. Besides, I also recommend working with a full service email marketing agency with expertise on specific marketing software like Mailchimp. For example, I use Mailchimp in my business, I have developed email marketing campaigns for clients in Mailchimp, and I’ve completed the Chimp Essentials course.  If Mailchimp is a vital tool in your digital marketing, I would be pleased to help your marketing team.

2) Ask What Goes Into Designing A High Designing Email Marketing Campaigns For Your Business

Email marketing campaigns that drive results require several elements. You need a template design that your target audience will find easy to read. In addition, you need marketing expertise to set specific business goals:

Example Business Goals

  • Increase orders from your existing customer email list by sending a weekly email campaign
  • Improve email marketing efficiency by creating a newsletter template that you can use repeatedly
  • Get better results from your sales funnel (i.e., increase email revenue by 10%)
  • Grow your email sign ups with more of your target customers by inviting Facebook followers to your email list
  • Implement marketing automation to onboard new customers (e.g., send an email campaign to new buyers with a buyer-specific email newsletter and a welcome email)?
  • Launch a survey to your target audience to inform your next product launch

The details of digital marketing – choosing when to use automation campaigns, reducing your bounce rates, and improving brand awareness –  are secondary to business goals. Your essential indicators in working with a full service email marketing agency should focus on revenue and lead generation business goals.

3) Are There Setup Fees To Start Your Email Newsletter?

Before you start sending out monthly newsletters, there is some preparation work to do first. That’s why setup fees are standard practice when you work with a full service email marketing agency. Specifically, a setup fee covers the cost of critical marketing activities like reviewing your current search engine optimization situation, evaluating past monthly newsletters, checking Salesforce, and evaluating the performance of the promotional email you send. All of these preparation activities take time and expertise, so you need to setup fees are a standard operating procedure before you start sending email marketing campaigns.

4) How They Use Content Marketing To Support Your Email Marketing Campaigns?

There is a close link between growing an email list and content marketing. Interesting content draws people into your business when people search for answers on the search engines. By offering helpful content marketing resources, prospects are more likely to agree to receive marketing email from you.

Once people are on your email list, content marketing continues to play an important role. You don’t want to fill every marketing email you send with sales pitch after sales pitch. That approach will encourage people to ignore their email marketing campaigns. Instead, train your customers to look forward to your promotional email by sharing valuable information like interviews.

Tip: Want to see interview-style content marketing in action? Check out my interview with Uploadcare, which explores their digital marketing wins.

5) How Will Email Marketing Agencies Support Your Marketing Team?

Email marketing agencies like to talk about their digital marketing expertise with copywriting and marketing automation. Those skills do matter. Alas, these skills are not enough. It is also vital that your email marketing agency knows how to work with your marketing team. After all, your marketing team has already put months and years of effort into understanding your company’s target audience, content creation for Google, and other Internet marketing projects. Such insights are vital to attracting potential clients to join your subscriber list.

To assess whether a digital agency will work effectively with your marketing team, ask the following questions:

  • What is your monthly process to seek feedback on marketing email?
  • What is your customer service process (e.g., do they report on bounce rates to you monthly)?
  • How do they define marketing leads for your business?
  • What is the team’s plan for the channel partner incentive program?
  • Will they help your marketing team to choose email applications?
  • Will the digital agency write email sequences for your business?

6) What Marketing Automation Ideas Do They Propose?

Email marketing agencies live and breathe digital strategy every day. Therefore, you should expect your digital agency to take a proactive approach to your email marketing campaigns. Specifically, email marketing agencies should develop a digital strategy that leverages marketing automation to achieve your business goals.

Practical marketing automation ideas may include:

  • Improve the quality of lead generation with marketing automation (e.g., only send a lead to sales when the person has interacted with multiple email marketing campaigns)
  • Get better results from Facebook with marketing automation (e.g., upload a customer email list to Facebook so that you can advertise to people in your target market)
  • Send triggered emails to your subscriber list based on customer activity

A proper full service email marketing agency will not send the same email blast to everybody. Instead, they will use carefully use your email program to target different parts of your target audience with marketing software. You might decide to send one email blast to your existing customer list, offering them a discount to buy. Everybody else (i.e., non-buyers) would receive a different marketing email.

