STARTUP KILLER CAC, LTV &
Other Metrics that will make (or break) you CAC ROI by Viral Lead Coefficient Time to Source Recover LTV CAC Churn Rate Viral Cycle Conversion Time Rate

MICRO-ECONOMICS PROFITABILITY AT THE CUSTOMER
LEVEL A POWERFUL WAY TO GAIN BUSINESS INSIGHT

An out of balance Business
Model Entrepreneurs are over-optimistic Cost to Acquire a Customer (CAC) Monetization (LTV)

Simple Customer Acquisition Funnel 200
Visitors required for 1 cust Visitors 5% Trial Using Google: At 50c per click 10% Cost: $100 per cust Customer

Add in People costs:- CAC
increases dramatically Input Variables Total Web Visitors 10,000 SEM cost per click $ 0.50 Conversion to Trial % 5% Trial conversion % 10% No of Sales & Marketing Staff 3 Cost per employee per month $ 16,500 Marketing and Sales people Flow Qty. Conversion % involved: Total Paid Web Vistors 10,000 CAC rises to Trials 500 5% $1,000 Customers 50 10% SEM Marketing Spend $ 5,000 Total Headcount Costs $ 49,500 Cost of Customer Acquisition Without headcount costs $ 100.00 With headcount costs $ 1,090.00

Sales Complexity No Touch Light
Touch High Touch Field Sales Freemium Field Sales Self-Service Inside Sales Inside Sales with SE’s

How I assumed the two
would relate

A rough estimate of CAC
versus Sales Complexity No Touch Light Touch High Touch Field Sales Freemium Field Sales Self-Service Inside Sales Inside Sales with SE’s Rough Estimates of Cost of Customer Acquisition (CAC) $0- $50 – $1,000 - $3,000 - $25,000 – $75,000 – $10 $200 $2,000 $8,000 $75,000 $200,000

The relationship is roughly exponential
Clearly adding Human Touch dramatically increases costs

CAC (logarithmic) 10x 10x 10x
Sales Complexity

CUSTOMER MICRO-ECONOMICS SaaS and Recurring
Revenue

Cash Flow at the Customer
Level 1000 0 -1000 -2000 -3000 -4000 -5000

Cumulative Cash Flow 1000 0
-1000 -2000 Ten months to -3000 recover CAC -4000 -5000

My rules for CAC/LTV balance
in a SaaS model LTV > 3x CAC Months to recover CAC < 12 months Required for Capital Efficiency

SALES & MARKETING
FUNNEL METRICS

1 st THE BASICS OF
FUNNEL DESIGN

Expand Suspects Closed Deals Upsell
Cross sell

IN A PERFECT WORLD… 1
Step

IN A PERFECT WORLD… MyProduct.com
DESCRIPTION HOW IT WORKS Our product allows you … Only $9,999.99 BUY NOW!

REALITY IS DIFFERENT Step 1
Step 2 Step 3 WE NEED TO BREAK THINGS DOWN INTO MULTIPLE SMALLER STEPS

WHAT WE ARE DOING ACTION
ACTION ACTION MOVEMENT MOVEMENT MOVEMENT

2 MEASURE "IF YOU CAN
NOT MEASURE IT, YOU CAN NOT IMPROVE IT." - LORD KELVIN

WHAT TO MEASURE FOR EACH
STEP / ACTION: NO OF ACTIONS % CONVERSION RATE TIME TIME

THE KEY METRICS CAMPAIGNS TO
DRIVE TRAFFIC VISITORS OVERALL CONVERSION CONVERSION % % TRIALS CONVERSION % CLOSED DEALS

NOT ALL LEAD SOURCES ARE
EQUAL Google Ad Word Funnel FaceBook Ad Funnel Visitors Visitors 5% 2% Trial Trial 10% 20% $5,000 Customer $8,000 Customer

ROI by LEAD SOURCE Cost
per lead OVERALL CONVERSION % (BY LEAD SOURCE) Lifetime value of the Customer

THE ART OF
MARKETING

DESIGNING YOUR FUNNEL

WHAT IS A FUNNEL? ACTION
ACTION ACTION MOVEMENT MOVEMENT MOVEMENT

HOW DO WE DESIGN OUR
FUNNEL?

THE
BUYER

THE BUYING CYCLE PURCHASE CONSIDERATION
CLOSED DEAL AWARENESS

THE BUYER CONSIDERATION ADDRESS THEIR
QUESTIONS & CONCERNS • Will this work for my situation? • Is it the best product in the market? • Is it a safe choice? (Who else is using it?) • Will I get a return on my investment? • Is it scalable, secure? • Is it easy to implement? • Will I get good support? • Etc.

