For Entrepreneurs Blog

Growth Hacking Free Trials: Time to Wow! is the key to success

This article is part of a series titled “The Art & Science of Growth Hacking” that will be published over time. My thanks to Gail Goodman, the founder and CEO of Constant Contact for introducing me to this concept.

Free trials and freemium products are two of the best ways to sell your product. They help the buyer address key concerns such as:

  • Will this actually work in my particular situation?
  • Will I get enough value to make the effort of using it worthwhile?

For a buyer, being able to get this level of proof is far better than having to trust what a web site or sales person has told them. Think about how you buy a car. How important is it to you to test drive the car before you part with tens of thousands of dollars?

Free trials (and freemium) also have another huge benefit for SaaS and consumer internet companies: the buyer does most of the work of selling themselves. If you have read any of my previous posts on the importance of CAC (Cost to Acquire a Customer), this can be a very powerful way to reduce CAC.

What is Wow!

Wow! is the moment in a free trial where your buyer suddenly sees the benefit they get from using your product, and says to themselves “Wow! This is great!”.  It’s also the moment where you have converted them into a fan who is likely to buy.

If you’re going to use free trial (or freemium) as a key part of sales funnel, it pays to understand exactly where in the free trial experience your buyer says “Wow!”. Then you will want to focus on the following set of questions:

  • How long does it takes to get to Wow!? (Time to Wow!)
    • Can we shorten the number of steps required to get to Wow!
  • What is the drop out rate of trial users on their way to Wow!?
    • Which step in the process has the highest drop out rate?
    • Why are users failing at that step, and can this be addressed?
  • Is the Wow! moment clear and strong enough?
    • What is the Wow! to Work Ratio?
  • Are different buyers interested in seeing different Wow! moments? (This is often the case in a product that has several modules.)
  • Are we providing the buyer with clear guidance on how to get to Wow!? Continued…

That’s a nice little $40M ecommerce company you have there. Call me when it scales

It will surprise a lot of entrepreneurs to learn that building an e-commerce business with $10 million to $20 million in revenues is not that hard. It also surprises many to learn that it’s not actually that valuable. This is in stark contrast to, say, a SaaS business, which is very difficult to build to that level but valuable when you do. As I read this week’s board deck for one of our portfolio companies, JustFab, I was struck by one of the reasons this discrepancy exists: marketing leverage. Most retail businesses (traditional or online) have to spend marketing money to acquire a new customer at scale. Small e-commerce companies can be exempt from that – if you fill a niche and you have distinctive product-market fit with a set of customers, you can and should land them virally or cheaply. But as the business grows, you need channels of acquisition that you control beyond sitting around and hoping your customers tell their friends. Having a product that delights the user and drives high levels of customer satisfaction (which leads to high levels of referral) is crucial for building a killer business. It separates the great businesses from the good ones at scale, and in the early years, it is often sufficient to drive growth with no need for paid media. It is an important topic, but one for another day. What demands further inspection is the fact that many companies stall out when it comes time to transition off organic growth and add paid media as the primary growth vector as they scale. Customer acquisition costs money and this is where things get tricky in retail. What is the lifetime value of a retail customer? It’s a non-trivial question. In SaaS, for example, this far more predictable due to the subscription model. For a concrete example, take the above chart which shows JustFab’s North American business. (I redacted the exact numbers, but it’s at large scale.) As you see, the company has been able to nearly double revenues year-over-year, on virtually the same advertising spending as the previous year – in fact, advertising has been flat for three years. This isn’t some magical outcome based on large-scale viral adoption. Rather, it’s just good marketing execution to land new customers who like the product coupled with a model that gets them back on the site an average of 30 times a year, providing repeated opportunities to sell to them. Given that a customer who sticks for the first couple months has an expected length of membership of several years, that’s a lot of selling opportunities. Another way to look at the marketing leverage they get out of subscription: Re-engagement is the key. This is important because the sneaky problem with e-commerce is paying to reacquire your existing customers. As an investor, I see a lot of companies with a killer product who have built $10 million in revenues at a rapid clip. (Understandably, most burn some cash to get there, but if companies didn’t burn cash to build, I’d be out of a job.) In almost all cases, these businesses have an “at-scale economics” slide in their pitch deck that shows a customer will be quite profitable in time – buying from them several times a year, and thus justifying the $42 spent to acquire them as something that will be easily amortized across future purchases. Re-engagement drives higher LTVs, which enable the ability to spend more on acquisition. Unless you’re Amazon, the capital markets won’t let you grow and burn cash forever. As these companies grow, however, they find they continue to burn cash at an unsustainable rate. One big contributor is the lack of marketing leverage: that customer you acquired for $42, you have to pay $20 again getting him back. Maybe he typed your site name in Google and clicked on the paid link at the top to navigate there, or after ignoring your emails, he finally clicked through on your 40% off coupon. Either way, now that customer cost $62 to acquire.   Zulily is the darling of the e-commerce world (and Wall Street) right now, and rightly so – it’s a great product, and it’s on a growth tear with very reasonable capital consumption. In time, it will have to demonstrate meaningful earnings, and to do so, I believe, it will need marketing leverage. From 2012 to 2013, Zulily grew revenue nearly 110 percent – an awesome rate – reaching an impressive $696 million last year. Marketing spend was up just 62 percent, after an 85 percent increase the year before. The company is certainly demonstrating some marketing leverage while still showing phenomenal growth – hence a breakout e-commerce story.

