Show Notes
In this episode of Startups For The Rest Of Us, Mike interviews Justin Gilchrist, co-founder of Optimum Feedback, about building outbound sales processes. He gives some tactics, talks about how to get started and challenges you’ll face with outbound sales.
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Transcript
Mike: In this episode of Startups For The Rest Of Us, I’m going to be talking to Justin Gilchrist about building outbound sales processes. This is Startups For The Rest Of Us episode 363.
Welcome to Startups For The Rest Of Us, the podcast that helps developers, designers and entrepreneurs be awesome at building, launching and growing software products. Whether you’ve built your first product, or you’re just thinking of it. I’m Mike.
Justin: And I’m Justin.
Mike: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. How are you doing this week, Justin?
Justin: I am pretty good, apart from a minor injury in the middle of the night last night. But, yeah, I’m good other ways. Thanks, Mike. Thanks for having me on.
Mike: Ah, I’m glad you can make it. Part of the reason I’m having you here is because a couple of weeks ago, Rob made this announcement for MicroConf’s Save The Date. Unfortunately it was wrong so I kicked him off for the week. That’s his punishment. He’s actually at Convert this week so he couldn’t make it. But the Save The Date correction is that MicroConf is actually April 29th to May 1st and then May 1st to 3rd for the Growth Addition and then Startups For The Rest Of Us. It’s not April 23rd to 26th. Scratch that from a couple of weeks ago.
We’re back to you, Justin. If you’re not familiar with Justin, Justin’s a UK based co-founder of Optimum Feedback, it’s a platform designed to help us increase the number of customers that they have and increase customer loyalty. He was also a former co-founder of a company called Centurica. It was acquired in 2015 and he’s also the author of Digitally Wed, which is a handbook to help you come to terms with buying online businesses and what to look for, what to avoid. He also invests in some companies, and one of the reasons that I’m having Justin on today is because one of the companies that he had invested in previously had a sales process problem. That’s really the focus of today’s episode. I wanted to walk through that process that you came up with and talk to the listeners through what you did to solve those problems and how you came to that. That sounds like an accurate assessment of what we’re doing today and any details that I left out?
Justin: Yeah, that was pretty accurate, Mike. That’s pretty bang on.
Mike: Okay. I guess lay out the scenario for us. What problem were you trying to solve in this business? Obviously it was a sales related problem but why was it important and what was the goal of the processes that you were trying to implement?
Justin: Sure. To give you some background first on why we’re trying to do that, this is a company which I bought 12 years ago now. It started out as a relatively small company and grew quite organically with no external funding over the years. It’s a company, I don’t know if any of the guys listening out there have read the book Small Giants, but one of the companies I really like to think of as a Small Giant is a really good culture here. The people who work here love working here and it’s a great team and we really put out a market beating, market leading service. This is a company that’s now at around 30 employees, it’s a company involved in B2B services around food and the logistics of food. Helping mostly blue chip companies organize how their people get fit, we’re providing a lot of the back end services for that.
In this industry, it’s a very mature industry, and in this industry things have always been done a very traditional way, including sales. The typical way you’re selling B2B is you hire a bunch of tele canvassers or telemarketing people, which now everyone’s calling them SDRs, which sounds a hell of a lot sexier. It’s telemarketing when we started. You got them basically just to dial a cold list until someone said, “Yes, I’ll be interested.” They would then book an appointment for sales rep, the sales rep would go and close or maybe not close and that would affect you to be as sophisticated as your sales cycle would get.
The problem was that we started with that as a strategy, as we started to grow and add more outbound telemarketing reps. This strategy started to mean that we were churning through leads really quickly because they weren’t getting multiple touches, it also didn’t work well with where technology has gone now, where everything is multi channel, where you’ll have a lead that you’ll maybe initially speak to via the phone, you’ll send them an email, they will go into your website, a retargeting cue will be set, they’ll visit you again, they’ll get remarketed in social media or in Facebook for example, they may get an SMS, and the old way of doing things, it doesn’t bring all of these things into holistic strategy for converting that lead into clients. Those were the problems that we’re really trying to solve.
Mike: To frame that for the listeners a little bit, the initial problem that you had was trying to reach out to these people and really establish a repeatable sales channel for the business, but the problem that you are running into was that overtime the way of getting people through your sales funnel was really changing and you had to modify your sales process to meet those changes in the way that people had modified their business and the way that they expected to be treated and marketed to, I guess. Is that an accurate way of rephrasing that?
Justin: Yes, pretty accurate. As I’ve said, things have changed. Over the last 10 years, things have changed drastically in the amount ways to market to a person in B2B. Social was around 10 years ago, but it wasn’t great for doing B2B, now what Facebook is doing makes it almost as essential as Google PPC was 5 or 10 years ago if you want to do B2B. Really the problem we had is we had these independent silos marketing to people but no real cohesion between them, and part of the problem with that is we were not converting at the rates we should have been converting, we were often losing leads in that process who would maybe be called once and never called again. We just needed a way to really bring that all together, but ultimately just get a better ROI on outbound.