TRIGGERS • Moving house •
Movers, phones, cable TV, furniture, insurance, etc. • Starting a new software project • PaaS (Platform as a Service), Dev Tools, etc. • Need to hire a lot of new employees • Applicant Tracking System • Just lost my data in hard drive crash • Backup software/service • Read about a new scary computer virus • Anti-virus software

Suspects Suspects Suspects Suspects Suspects
Suspects Suspects Suspects Suspects Suspects Suspects Suspects BUT EVEN IF YOU ARE MICROSOFT, CISCO, ORACLE, OR GOOGLE YOUR FUNNEL WILL HAVE BLOCKAGE POINTS

IMPROVE

IN DIAGNOSING MANY FUNNEL BLOCKAGE
POINTS, I HAVE FOUND THAT THERE IS A CLEAR PATTERN…

YOU ARE HOPING YOUR CUSTOMERS
WILL DO SOMETHING THAT THEY ARE NOT MOTIVATED TO DO

IN OTHER WORDS… YOU DESIGNED
YOUR FUNNEL THE WAY YOU HOPED IT WOULD WORK… BUT YOU MAY NOT HAVE THOUGHT ENOUGH ABOUT THE CUSTOMER’S POINT OF VIEW

JBOSS EXAMPLE PUT A REGISTRATION
FORM ON THEIR WEB SITE BEFORE A FREE DOWNLOAD IMPACT CUT THE DOWNLOAD RATE BY MORE THAN 10X

GET INSIDE YOUR CUSTOMER’S HEAD
FRICTION & CONCERNS - Hate being sold to - Find it offensive to give name and email - Don’t want to get spam sales emails - Worried that email address will be given to other marketers

UNDERSTAND WHAT MOTIVATES THEM FRICTION
& CONCERNS MOTIVATIONS - Want to solve my problem - Recommendation from a friend - Education - Data/ information reports - Entertainment - Free stuff - Meeting other people like me that have insights to share

CREATE A SOLUTION THAT ENTICES
THEM AND ADDRESS THEIR CONCERNS FRICTION & CONCERNS ENTICE & ADDRESS CONCERNS - Customer testimonials address vendor risk - Free trials address product viability and fit concerns - Lowest price guarantees

JBOSS EXAMPLE • Making $27,000
a month selling documentation • Solution: • Give away documentation to get their email address

EXAMPLE: DRIVING TRAFFIC TO YOUR
WEB SITE GETTING FOUND Not going to find your site unless: friction & - On top page of Google concerns search results - Recommended by a trusted source - Referred to in social media or blogosphere

LESSONS FROM WEBSITE GRADER •
Free tools drive viral spread • Low customer work required • High value delivered • Score leverages competitive urge, and acts as a trigger • Builds trust through clear demonstration of expertise

using engineering for marketing

USING DATA TO DRIVE WEB
TRAFFIC SYSOMOS: SOCIAL MEDIA MONITORING LEVERAGED THEIR DATABASE TO CREATE BLOG POSTS WITH DATA ON TOPICS OF CURRENT INTEREST: • IRAN ELECTION RIOTS • TWITTER’S GROWTH • FACEBOOK USAGE

LED TO: SYSOMOS ARTICLES IN
ECONOMIST, NY TIMES WEB TRAFFIC TO READ THE FULL REPORT LEADS – IMPRESSED BY THE CAPABILITIES OF THE SOFTWARE

DROPBOX: SIMPLE FILE SHARING SOFTWARE
– Get you hooked for free – Storage slowly increases to the point where you need to pay – But by then they have established trust – And it is hard to move your data that is shared with others

First Contact Sell Build Build
First Contact Sell Relationship Trust

OFTEN NECESSARY TO FIND TOPICS
THAT ARE NOT RELATED TO THE SALE Build Build Relationship Trust First Contact Sell

SELLING IS 10X EASIER… ONCE
YOU HAVE ESTABLISHED TRUST

THE KEYS TO SUCCESS THE
BUYER GET INSIDE YOUR BUYER’S MIND

CONCLUSION

WHAT I DIDN’T COVER •
Sadly way too many topics for this time slot • Virality – see my blog • NPS – Net Promoter Score • Etc.