Much more common is a fate like Overstock.com. It grew revenues 18 percent last year (to $1.3 billion) – about the rate of overall e-commerce growth – but to do that, it spent 46 percent more on marketing than the year before. The result, excluding a one-time tax gain, is $16 million in profit (roughly 1 percent margin). That’s a lot of work to sell stuff for a buck that costs you 99 cents, and hence a market cap of 0.4-times-sales, compared to Zulily’s seven-times ratio.

I fear this fate is in store for many popular e-commerce businesses today who are hoping their curation of distinctive products and the brand are enough to lock their customers in. Retail customers are fickle and forgetful. They will find other merchants they like, and even if they continue to like your business, they will forget to come back to shop. That is, unless you create a systematic method of re-engagement with no marginal cost.

There is a perception in some quarters that flash sale and subscription businesses have failed as a category. I think a lot of this has to do with high profile companies that didn’t live up to the expectations they set both in their promotion and in the amount of money they raised. While a full teardown of the operational challenges posed by a rapidly growing e-commerce company is worthy of an entirely separate discussion of its own, it is true that the degree of difficulty of scaling these businesses is much, much higher than that of most mobile, social, or SaaS startups.

There was a period of easy access to late stage capital (2009-2011), where I believe investors were seduced by the large revenue numbers these startups generated, and all that capital allowed undisciplined management teams to dig themselves very deep holes with mediocre operations. Thus the pendulum swung, and investors who were once “all-in” on e-commerce were now all out – rather than a more nuanced realization that there are some great companies and some poor ones. With Zulily now public and on a staggering trajectory, and other companies like JustFab, Gilt, and One King’s Lane all clearly delivering great results at large scale, it’s clear that the best of these companies are quite good. As we see several more go public over the next year, it would not surprise me to see the pendulum swing back, and the category begin to get over-invested again.

Some potential models to drive re-engagement:

  • Subscription: Long popular in low-COGS business (media such as Netflix or Spotify, SaaS software, information services like Care.com or PeopleSmart), e-commerce is just starting to catch on to this approach. JustFab and BirchBox are probably the biggest examples to date, but others like Dollar Shave Club are knocking on the door.

  • Flash Sales: Gilt (a Matrix company) pioneered this category and continues to make it work. Zulily also uses this as a primary means or driving re-engagement. One King’s Lane is another great example in the home category, and there are countless others. The key here is to make daily content an exciting event – unlike subscription, you only have permission to be in the inbox, not a commitment to come to the site – so you have to earn them back every day. Without great content or unbeatable deals this does not happen. Also scarcity is key. Consumers must feel that they better click through that email RIGHT NOW because if you wait an hour, the best things may be gone. If you are going to use “unbeatable deals” as a vector, you’d better have a compelling reason to believe you (as a startup) will have a structural pricing advantage that can’t be matched by other larger scale retailers.

