The Key Elements behind Business Model

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2 The Key Elements behind Business Model Cost to Acquire the Customer (CAC) Profit from that Customer (LTV) There is a common problem: Startup Killer

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

4 What we are looking for A well balanced business model Monetization (LTV) Cost to Acquire a Customer (CAC)

5 The Big Power Shift The Internet caused the disruption Buyers are now in charge Able to find all the information they need on-line Comparison shopping Detailed reviews Consumer reviews, complaints and comments

6 Buying Behavior has Changed Please understand that I get dozens of these types of messages a week. I simply do not have time to read them, dig into them, follow-up on them, or reply to them. The most effective solution to this problem is for me to ignore the messages, which is what I usually do. Finally, a small comment. As a customer, I find this type of approach to sales to be largely annoying to me and unproductive for you. We learn far more about what we want to purchase by searching the web, looking for customer references in blogs and forums, word of mouth, and by finding white papers on your site that concretely describe solutions to problems we are having. CIO of Large Pharma Co.

7 Sellers need to change An intimate understanding of the Buyer Buying behavior Likes Dislikes is the key to success

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9 Buying Behavior has Changed Outbound Marketing: Annoying to your customers Expensive Increasingly less effective What is the new process? Google Search Web Site Reviews Blogs & Social Media Influencers Trials or Free software / services Requires Inbound Marketing thought processes

10 It s not all bad news The Internet has also given marketers some powerful new tools Web sites, videos, trials, etc. to convey rich information Search Marketing (SEO/SEM) The Social Graph Viral acquisition Behavioral tracking Location information A/B Testing Etc.

11 Business Model Disruption in B2B New Low Cost Customer Acquisition Models: The Low Cost Sales Model (Inside Sales instead of Field Sales) The Touch-less Conversion Freemium

12 The Low Cost Sales Model (Inside Sales) SolarWinds 2009 Revenues: $116 million EBITDA: $60 million 52% operating margins Others: HubSpot, JBoss, LogMeIn, Constant Contact, Salesforce.com, etc.

13 The Touchless Conversion ZenDesk Common Funnel Metrics: 10% of visitors do a trial 20% of trials convert to paid Extraordinarily scalable Extremely low cost

14 Free Trials require different Product Thinking The product is your salesperson Extreme focus on: Ease of installation Ease of use Clear instructions on how to test (short videos, etc.) Fast proof that it works

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

17 How I assumed the two would relate

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

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

20 CAC (logarithmic) $100,000 10x $10,000 $1,000 10x $100 10x $10 $1 Freemium No Touch Inside Sales Field Sales Sales Complexity

21 High CAC, requires high scores for: Value, Pain, Urgency Value / Pain / Urgency = LTV (logarithmic) $1,000,000 $100,000 $10,000 $1,000 $100 Unprofitable: LTV < CAC $10 $1 Freemium No Touch Inside Sales Channel Field Sales Sales Complexity

22 How SaaS changes Sales Complexity Value / Pain / Urgency = LTV (logarithmic) $1,000,000 $100,000 $10,000 $1,000 $100 $10 $1 Freemium No Touch Inside Sales Channel Field Sales Sales Complexity

23 Levers you can use to move from Red to Green Make it easy for customers to sell themselves Make the first decision to work with your product easy Simple product Free versions, Free Trials, Open Source Remove Complexity from closing the Sale Remove IT (SaaS) Eliminate committee decision making Make the first financial commitment easy $10,000 or below for enterprise sales $250 per month for very small business SaaS

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25 Able to leverage the Internet revolution Human Costs dominate: Old world business model Value/Pain/Urgency $1,000,000 $100,000 $10,000 $1,000 $100 $10 $1 Freemium No Touch Inside Sales Channel Field Sales Sales Complexity

26 Another trait of highly successful companies A Sales and Marketing Machine

27 BUILDING A SALES & MARKETING MACHINE Brand Advertising Webinars Marketing PR Events Sales Social Media Tradeshows

28 ? WHAT IS A SALES & MARKETING MACHINE

29 PREDICTABLE CLEARLY DEFINED LEVERS THAT YOU PULL TO MAKE IT GO FASTER SCALABLE SALES & MARKETING MACHINE 9 INSTRUMENTED WITH GREAT METRICS AUTOMATED COST OPTIMIZED

30 HOW DO YOU GO ABOUT BUILDING ONE OF THOSE?

31 9 STEPS

32 4 WHY 4 FIRST? BECAUSE 1, 2 AND 3 ARE NOT OBVIOUS SO WE WILL COME BACK TO THEM AT THE END AFTER WE HAVE SEEN WHY THEY ARE SO VALUABLE