For More information  Visit
my blog at www.forEntrepreneurs.com

APPENDIX

WHY
CHURN IS SO
IMPORTANT

Why Churn is so Important
Bookings Versus Churn MRR (Monthly Recurring Revenue) $150.0 $3,000.0 2.5% Churn $2,500.0 $100.0 $2,000.0 $50.0 $1,500.0 Months $- 5% Churn $1,000.0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 2.5% Churn $500.0 $(50.0) 5% Churn $- Months 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 $(100.0)

The Impact of Negative Churn
Bookings Versus Churn MRR (Monthly Recurring Revenue) $200.0 $8,000.0 -2.5% Churn -2.5% Churn $7,000.0 $150.0 $6,000.0 $100.0 $5,000.0 $50.0 $4,000.0 Months $- $3,000.0 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 2.5% Churn 2.5% Churn $(50.0) $2,000.0 5% Churn $1,000.0 $(100.0) 5% Churn $- Months 1 4 7 10 13 16 19 22 25 28 31 34 37 40 43 46 49 52 55 58 $(150.0)

MICRO-ECONOMICS
FOR A SALES PERSON

How Revenue Builds for a
SaaS Salesperson (assuming no ramp up time) With no Churn With Churn of 2.5% $45,000 $45,000 $40,000 $40,000 $35,000 $35,000 $30,000 $30,000 $25,000 $25,000 $20,000 $20,000 $15,000 $15,000 $10,000 $10,000 $5,000 $5,000 $0 $0 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Jan Custs Feb Custs Mar Custs Apr Custs Jan Custs Feb Custs Mar Custs Apr Custs May Custs Jun Custs Jul Custs Aug Custs May Custs Jun Custs Jul Custs Aug Custs Sep Custs Oct Custs Nov Custs Dec Custs Sep Custs Oct Custs Nov Custs Dec Custs

The Cash Flow Gap MRR
vs Expenses – New Sales Hire Net profit - New Sales Hire $30,000 $25,000 11 months to $20,000 breakeven MRR $25,000 $15,000 $20,000 Expenses $10,000 $5,000 $15,000 Cash $- Gap Month 10 Month 11 Month 12 Month 13 Month 14 Month 15 Month 16 Month 17 Month 18 Month 19 Month 20 Month 21 Month 22 Month 23 Month 24 Month 1 Month 2 Month 3 Month 4 Month 5 Month 6 Month 7 Month 8 Month 9 $10,000 $(5,000) $(10,000) $5,000 $(15,000) $(20,000) $- Month Month Month Month Month Month Month Month Month Month Month Month 1 2 3 4 5 6 7 8 9 10 11 12 $(25,000) (Slightly later breakeven point, because Gross Profit is less than MRR)

The SaaS Cash Flow Trough
Cumulative Net Profit - New Sales Hire $400,000 $300,000 $200,000 $100,000 $- $(100,000) $(200,000) Total amount 23 Months to get But a great invested: back the return on $110k investment investment

UNDERSTANDING
CUSTOMER
ENGAGEMENT

THE OLD WORLD
HUMAN INTERACTIONS

THE NEW WORLD
MACHINE INTERACTIONS

THE PRODUCT HAS BECOME YOUR
SALESPERSON

TRACKING ENGAGEMENT What do we
know about them? What do their actions tell us? Buyer Behaviors Attributes

Account Profile

WHY MEASURE ENGAGEMENT? INSIGHT Which
customers are about to Churn? ACTION Use emails and/or customer service reps to increase usage

WHY MEASURE ENGAGEMENT? INSIGHT Which
Free Trials are going wrong? ACTION Use emails and/or customer success reps to increase usage

WHY MEASURE ENGAGEMENT? INSIGHT Which
free trials are going really well? ACTION Get Sales to call and ask for the order

Active Lists

Engaged Evaluators Report

WHY MEASURE ENGAGEMENT? INSIGHT Which
key features in the Free Trial have not been tried? ACTION Use emails and/or customer success reps to focus on those features

PATTERN DISCOVERY AND THE NEED
FOR DATA SCIENTISTS

Which behaviors are most correlated
with Churn? Which lead sources lead to the most profitable customers? What Free Trial behaviors indicate a customer that won’t buy? Etc.

THE BUYER WHO IS YOUR
BUYER? • Who is involved? • What are their roles (Champion, Influencer, Decision maker, etc.)?

THE BUYER UNDERSTAND THEIR BUYING
PROCESS • What are their approval processes? • e.g. IT approval needed, Board approval needed Wife’s approval needed

USING METRICS TO MEET TARGETS
WORK BACKWARDS FROM THE TARGET

Example: JBoss - Sales &
Marketing Machine Enterprise Suspects Closed Deals Rollouts Web Web Phone Inside Leads Scoring Call Sales Lead Nurturing

Metrics: The End Goal 4:1
3:1 4:1 (25%) (33%) (25%) Raw Web Closed Tele- Tele- Leads activity Deals marketing sales scoring

Using the model to work
backwards 4:1 3:1 4:1 Raw Web Closed Tele- Inside- Leads activity Deals marketing sales scoring • To do $4m in the month: – If Average Deal Size is $10k – Need $4m divided by $10k deals to reach target = 400 deals – Means 1,200 deals being worked in Inside sales (400x4) • Know that each rep can work 60 deals at a time, means 20 reps – Means 3,600 telemarketing contacts (1,200x3) – Means 14,400 Raw Leads (3,600x4)