  • Loyalty Programs: Amazon Prime is effectively a loyalty program that gives benefits back to the consumer in exchange for concentrating their purchases. A Costco membership is a premier offline example with a similar model: “Pay us $50 per year and we’ll sell you everything at cost.” The question is, what benefit can you provide your customers that re-engages but doesn’t just cost you the same as re-marketing to existing customers? Amazon would argue “it’s better to give that money to the customer than Google,” and that’s true. But, remember, you are not Jeff Bezos and the market won’t let you lose money forever.

I think this is an area where there is still room for innovation.

Without a structural re-engagement mechanism, you are banking on having such an amazing product (or value) that the customer comes back over and over. It does happen – look at LVMH offline – but it doesn’t happen often, and usually not at the pace necessary for a tech startup. I’d rather run a business where you have your hands on the levers of growth than betting on a merchandiser who can anticipate trends and always be at the forefront – though having both would be really nice.

This was originally published as an article in Pando Daily.

(Thanks to: Greg Bettinelli, Dana Stalder, Brian Spaly, Michael Carney, and Adam Goldenberg for their help.)

Building smarter software: Proactively deliver insights

Actionable Insights image

Three years ago I spent a lot of time looking at SaaS business intelligence companies. I loved what I saw in the demos: easy data connections, slick looking graphs, powerful drill down tools and custom dashboards made the tools look like no-brainers. And then I began my diligence calls. All of these bells and whistles were useful for data analysts I learned, but mostly worthless for regular users. Customers didn’t want to become data analysts, they wanted the software to do the work of the data analyst.

It then dawned on me that there’s a massive mismatch between the areas where vendors focus—namely graphics, dashboards, query and reporting tools—and the reality of customers’ needs. No one has time to dig through dashboards, graphs and reports. And customers don’t want to spend any time in your application unless they absolutely have to. Continued…

Manage Customer Success to Reduce Churn

The health of a SaaS business is directly tied to its ability to retain its customers and prevent churn. To do this, they have to ensure that their customers are happy. That means making sure they get the promised business benefits they signed up for. This blog post discusses how to measure customer happiness, and how to actively manage your business to achieve it. It also looks at the newly emerging Customer Success function. Continued…

2013 Pacific Crest SaaS Survey

We worked together with Pacific Crest, an investment banking firm with a specific focus on SaaS, to survey 155 SaaS companies on a variety of topics such as growth rates, CAC (cost to acquire a customer), gross margins, churn rates, etc. The goal of the survey is to provide useful operational and financial benchmarking data.

Continued…

SaaS Metrics 2.0 – A Guide to Measuring and Improving what Matters

“If you cannot measure it, you cannot improve it” – Lord Kelvin

This article is a comprehensive and detailed look at the key metrics that are needed to understand and optimize a SaaS business. It is a completely updated rewrite of an older post.  For this version, I have co-opted two real experts in the field: Ron Gill, (CFO, NetSuite), and Brad Coffey (VP of Strategy, HubSpot), to add expertise, color and commentary from the viewpoint of a public and private SaaS company. My sincere thanks to both of them for their time and input.

SaaS/subscription businesses are more complex than traditional businesses. Traditional business metrics totally fail to capture the key factors that drive SaaS performance. In the SaaS world, there are a few key variables that make a big difference to future results. This post is aimed at helping SaaS executives understand which variables really matter, and how to measure them and act on the results.

The goal of the article is to help you answer the following questions:

  • Is my business financially viable?
  • What is working well, and what needs to be improved?
  • What levers should management focus on to drive the business?
  • Should the CEO hit the accelerator, or the brakes?
  • What is the impact on cash and profit/loss of hitting the accelerator?

Continued…

Metrics and Compensation for SaaS Inside Sales

The Bridge Group have recently published a report titled:

Inside Sales for SaaS
Metrics and Compensation Report for B2B technology companies

image

 

The report is based on a survey of 197 B2B technology companies, and covers topics such as:

  • Ramp and Retention
  • Compensation and Quota
  • Activity and Infrastructure
  • Inside Sales Management
  • Management’s top challenges

They kindly offered to provide a link for readers of this blog. If you are interested in downloading a copy, please click here to access the report.