33 4 ALIGN ALIGN EVERY MARKETING ACTIVITY AROUND ONE GOAL CREATING LEADS THAT HELP SALES CLOSE MORE DEALS

34 Sales CLOSED DEAL

35 Blogging Social Media SEO Campaigns Sales CLOSED DEAL SEM Webinars PR

36 RULE NUMBER 1 If it doesn t create a lead, or directly contribute towards closing a sale, it doesn t belong

37 Sales CLOSED DEAL

38 RULE NUMBER 2 If the cost per lead is too high, it doesn t belong Exception to this rule: If you can recover cost through: higher conversion rate to closed deals higher average deal size

39 Sales CLOSED DEAL

40 5 LINK

41 CLEARLY LINK FLOWS FROM START TO FINISH $ SEO LANDING PAGE FREE TRIAL CAMPAIGN SALES TOUCH CLOSE 1. At the end of every action, there should be a clear link to the next action 2. The overall flow from start to finish should be carefully designed

42 AN ORGANIZATIONAL STRUCTURE

43 YOUR CUSTOMER S PURCHASING STAGES CONSIDERATION PURCHASE CLOSED DEAL AWARENESS

44 AN ORGANIZATIONAL METAPHOR FOR THE KEY FUNNEL STAGES MIDDLE OF THE FUNNEL SALES CLOSED DEAL TOP OF THE FUNNEL

45 WHAT IS TOP OF THE FUNNEL? customer is not aware they have a problem, or that your product category exists GENERATE AWARENESS customer has a problem and is looking for a solution GET FOUND

46 WHAT IS TOP OF THE FUNNEL? RAW LEAD GENERATE AWARENESS WEBSITE

47 WHAT IS TOP OF THE FUNNEL? RAW LEAD GENERATE AWARENESS & GET FOUND WEBSITE Inbound marketing Outbound marketing

48 WHAT IS THE MIDDLE OF THE FUNNEL? NURTURE QUALIFY MQL (MARKETING QUALIFIED LEAD) SEGMENT

49 PROBLEM: SALES SAYS MARKETING ISN T GIVING THEM ENOUGH LEADS MARKETING SAYS THAT S RIDICULOUS, I GAVE THEM A TON OF LEADS. THEY JUST DON T FOLLOW UP ON THEM PROPERLY. SALES MARKETING

50 CAUSE: SALES CALLS A FEW UNQUALIFIED LEADS, AND FINDS THEY ARE WASTE OF TIME - THEY STOP CALLING THE REST OF THE LEADS SALES

51 SOLUTION: GET AGREEMENT ON THE QUALIFICATION CRITERIA NEEDED TO BE ABLE TO PASS A LEAD ACROSS TO SALES (MQL) MARKETING

52 SALES SALES FURTHER QUALIFIES THOSE LEADS TO FIND OPPORTUNITIES

53 USING BANT BUDGET AUTHORITY NEEDS TIMING

54 COMMON LEAD STATES RAW LEAD CLOSED DEAL MQL (MARKETING QUALIFIED LEAD) OPPORTUNITY (SALES QUALIFIED LEAD)

55 6 AUTOMATE

56 MIDDLE OF THE FUNNEL SALES MARKETING AUTOMATION CRM CLOSED DEAL TOP OF THE FUNNEL INBOUND MARKETING

57 LEAD SEGMENTATION

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59 7 MEASURE "IF YOU CAN NOT MEASURE IT, YOU CAN NOT IMPROVE IT." - LORD KELVIN

60 THE KEY METRICS CAMPAIGNS TO DRIVE TRAFFIC OVERALL CONVERSION % VISITORS CONVERSION % (BY LEAD SOURCE) TRIALS CONVERSION % CLOSED DEALS

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67 8 ANALYZE

68 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

69 IDENTIFY YOUR BLOCKAGE POINTS

70 HOW?

71 WHAT IS STOPPING ME FROM INCREASING SALES BY 5X?

72 9 IMPROVE

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

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

75 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

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

77 GET INSIDE YOUR CUSTOMER S HEAD CONCERNS - Hate being sold to - Don t want to get spam sales s

78 UNDERSTAND WHAT MOTIVATES THEM CONCERNS MOTIVATIONS - Want to solve my problem - Recommended by a friend - Education - Data/ information reports - Entertainment - Free stuff

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

80 EXAMPLE: DRIVING TRAFFIC TO YOUR WEB SITE GETTING FOUND Not going to find your site unless: concerns - On 1 st page of Google search - Recommended by trusted source - Referred to in social media or blogosphere

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83 LESSONS FROM WEBSITE GRADER Free tools drive viral spread Low customer work required High value delivered Score leverages competitive urge Builds trust through clear demonstration of expertise

84 GOOD LINKAGE TO NEXT STEP

85 using engineering for marketing

86 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

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

89 GETTING CUSTOMERS TO SIGN UP FOR A TRIAL concerns - I don t have the time - I don t want to get spam - Yet another password to remember