Mike: Got it. Really, things had worked for a while and then, obviously, the world changed around you and then the existing process that you had in place was no longer working and it needed to be tweaked or improved and given this overhaul. I guess to dig into that piece, what was the process that you ultimately came up with? You initially talked about how you were really just going through these leads that you had and phone numbers people call and then if they were interested, great, schedule a meeting, take them into the next step, if not, then they got dumped on the floor. How did that change into what you ultimately came up with? How did you come up with that and what sorts of things did you try to reach whatever that conclusion was?
Justin: One thing I have to say is I’m from both sides of the track in my passion and what I work on day in day out is SaaS, but I also understand sort of dodgy, all the old school offline businesses as well. It sounds ridiculous saying that this is the way things were done. But still, to this day, in the majority of more mature conventional business, the sales process really is telemarketers working in their own silo. If you’re from the world of SaaS, if you’re familiar with things like predictable revenue and how outbound SaaS efforts are usually set up, then it seems like it’s a really obvious thing, but it wasn’t that obvious to us because we’ve been doing things for so long the same way of doing them.
The process that we ultimately came out with really was solving the problem that we’d have leads that we would either purchase or cold leads that would come in. These leads would get contacted or they would get targeted one way or the other, but if that wasn’t a yes straight away, a lot of these leads would be lost in the system and I’m sure most people know that you need to have multiple touches with people over time in order for them to convert. By our estimation, we were converting probably 25% to 30% of all the people we could have possibly converted but a lot of these leads were being forgotten about because there wasn’t a scalable or repeatable system for maintaining contact with these leads and grading them over time. The process that we ultimately came up with was more of a campaign approach. It was a campaign that included multiple phone calls, multiple emails, but also other things like direct mail or retargeting through Facebook, or in some cases, SMS.
Mike: What was it that ultimately led you to incorporating all of these different things? I think if you’re running your business in a certain way for a long time, you get out of touch with a lot of these other marketing channels happen to be and in this particular case, you’re really combining a bunch of different channels together. You talked a little bit about the cold calling aspects, the direct mail outreach, SMS messages, what was it that lead you to believe that this particular combination of things was going to make a difference for you or was it just you did a couple of tests or were you talking to other people about some of the different sales processes for related businesses. What lead you to this approach?
Justin: It was SaaS. We don’t realize how fortunate we are working in an industry that is always trying out and testing things this whole idea of the lean or the agile way of doing things is not necessarily the standard way of doing things in other companies. We get used to or almost desensitized from the fact that we are often bleeding edge with marketing practices and with the technology that we use. When you take those same marketing practices and those same technologies and apply them to companies and industries where it’s not so common, it really does give you an edge.
Mike: I know a SaaS company that does exactly this. They have physical books that they send out, and they also have postcards that they will send to people as physical mailers and it’s a SaaS application but, because their audience likes things offline, they’re kind of older, more engrained in their ways and not likely to change how they typically do business, by using those techniques and getting in front of them, I mean, that’s really all you’re doing with email marketing, or Facebook ads or anything like that, you’re just trying to get in front of people, using those physical mailers is another way to get in front people. It’s really not any different except for the fact that it costs more money to send a postcard or giant envelope in the mail and your iteration cycle is a lot lower, it’s harder to do that, you can’t run those tests in a week. You have to take a couple of months in order to do it. How did you go about dealing with some of those challenges?
Justin: A lot of this was prompted by the fact that we needed to grow, we needed to scale, so we’re going from 6 outbound reps to 15, but that’s where we want to be. The first decision was in that we have to find the way of making the process a lot more stable and a lot more sustainable in order to grow. I think you ultimately have two decisions when you have an existing process, you can either make the existing process a lot more efficient, so we could have looked at how much are we losing from initial confirmation call to meeting from people, maybe sling or rearranging the meetings, how much we’re losing in the meeting stage, what things could we do there to tighten up those numbers in that funnel, or we could just look at adding more volume. If we throw more volume in, then we’re going to get more out at the end even if the efficiency stays the same or the conversion rate stays the same.
To this day, I can’t say I know what the right answer was, but for us, we had a lot of leads and a lot of leads that were becoming old that we needed to get through. The priority first really was increasing that volume of leads going through. That meant hiring more outbound SDRs, but it also meant having a better process which I can get into the nuts and bolts about what the actual process is but it meant having a better process for each leads that we call and having a clear strategy and knowing what the outcome for that lead in particular was.
