This is the third post of a six post series discussing Sales and Marketing strategies for Enterprise Cloud Computing (SaaS) companies. Links to the related posts will be updated at the bottom of each page as they become available. You can start from the first post here.
Today’s post focuses on Freemium, Social, New Age Customer Behavior and Key SaaS Metrics
Freemium, Free Trials, and the Enterprise
$$$ = Commitment. If you remove all barriers to entry, you are removing all barriers to exit. The freemium model can be great at appealing to a large, point product market to see where you stick, but is much harder to execute in the Enterprise. Free trials are similar, in that it shows faith in the quality of your product to provide value in a short period, but those that sign up can only be considered leads at best, and have a low conversation rate into actual opportunities.
If a prospect is willing to commit their money to the evaluation process, it will also guarantee their time and attention. Consider a scenario where you have 2 products that are similar in nature that you are looking to evaluate. The first you receive for free for 30 days, and the second you have committed $5,000 for use during that same period. You can bet that more of the companies resources will be committed to the ensuring the second option is properly evaluated.
If using freemium or free trials today (and targeting the Enterprise), I recommend trying paid pilot and evaluation programs. Unsure how much you should you charge? Start by asking your prospects what they would be willing to pay. Using the paid evaluation model will significantly raise your conversation percentages, and position you for more long term success with each prospect.
Should you be investing in social media? Overwhelmingly, the answer will be yes.
But should you be investing in social media campaigns? Marketo co-founder Jon Miller says no, or at least not directly. During his talk with us last week, he shared that Marketo does not run social media campaigns specifically, but rather every marketing campaign is elevated by social media. “Social Lift” promotes each campaign to higher levels of effectiveness. Landing pages, online ads, email, events… all get the social treatment.
There are many blogs and resources dedicated to this subject, Marketo’s own blog being one of the best.
Well, with regards to customer behavior, they have already changed. Gone are the days where customers were deprived of information and had to resort to lowly measures like calling sales representatives to access white pages, pricing and the like. Instead, today’s consumer is dealing with problems associated with TOO MUCH information being available.
It is the job of marketing to make your information relevant, easy to understand, and available in the right forms that it will gain the attention of potential buyers and move them to take further action. Sales teams are now invited to the party only after the buyer has done initial reserach and decided they are ready, often when a shortlist has been decided. It is important for marketing to have balanced the right amount of information being pro-actively provided to prospects, while withholding enough information to ensure engagement between the prospect and sales needed to impact the decision process and articulate the value of your solution for the specific customer.
Defining Your Ideal Customer
In order for marketing to gain the invite to your sales team, it is important that the right information is available to perspective buyers in relevant and timely formats. In order to achieve this, marketing must understand the unique nature of their prospects in customers like never before. While you may sell to many industries, verticals and regions, it is important to tailor your message according to the key personas that purchase your solutions. While company size and vertical will factor in to some degree to defining these personas, more important characteristics include having (and acknowledging) the problem you solve and willingness to provide access to the economic buyer.
It is not easy to define such a persona, as it can be hard to stereotype your customers on a general level. You can start by listing out as many single-line characteristics as you can think of for an ideal customer, and continue to read and revise as you engage with your customers, ideally narrowing the list down to less than 10 key descriptors. Perhaps none of your actual customers will be a perfect match, but having an accurate ideal customer list can help identify good opportunities earlier in your engagements, and alerting you to those that are less likely to become quality customers.
The Key Metrics of SaaS - CAC and CLTV
We covered basic cash flow of SaaS companies in Part II of this series, but to summarize: SaaS companies burn through more money than they make in the early stages of growth, with the renewal strategy paying major dividends in the long term. For many, that would seem like a turnoff to early investors, as businesses of the past were often measured on total bookings and revenue from day one. So why are companies that have not achieved profitability being valued in the 100′s of millions?
Investors and analysts are more concerned with metrics relating to growth and long term value than they are with current bookings. Two of the metrics that are monitored from the start are Cost Acquisition Cost (CAC) ratio and Customer Lifetime Value (CLTV). These metrics are especially important when a company is young, as a company builds its renewal pipeline and validates the business model.
CAC Ratio = (Recurring yearly revenue from customer) / (All Sales and Marketing Costs in year 1)
- CAC < 1/3 means it will take 3 years or more to get payback on this investment, VERY BAD!
- CAC > 1 means you will be paid back in less than a year, and should go peddle to metal as long as you can maintain this.
CLTV (or CLV) definition (thanks to Wikipedia):
where is yearly gross contribution per customer, is the (relevant) retention costs per customer per year (this formula assumes the retention activities are paid for each mid year and they only affect those who were retained in the previous year), is the horizon (in years), is the yearly retention rate, is the yearly discount rate.
Also, a great free Harvard.edu tool for calculating CLTV here.
For companies that have maintained a CAC ratio near or above 1 and continue to maintain a positive CLTV for a few years, they can achieve profitability almost at the flip of a switch by cutting expenses and focusing on renewals and organic growth. But why should they? These metrics indicate they should continue to drive growth, negative cash flow from investment into sales and marketing will be offset by added company value. Should these metrics begin to drop, it may indicate a time when the company has matured to a point that focusing instead on profitability rather than growth is the right move.
On to Part IV!
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Read the other posts in this Selling and Marketing SaaS to the Enterprise series:
Part IV - (not yet published)
Part V - (not yet published)
Part VI - (not yet published)