90 RE-THINK THE PROCESS CONVENTIONAL APPROACH SIGN UP FOR TRIAL WOW! CONVERT TO CUSTOMER WOW! FIRST, REGISTER LATER WOW! SIGN UP FOR TRIAL CONVERT TO CUSTOMER Source: Josh Porter Designing for Social Traction

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93 PROBLEM: GETTING A MEETING

94 GETTING TO EXECUTIVE DECISION MAKERS TECHCRUNCH FOR INSURANCE CLAIMS

95 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

96 First Contact Sell First Contact Build Relationship Build Trust Sell

97 SELLING IS 10X EASIER ONCE YOU HAVE ESTABLISHED TRUST

98 YOUR BLOG CAN ESTABLISH TRUST HOW?

99 VALUABLE CONTENT EDUCATION INFORMATION ENTERTAINMENT WITH ZERO SELLING

100 THE KEYS TO SUCCESS DEEP UNDERSTANDING OF YOUR CUSTOMER What don t they like? What do they like/need? What motivates them? What are their problems? What does their boss expect of them? etc. Combined with OUT-OF-THE-BOX THINKING

101 APOLOGIES MY EXAMPLES ARE ALL SOFTWARE COMPANIES THIS APPLIES EQUALLY WELL IN OTHER BUSINESSES

102 FINALLY LET S GO BACK TO THE BEGINNING

103 AND INTRODUCE THREE NEW STEPS AT THE BEGINNING OF THE FUNNEL DESIGN PROCESS

104 1 IDENTIFY IDENTIFY ALL THE PEOPLE INVOLVED IN THE PURCHASE DECISION

105 2 UNDERSTAND SKETCH OUT THEIR BUYING PROCESS AND CONCERNS AT EACH STAGE

106 3 ENTICE ADD THE STEPS TO ADDRESS THEIR BUYING PROCESS AND: ADDRESS THEIR CONCERNS ENTICE THEM

107 SUMMARY

108 WE WENT FROM THIS: 1. Align 2. Link 3. Automate 4. Measure 5. Analyze 6. Improve

109 TO THIS 1. IDENTIFY 2. UNDERSTAND 3. ENTICE 4. Align 5. Link 6. Automate 7. Measure 8. Analyze 9. Improve

110 THE NINE STEPS 1. IDENTIFY Identify people in purchase decision 2. UNDERSTAND Address their buying process and concerns 3. ENTICE Design actions to pull them through buying process & address concerns 4. ALIGN Ensure funnel actions lead directly to sales 5. LINK Link every funnel action to the next step 6. AUTOMATE Use software to automate 7. MEASURE Measure key funnel metrics 8. ANALYZE Identify blockage points 9. IMPROVE Brainstorm better enticements and ways to address concerns

111 SALES-DRIVEN FUNNEL DESIGN TO A CUSTOMER-CENTRIC FUNNEL DESIGN

112 CASE STUDY JBOSS

113 JBOSS - FREE open source software - downloaded 5 MILLION times

114 The Highlights Breakthrough Business Model Open Source A great example of the power of Free 5 million downloads The first challenge: How to monetize The second challenge: Conversion While keeping CAC low Solution: Build a Sales & Marketing Machine

115 ORIGINAL BRAINSTORMING SESSION

116 THE FIRST BLOCKAGE POINT 5 million users had downloaded JBoss But none had given their names The problem: registration in front of download reduces conversion rates significantly

117 JBOSS example NEEDED: a carrot to incent them to provide an address SOLUTION: give away the documentation for free RESULT: 10,000 leads per month

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

119 Metrics: The End Goal 4:1 (25%) 3:1 (33%) 4:1 (25%) Raw Leads Web activity scoring Telemarketing Telesales Closed Deals

120 Using the model to work backwards 4:1 3:1 4:1 Raw Leads Web activity scoring Telemarketing Insidesales Closed Deals 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)

121 THE NEXT CHALLENGE: Multi-pronged approach INCREASE LTV Add services to the subscription (beyond just support) Key service was JBoss Operations Network Broaden the product line and upsell JBoss Enteprise Middleware Suite (JEMS) Scalable Pricing Result 4 axes to drive pricing higher Drove average deal size from $10k to $50k While maintaining the same pipeline flow and conversion rates

122 THE RESULTS Before venture financing 2003 $2m Early 2004 venture round closes Bookings Growth: 2004 $11m 2005 $26m 2006 on plan to do $65m

123 JBOSS SUMMARY Business Model disruption Gave the product away entirely free Monetized support & management Low CAC Leveraged free and virality to acquire non-paying customers Sales & Marketing Machine Careful study of customer motivations Low cost Sales model Excellent Metrics Scalable pricing model

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