Mike: I think what I find really interesting is kind of a side step here to talking to how it is that you’ve mapped that out, because I’ve looked at a bunch of different tools mapping these things out and what you tend to find is that there are different parts of that process that tend to run in parallel to some extent. For example, if you send out postcards or something to mail, that may take a couple of weeks to get there and you don’t know whether or not it got though. At least with email marketing, a lot of times you can see whether or not somebody opened it or there’s a campaign and there is multiple touch points along that entire way. But when there’s hand off, like somebody get something in the mail, and they are expected to call you, for example, or just because there’s a phone number on it. How do you tie those different pieces together and that’s more of a technical challenge, but the other side of it is how do you map these out? Do you get a giant sheet of graph paper and draw things out or do it with a bunch of notecards, or is there a software tool that you can use? Because I think this is where people start to get confused about how do I put this stuff together and how do I create this, for lack of a better way to put it, like a workflow that I can translate into having software that fulfils all these different needs.
Justin: It’s pretty cool that you mentioned mapping out because the mapping out part really was the part that was the most important for us because it’s wider than just mapping things out for an operational side but it actually goes back to recruiting and cost saving. To give you an example, we have different campaigns, and one campaign might be a lapse lead campaign, for leads that have been in the database for six months, we previously got somewhere with them but not all the way that technically then allows leads. We may have a lapse client campaign, we may have a cold lead campaign, we map put every one of these campaigns up front and by mapping out, I mean we look at what actions do we want to take first of all.
To give you an example with the lapse leads, we’ll schedule a call for days era, so the minute one of our prospectors goes in, sees this, decides this is going to be good fit for that campaign, they will manually hit the button to our campaign software. The first thing we do is we schedule a call, two days after that call we’ll have an email, and that email will go out from a different person, it’s our system but it obviously comes out as person and that generally tries to achieve the same objective of the call, which is touching base, finding out if their details are correct and if they’re still in the market for whatever the services that we’re offering are.
We’ll then have another email pre scheduled for three or four days after that, but bear in mind these emails get cancelled if the call gets completed first, but this whole idea of mapping things out is not just mapping out what goes out, it’s mapping out every outcome from a call. Whenever our SDRs get on the phone and they make a call, our system will show them a list of options when they come off that call based on what happened.
It can be as simple as, “Did you speak to the contact?” Yes or no. If they didn’t speak to the contact, they’ll ask them if they left a voicemail, if they didn’t leave a voicemail, it’ll schedule that call to come back for 30 minutes later. If they did leave a voicemail, it’ll schedule it to come back for the next day. If they did speak to a person, and the person is maybe not ready yet, or there’s another decision maker that wasn’t there, it will make different decisions based on that too. The idea is that we’re trying to cut down the amount of thinking reps have to do, one to reduce human error but two, and most importantly, to make the job a lot more systematized so we can get the same results or the same good results from every rep we hire without having to hire specific kinds of people who just know how to do that. That has the ripple effect of making our recruitment a lot easier because we don’t have to necessarily recruit people who are superstar SDRs in their own rights, but it makes trainees easier because we’ve got less situations or circumstances that we have to role play with people and indicate people about that long term it means we’re saving money because we’re hiring less, we’ve got less churn and these guys are going out and they’re doing a better job from day one.
Mike: The way you phrase it is it makes it sound like it’s somebody coming from the world of technology or developer background would have an advantage in putting this together because really, it’s just a series of if else statements where you’re checking for certain conditions and if the SDR actually talks to somebody, then do this, and if they didn’t, talk to them, or if they left a message, do these other things. That seems the way that it plays out, but how do you go about mapping these things out so you know what to do, because there’s a difference between planning and designing it versus implementing it because the implementation, I feel like that’s once you know what needs to be done, implementing is, I’ll say, much more trivial because then you can just go out and find the tools or plug things into it, but figuring out what needs to be done and where and what the decision points, to me, seems like the hard part.
Again, it goes back to how did you do that piece. I would default to graph paper, but I don’t have graph paper that’s large enough for stuff like that. It just seems like then you’re almost going to like tools, like Lucidchart is one that I’ve come across that allows you to put things on a screen and lay out like a decision tree. I think Gliffy does it as well. Did you look at any things like that? Or was it just you working on this, did you have a team working on it? I have like a billion questions here.
Justin: No. I’m laughing because we started out using Balsamiq, which is like a markup tool we use for wireframing. There was three of us working on it. The reason we were using Balsamiq is it’s easier to collaborate. Balsamiq is a brilliant product but what worked better for us in the end is we bought three white boards and set them up in each of our offices and literally just spent time mapping out one process at a time, mapping out on this giant white board. I think the white board is about 4 meters wide and so we could get everything on there. Once we had it on the whiteboard, we then probably add post it notes for things that needed to be done at the various stages. For example, if we had day one call scheduled, email scheduled, we’ll have a post it note on the call and email and then someone would then write the script for the call and the script or the email. Within all of those, we then take the post it notes off when those items were done.