  • Propose effective strategies for marketing automation based on other projects. As a business owner or digital marketing manager, you are only familiar with your customers. Experienced email marketing companies work with multiple companies. If they find a way to ignite visibility or get better results from a landing page in a different target market, those ideas could be adapted for your business.

7) How Will The Full Service Email Marketing Agency Achieve A Good Return On Investment?

An email program like MailChimp automatically collects specific data like open rate and customer engagement metrics like clicks. On their own, these data points do nothing to advance your business goals. As a business owner, you’re probably too busy to study your open rate for insights.

In contrast, your marketing team and a full service email marketing agency will work together to design more effective strategies. The digital strategy may evolve to recommend increasing email sign ups with a blog post and landing page rather than pay per click. In many cases, generating leads from Google is a better way to get more potential clients.

8) What Is The Digital Agency’s Approach To Using Strategic Partnerships To Grow Your Email List?

Your email list only contains a fraction of your overall target audience. For example, there are millions of people who use Microsoft Excel every day. Yet, only a fraction of those people is familiar with Excel products like FormulaSpy or Mr Excel. Rather than sending email campaigns to your current email list, email marketing agencies will sometimes suggest a different approach to lead generation: strategic partnerships.

In its simplest form, strategic partnerships mean that another company permits you to send a promotional email to their email list. To make the arrangement attractive to the other company, offer them a concrete benefit like a revenue share. What about cases where you don’t have the marketing expertise to do a direct marketing share?

You can still use strategic partnerships to achieve better results. Instead of a sales promotion, ask your partner to send a promotional email to tell their email list about an upcoming webinar or virtual event. With this approach to digital marketing, your company brings valuable information to the target market. Your partner looks good to their email list because they are bringing new insight to the market.

If you’re not sure how to create a webinar or presentation, you may need to work with a content marketing consultant. They can work with your marketing director to create a custom landing page, write the promotional email, and write the presentation script.

9) When Does It Make Sense To Take Marketing Software And Email Campaigns In House?

A full service email marketing agency probably would not tell bring up this point, but it is crucial. In some cases, you are unlikely to achieve better results or a meaningful return on investment when working with email marketing companies. This disappointing digital marketing outcome can happen for a few reasons.

Your email list is too small

If you have 10, 50, or even 100 people on your email list, it is challenging to generate significant results even if you send a marketing email every day.

Your email newsletter has no call to action

Your business goals probably include increasing revenue, right? Therefore, your email newsletter has to make it easy for people to buy a product or request an appointment. If your email blast does not include a clear call to action (e.g., click here to buy), nothing is going to happen.

You refuse to use a marketing email platform like MailChimp

Whether you use MailChimp, Constant Contact, HubSpot, or a different platform, it is vital that you use a professional marketing automation platform to send your email newsletter, triggered emails, and promotional email. These email programs are an essential component of running successful email marketing campaigns that increase revenue.

Your marketing director isn’t interested in working with email marketing companies.

Your digital marketing budget is too small. Do you only have $500 to spend each month on your digital marketing program? It is possible to ignite visibility on occasion and use some essential marketing software on that budget. However, the overall results are likely to be minimal.

You avoid participating in a kickoff meeting or campaign management discussions.

A kickoff call to gather information is critical. Without a kickoff call, creating lead magnets, developing a drop campaign, and exploring search engine optimisation ideas are likely to fail. Failure is likely because the digital agency will be guessing about your business goals and target customers.

What’s Better Than A Free Consultation: Get A Marketing Email Health Check

There are so many email marketing companies offering to run your email marketing campaigns. How are you supposed to determine which one will help you implement your marketing strategy? I recommend looking for an email marketing agency that gives new clients more than a free consultation.

That’s why I have developed a 10 point health check for email marketing campaigns. This checklist will pinpoint where you need to make changes to get more sales. For more information about the email marketing health check, contact me today to request it.