Using Surveys to Validate Key Startup Decisions

Summary

This article describes in detail how to use on-line survey tools to validate your key startup assumptions, and gain actionable insights into topics such as pricing, target demographics, messaging, etc. Continued…

Pacific Crest’s 2011 SaaS Survey

Pacific Crest, an investment banking firm with a strong focus on SaaS, has surveyed a 70 SaaS companies with very interesting results. There is some great data on topics such as growth rates, cost of customer acquisition, churn/retention, expense models, capital efficiency, etc. The full survey, which was put together by David Spitz and his team (follow @dspitz on Twitter), can be found here. In this article, I include many of their slides, and the associated Pacific Crest commentary. In a few cases, I add my own commentary prefaced by my initials DRS. I highly recommend downloading the entire survey, and signing up to contribute your own data for the 2012 survey (which can also be done at the same link). I’d like to thank David Spitz of Pacific Crest for giving me permission to reprint their results below.

Details of the participating companies:

  • 70 private SaaS company respondents, participating anonymously and confidentially
  • Administered to CEOs and CFOs, May-July 2011
  • 69% multi-tenant/single instance
  • Diverse mix:
  • –$0-$60M+ in revenues (~$13M median)(1)
  • –25-250+ employees (~120 median)
  • –10-2,000+ customers (~480 median)
  • –$100s to $MMs median ACV (~$37.5K median)
  • –~50% horizontal apps, ~50% vertical apps, infrastructure, etc.
  • –Primarily U.S. headquartered Continued…

Why Churn is SO critical to success in SaaS

Summary: Illustrates graphically why churn is a huge problem a SaaS company gets larger. It also looks at a very surprising factor that can massively accelerate SaaS growth: negative churn. (This article  is applicable to any recurring revenue business, not just SaaS.) Continued…

Why Sales People shouldn’t Prospect – An interview with Aaron Ross

hi res aaron headshot 300dpi for sales bookIn this article I interview Aaron Ross, co-author of a new book, Predictable Revenue. Aaron discusses his experience at Salesforce.com starting a new group that used an innovative outbound prospecting approach (involving no cold calls) to create new leads. Aaron’s group came up with several important breakthroughs which enabled them add over $100m in incremental recurring revenues over a few short years. This article reviews some of those best practices which provide a recipe for others to make outbound prospecting a repeatable and predictable revenue generator.

Continued…

Understanding the Customer Buying Cycle & Triggers

This article looks at why customers expect different interactions with you depending on where they are in the buying cycle. It also examines how specific events trigger them into a buying mode. It then explains how you can use this information to make your marketing more effective. Continued…

The Application Development Landscape – 2012 and beyond

Today’s application developers are faced with a broad set of architectural decisions that can make or break their company going forward. This presentation, which was given as a keynote for the MassTLC application development conference, highlights the major changes that are taking place in the world of application development. Continued…

HubSpot’s Best Practices for Managing SaaS Inside Sales

Mark Roberge photoBest practices for inside sales managers. An interview with Mark Roberge, VP of Sales at HubSpot, discussing how he blends science and process with the art of selling.

HubSpot is a SaaS company selling Inbound Marketing software. HubSpot has grown revenue over 6,000% in the last four years, placing them #33 on the Inc 500 fastest growing companies list. They now employ about 300 people. I have always been very impressed with how Mark has run their inside sales organization, which has now grown to 110 people. In this interview, I talk to Mark about his strategy and tactics for running a successful SaaS sales organization. I believe Mark is at the forefront of using data and science to drive how he hires and manages his organization, and this article should bring out some interesting best practices.

Continued…

When Selling is the Worst Way to Win Customers

imageCustomers hate being sold to. They don’t mind getting expert help when they want to buy something. But much of the time they are not ready to buy, and one of the most irritating things is to have a salesperson try to get them to buy when they aren’t ready. Unfortunately too many people in marketing and sales positions don’t seem to understand this, and proceed to irritate their potential customers. They don’t realize that there is a far better way to sell. That is what this blog post is all about. Continued…