I’m giving you the most low tech solution to this as possible. But there’s something about pen and paper when I’m planning out. If I don’t know the answers, I always prefer to do things on pen and paper. When I do know the answers, that’s when I like to use software because it’s easier for me to put it in and share it with the world. But I think sometimes, just having a whiteboard or pen and paper because you’re going to cross out a lot of things or you’re going to look at a lot of things and think, actually this doesn’t makes sense or we can tighten this process up. I think I’m pretty tool agnostic and I don’t think the tool is the most important part, I think getting it documented and getting it down is the most important thing. That advice goes for any kind of marketing automation. If you’re about to use InfusionSoft or Ontraport, before you’ve even considered buying the software, you really should have your marketing process mapped out at least on paper to begin with. We started using a combination of different tools like those on the call side, we used Woodpecker for emails and SalesLoft for the calls. They’re both great tools for getting a call cadence going in there. But in the end, we ended up building our own solution in house because it was just easier to bring everything on the one roof and have all the information in one system.
Mike: The reason I dived into that piece of it, how you mapped it out and how you designed it and what things to try, you said initially Balsamiq and then you switched over and just used these massive white boards. That scenario where I’ve run into challenges in the past and talking to other people, and that tends to be a big hang up. I’ve tried using Balsamiq before as well. I love Balsamiq but for that particular thing, it doesn’t work well and I haven’t really found a good tool that does work well for that. Really, you change things so often that most of the time, when you’re using those tools to lay out a workflow, it’s more challenging to make the changes than it would be if you just had some graph paper or whiteboard and just erase things, move things around. That’s the part that is a challenge to deal with, but I think once you get past the point where you’ve got everything, then it makes sense to take that and implement it in something like Lucidchart or Balsamiq where you can lay it out and then print it and say this what our process looks like because this is more a finalized version of it. When you’re just prototyping, I’ll say, the software actually tends to get in the way, I think.
Justin: Sure. I think the most important thing is getting started. The problem with softwares is – I always get this wrong when I say it – analysis paralysis or paralysis analysis. It creates this fear because people trying to get to the optimum solution, they’re trying to have everything in place before they take on this big overwhelming task. But actually we found that the day we started mapping things out is the day we are able to consistently get people to do the right actions rather than leaving it up to their discretion. Because when you leave things up to people’s discretion, it doesn’t always go the way that you want it to go.
Mike: I couldn’t agree more. That’s a fantastic point. The software just getting in the way and then try to make sure that people are all on the same page. Something else that jumped out at me was try a couple of different tools and ultimately, you would’ve ended up building your own. What was it that made you make that decision because building software, especially since this is not really a tech company, that’s not your core function is to write software for a company that serves lunches and dinners to other companies, that’s not what you do. But what made you make that decision because that is a big leap from, okay, we’re doing our services business over here and that’s how we’re making money to, okay, let’s build this piece of software as an in house tool to help us reach more customers and sell more into our channel. To me, that seems like a huge leap. What went into that decision making process?
Justin: Yeah, it is. In hindsight, if you ask me would I have done it again, I would have but only just. It was marginal whether it was wise to build this out ourselves. Now I’m a fan of using everything off the shelf but I’m also a fan of using technology. As a company, we won Online Business of the Year last year, which is ironic because no one here sees this company as an online business. But from day one, partly because of my influence and my background, we’ve always invested heavily in technology and that has been one of our USBs, that has been one of our main advantages. We’re probably one of the only smallest services company doing what we do that use things like Slack and GitHub for non-coding things and intercom on a regular basis because that’s just what we’re used to using these in SaaS or technology startups.
I think sometimes being a developer is a bit of a gift and a curse because you tend to build things when you shouldn’t because you can. I think knowing when not to build and when just to get something off the shelf is equally as important as building the perfect piece of software, but in this case because we’ve started from day one with our own custom management system, we almost have everything under one roof with the exception of maybe the accounting package, everything that we have is in this system. There’s actually a huge advantage for us in being able to have everything new in terms of campaigns and marketing and all the information on these leads in one place rather than having to use APIs to cobble something together and then have to have a dashboard to see what’s going on.
Mike: All that you just said makes a lot of sense. It’s sometimes cobbling tools together is actually harder than having just one tool that does everything. Even if it’s not a best of breed technology where it does everything at the top level. Sometimes, just having one thing that does everything that you need adequately is more than enough and it’s actually more helpful than trying to deal with data being passed between one tool and another or hey, why didn’t this get there or was this delayed or is there an error of some kind. Sometimes those web hooks just don’t work.
Justin: Sorry to cut in, Mike. Just to add one thing which I think’s pretty important as well is the whole kind of buy and build. I’d say. In hindsight, it always makes sense to build if what you’re doing or what you’re building for is what you’re defining is one of you core expertise or central to your business. That’s why it’s really important to know what business you’re in. We worked out we are in the service business as opposed to product business or specific services that we deliver, and part of that is technology. It’s about facilitating what we do through technology and that is something that’s really central to this particular business. That’s why we’ll invest probably heavier in technology than other businesses of our size. That’s because that’s our business model. I think if you’re a SaaS company and you are all about the product then it doesn’t make sense to build third party tools to help you sell that product and it sounds ridiculous because you’d think every SaaS company’s about the product but they’re not.
Someone like HubSpot. In the early days, I see them more being about the distribution of the product, they were a very, very efficient sales machine. If sales is what you do, or sales is what you want to do and you need things that you can’t easily get off the shelf, then I think it makes sense to build because that’s your core expertise and then you can really develop a specialism in there that allows you to recruit quicker, train quicker and ultimately get the products out to market quicker than you can using off the shelf stuff.
Mike: You touched on this very briefly but do you also have included in the software that you built entire life cycle management for the customers? Do you have order processes and stuff in there? Or is it really just managing your sales process and then at that point it cuts off and then there’s some other system that you built or something off the shelf that you’re using to do the day to day servicing of the customers?
Justin: No. We have everything under one roof. I think that’s been one of our main competitive advantages for a while. Everything is connected into the same system, the system that customers see on the front end of the mobile apps that even dispatch people, drivers use, everything is connected into the same system. That helps massively. It’s a huge investment that you have to make because the time investment and a maintenance investment but it just gives you that little edge over your competition when they’re using off the shelf software and there are things that they can’t do but you can that are really specific to the customers that you serve but make a difference that add to that overall customer experience.
Mike: That makes a lot of sense. I guess for the listener who is thinking about this, what is it that you would recommend to get started, if you’re a solo founder running a business, where would you start looking either for resources or in a way to implement this in your own business to do some sort of an outbound sales process? Because I think that most people running, for example, a SaaS business, when you’re starting out, I’ve done this with Bluetick for example, a lot of it has to do without reaching those very early days because you need to reach out to people because I have no idea who you are, you don’t really have the time for tweaking marketing campaigns and it takes too long to get one, just get them started up, but it also takes a while to optimize them to the point that you can make any sort of return on your investment. In the early days, you’re really just trying to get in front of people who you think are going to be a good fit, so you do a lot of outbound stuff. What is it that you would recommend for people to get started with that?
Justin: Especially if you’re a solo founder, or there’s only one or two of you, in the early days, the outbounds that you do isn’t sales, it’s customer development. The first probably 50 clients that you get on board. If you see it as sales, it’s going to be a wholly inefficient process because your customer acquisition is going to be through the roof because of all the time that you put into getting those clients and then making the little tweaks or changes, or even having meetings to decide whether you should change your product roadmap based on what all these clients are telling you. But I think in the early days, it’s more about customer development because it doesn’t need to be as efficient, it doesn’t need to scale as much because you’re actually getting something from all the people you speak to, whether they sign up or not and it’s crucially what helps you shape the products and make the products a little bit better than your competition. I think when we initially started doing this, we originally outsourced. Those reps we get from telemarketing agencies here in the UK and we generally paid a day rate of around £120 £150 a day which is about $170, and that would get us a full day of calling that gets around 80, 90 dials, 34 connects and then we’d know from that we’d usually get 3 or 4 appointments. That was pretty scalable because we could keep scaling up.
I’d probably recommend that anyone who is thinking of doing this but doesn’t know what their numbers are yet, try that out first of all. Find a small agency that can do this just so you can get up and going, just you can get an idea of what you’re numbers are and should be.
Personally, I agree with the common advice that it should always be the founder that does the first set of calls and you should do in order to get an idea of what your script is and what objections people are coming up with, and where you want to go. But at some point, you have to face the reality that you’re probably not going to have time to do this as much as you should do to get those over next 10 or the next 20 customers on board and that’s the point where it’s probably a good idea to outsource one, just to get data, but two, just to get the ball rolling. I think sometimes, doing something, although it’s not you, and although it’s never going to be done as well as if you were doing it, it’s better than not doing anything at all because you’re busy with the million and one other product related things or customer support related things because there’s just one or there’s just two of you.
Mike: One thing to point out there in what you said is there’s a distinction between customer development and sales. I think in this particular context, I’m using them interchangeably because you’re right, those early days really are about customer development and you’re spending way more time on any given customer than you would otherwise, especially in the future because it’s not worth the time to spend with them. But, at the same time, you need those early people and it’s almost like a lost leader, you have to spend that time in order to learn so it’s not that you are getting a negative ROI on those customers, it’s really you’re spending the time and money to learn what needs to be done in the future, not how do I make this a repeatable process that is going to scale to infinity and optimize it. Your goal is not optimization, your goal is just have those conversations and learn from it, and that’s what you’re paying for. That’s the time and money investment. The money that you get from them is almost meaningless. Obviously, any sort of revenue helps but you need to know the stuff that goes into it in order to be able to do anything with that information. You can’t operate in a black box.
Justin: I think the pretty important thing to realize as well is that the [00:30:44] book comes into play where 80% of your results are going to come from 20% of all of the things that you try. With us in the past, we found that something new comes along, we will give it a try. Sometimes our execution is poor, sometimes our execution is great and I’m sure that affects the end result, but time after time we found that outbound for B2B is what works out. Outbound as in outbound dials, outbound getting sales people out to that person, that’s what works. We’re seeing better results with things like Facebook marketing, we’ve always had results from PPC, but you’ll generally try a lot of things and a few of them will work. I think it’s a case of from the early days, if you’re just getting started, be prepared to try maybe three or four things in the first instance but then instantly double down on the first thing where you get a little glimmer of hope where you see that working, because it’s all too easy to spread your time and your budget and your attention across multiple channels. But the chances are one of those is going to work for you better than the others, and it’s best that when you experiment, you really double down and put the time and attention into that one that does work.
Mike: You’d also mentioned the possibility of outsourcing this. What sorts of things should you avoid or at least be cautious of or mindful of when you are trying to outsource this? I think there’s the two different buckets that you pointed out. Like if you’re very early on, the founder should really be doing this. But at some point, the founder really needs to take a step back because there are other areas of the business that you need to pay attention to, you can’t always be focused on that customer development because there’s engineering or support or various other things that need to happen. But in terms of the sales processes itself or the outbound process and outsourcing it, what sorts of things should people be cognizant of when they’re looking specifically at that?
Justin: I think one of the key things to realize is there’s a difference between knowing that you should be doing something and actually doing it. I’ve fallen into this trap plenty of times where I know I set myself a goal of maybe 20 or 30 calls a day, either for customer development or for sales. But if you’re not getting around to doing that one because you maybe procrastinating because you hate the idea of telemarketing. Telemarketing is for the wrong person, it can be so destroying. You get a lot of rejection, you feel like this is a waste of my time, I should be coding, or I should be designing. If you’re not getting the job done, I think at some point, you have to be realistic and face the fact that this thing is terrifying, it does need to be done by someone. I think in that case, even if it’s not you, it’s better to have someone doing this but you do really need to have a grip on the process from the really, really early days because you need to be able to tweak that script on the fly. You need to know what are the pain points that you are trying to get people or hook people with in order to get a response from them, you need to have an idea of what your script looks like.
Before we start telemarketing, we always send them our self telemarketing guide which is one, it’s kind of our script but more importantly it’s an explanation of each point in that script and why we’ve put that in there and it’s simply for that fact that everybody has their own different style of sales and we don’t want people to read from a sheet of paper, but they do need a script because there are certain pieces of information we need to get from each call. We give people the objective of each call, what we’re trying to do, we tell them, “Look, these are things that is necessary to get from this call in terms of information and these are things that if you have rapport, or if you’re able to get it, get them as a bonus, but don’t worry too much about it because we’ll get these on later contacts with that person. And this is the main objective of the main goal of the call.” I’ve been able to put that together, requires you to hit the ground and work from the front lines for a bit and have enough experience to know what you want from that agency.
Mike: Yeah. I think having goal for each call is an extremely valuable piece of advice just because it’s very easy to get on a call where you’re trying to talk somebody about whatever it is that you’re developing, you’re in that customer development phase and run an idea by somebody or float some mockups in front of them and say, “Hey, what do you think about this?” Having that goal of the call in mind in advance of having the call really helps you dig into it and get to the heart of the matter rather than just having this open ended thing where at the end of the call, you’re lost and you really don’t know what to say because you didn’t have a goal in mind to start with. That’s a huge piece of information.
Justin: I speak to a ton of people who have a SaaS company that just started up and they try outbound so they’ll get a list, a small list of maybe 50 people, and they’ll start calling for that list. Typically what happens is they have their own responsibilities, they have life getting in the way and they have things throughout the day to do. They’ll probably get maybe two, three hours in the day where they start calling but because they hate it or because they’re not used to it… I think if we spoke to 10 founders, I’d say 8 hate the idea of call telemarketing and that’s probably why they’re not doing that as a job or profession, but because you’ve got this anxiety about it, that hour or 2 hours that you spend calling, it feels like a lifetime. What will usually happen with the other distractions that come in, you make 15, 20 calls. You then force yourself to do that again, like a second day and you make 15, 20 calls, you haven’t perfected your script, you’ve just started, you’ve done no kind of tweaking, testing, testing different messages and then as a result, you get no result, and a lot of people get disheartened and give up and they’re like, “You know what, we’ve tried outbound and it doesn’t work for us.” If you got 40 clicks from a PPC ad or a Facebook ad you didn’t convert, you think nothing of it, you just think I need more traffic, obviously.
But it’s exactly the same with calls, you do need to make a significant volume of calls, especially if you’ve not tested your script or your message or your approach out yet and it really is in the early days about churning through in getting data, knowing that you’re probably not going to convert that efficiently but you need to do it in order to work out what your messaging is. I always advise using cold email in the first instance as a way of breaking through that resistance to testing and finding out what the message is. If you’re hesitant about making phone calls, find 1000 people that fit your target criteria and over days, do 100 emails a day, or maybe batch 50 emails a day. See the responses you get and tweak your emails until you start hearing the message that works and then go on to making a few phone calls with that same messaging.
Mike: One recommendation I’d have in that situation is that either during the call itself, or immediately after each call, write down all the notes or stuff associated with that. If you have the flexibility or the leeway or relationship with people to make the notes on the call, that’s great, otherwise, recoding them is a good option as well, because then you can always go back to them, maybe even have those audio calls transcribed so you can go back to them later. I’ve got 75, 100 pages worth of notes just from calls that I did early on with Bluetick and I can always go back to each one of those calls and say what is it that we talked about and where are the important pieces that I took away from that conversation and use that to tweak future conversations, or I can hand that entire file to a copywriter and say, “Hey, these are all my notes on all the different calls and this is what people told me that were important.” It allows you to have that base of information to move forward with because if you don’t capture it at the time, you’re probably going to forget 90% of it. Which is terrible because then you can’t even transmit it to somebody else.
Justin: For sure. When we train new reps, we actually tell people not to make notes on the call. Every bit of a darling software now should record. We have our own dialler in the CRM that we built and it just uses Twilio and then grab the recording. But the reason why we tell people not to make notes, because we find that the minute people make notes, unless they’ve got this weird brainman likeability, they can do one thing well. If they’re taking notes at the time, they’re probably thinking about the notes they’re making and they’re not listening to the person on the other end of the phone, and one of the key things if you’re going to get a result is to be able to listen and take the little subtle keys that the points when people maybe switch off when you said a certain thing or the point when people get excited or you’ve got them on a hook when you’ve said something else. It’s really important to listen and to try and find that person’s pain or that person’s problem, and I think being fully present on that call and being able to do that, you tend to see a better result so we get our reps to listen to the recordings and then transcribe the recordings themselves later, to think there’s something important in there, but we generally tell them not to write stuff down while they’re on the call.
Mike: Justin, all of this has been fantastic information, really appreciate you coming on. I think that’s about time to wrap us up. Where can people find you if they want to learn more? On Twitter, email, website, what do you got?
Justin: Sure. You can catch me on Twitter. Twitter.com/flipfilter, which is an old name I’ve had for ages and like many people want to change but it’s been with me for too long, so I can’t. You can also find me at exitplan.co/digitallywed or you can catch me at optimumfeedback.com.
Mike: Again, thanks for coming on. If you have a question for us, you can call it into our voicemail number at 1-888-801-9690 or you can email it to us at questions@startupsfortherestofus.com. Our theme music is an excerpt from We’re Outta Control by MoOt used under Creative Commons. Subscribe to us in iTunes by searching for Startups and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening, we’ll see you next time.
Episode 337 | Hacking (Customer) Acquisition with Sean Ellis
Show Notes
In this episode of Startups For The Rest Of Us, Mike interviews Sean Ellis, CEO at GrowthHackers, about hacking customer acquisition. Sean defines his coined term “growth hacker” and talks about some topics in his upcoming book that draws from experiences from past products/companies he’s worked on including Dropbox, Eventbrite, Lookout, LogMeIn, and Uproar.
Items mentioned in this episode:
Transcript
Mike: In this episode of Startups for the Rest of Us I’m going to be talking to Sean Ellis about hacking customer acquisition, this is Startups for the Rest of Us episode 337. Welcome to Startups for The Rest of Us, the podcast that helps developers, designers and entrepreneurs be awesome at building, launching and growing software products whether you’ve built your 1st product or you’re just thinking about it, I’m Mike.
Sean: And I’m Sean.
Mike: And we’re here to share experiences to help you avoid the same mistakes we’ve made. How are you doing this week Sean?
Sean: I’m doing great Mike, how are you doing?
Mike: Good, I haven’t talked to you in a while.
Sean: Yeah, it has been a while.
Mike: I think the last time we were in a room in person it was back in MycroConf in 2001, is that correct?
Sean: Yeah, I think that’s correct and when in Vegas you don’t really remember too many conversations that you have because there’s so much stuff going on.
Mike: Do you remember the hot sauce incident?
Sean: I don’t.
Mike: Oh okay, Sean’s hot sauce flew from the stage, okay we’ll skip over that. So, I wanted to have you on the show to talk about a
[00:01:00]
Mike: new book that you’re coming out with and it’s called Hacking Growth, which I think it comes out pretty soon. This episode goes life on the 25th and it’s right about that time, right?
Sean: That is the day that it comes out, perfect.
Mike: Yes, so fortuitous Tuesday I guess we’ll call that. So, to give the listeners an intro to you though, you were the Growth Marketing executive at DropBox, Eventbrite, Lookout, LogMeIn, Uproar and you were like 1 of the 1st people hired in a marketing capacity each of those companies, is that correct if I remember correctly?
Sean: That is correct, Eventbrite would be the only 1 where there was actually somebody already going marketing when I got there but all of the others it was primarily engineers and I came in and started thinking about how to grow those businesses.
Mike: Got it and then you were also the founder of Qualaroo which you sold off last year, if I remember correctly, right?
Sean: That’s right. Yeah, we sold that February, March of last year and ha d a good run for a few years but really wanted to focus our efforts on Growth Hackers.
Mike: And that’s where you’re the CEO at today, it’s Growth Hackers dot com, there’s a fairly large community there and then you
[00:02:00]
Mike: also, coined the term Growth Hacker back in 2010.
Sean: Yeah, that was for better for worse, some people love it and some people hate it but I guess the good news there is that very few people ignore it, it’s evoking emotion.
Mike Yes, it does and I have heard mixed feelings on that, so I guess straight from the source, how do you find Growth Hacker, like what does it mean to you and how do you explain it to people?
Sean: Yes, so for me it’s about rapid experimentation across all of the growth levers. So, it’s really those growth levers sit across the customer journey where to contrast that against just marketing, marketing is generally externally focused. So, it’s looking only at acquisition and marketing is about just anything that’s important for driving growth in the business, you’re experimenting in those areas and the fact is that most of the really powerful levers actually sit in the product team’s area and so that’s what I think 1 of the big things that differentiates compared to marketing.
Mike: So, if I understand that correctly, you’re really
[00:03:00]
Mike: looking at Growth Hacking as a mechanism for taking all of the things that you’re currently doing and optimizing them or making them better, is that a fair assessment versus something like marketing where you’re doing content emails, searching engine optimization and that kind of stuff, is that correct?
Sean: Yeah, well there is optimization is definitely an important part of Growth Hacking but discovery is also important, so it’s taking everything from discovering new channels which would normally fit into marketing, so that part is still I believe really important for growth and a Growth Hacker should be doing those things but you should also be experimenting with what is that 1st user experience in the product, what should that look like, how do you get them to a really valuable experience with the product, how do you drive continued engagement, what are your different monetization levers for driving revenue growth. So, it’s really looking about what are all of the different levers that you can pull to drive growth of both customers and revenue in the business.
Mike: Okay, so with that in mind what are some of the most common misconceptions that people have about
[00:04:00]
Mike: Growth Hacking?
Sean: I think probably the biggest 1 is just that there’s these magic silver bullet kind of growth hacks that you just go and pick a silver bullet of growth hackers, so that would be 1 or another would be that you kind of, it’s about trickery, it’s about coming up with ways to trick users to find up for products and sometimes it’s just described as really clever marketing. I think all of those really miss the mark. What I was going for when I coined the terms was, I was looking at Dropbox where I was getting all of these resumes in with people having a kind of traditional marketing backgrounds or even online marketing backgrounds and they were so focused on everything a marketer could do or should do and I knew from my own experience that there was a smaller set of things that really impacted growth and then there were a lot of things that were just ignored by marketers or marketers didn’t have the access to them, they just didn’t have the right sort of influence in the organization that are also really important, so I was really trying to carve out a description
[00:05:00]
Sean: of what is really important for driving growth in business based on my own experience and when I looked at companies like Facebook and LinkedIn that were also growing quickly, what were they doing differently and how can we kind of make a description of a role that is more aligned with what really matters for driving growth in a company.
Mike: So, it’s really about for those high value multipliers so to speak, right?
Sean: Right and you can chaste that where I had a lot of startup CEOs at the time that were reaching out to me and saying hey can you maybe come and help us get some awareness in our company and you know I think that’s kind of the 1 big misconception of a lot of people in the startup world that’s like oh if people only knew if we could just some awareness we’d be killing it but the average person sees 3,000 advertisements a day. Nobody with a little start up salary is going to be able to get any meaningful awareness off of just running a few advertisements and having people see them, you build growth
[00:06:00]
Sean: through experiences and through a return on investment where you’re actually tracking your ability to convert, generate revenue and that was another big part of it, was marketers were kind of thinking like the CEOS and CEOs who were hiring marketers were looking for those types of marketers and you know in both cases they were really disappointed with the results most of the time, so you had this really high turnover with startups among marketers who were trying to take a traditional marketing play book to growing a business, a startup and just not very effective.
Mike: So, is that the core audience for this book, is it people who are coming in from a marketing position or would it be useful to developer slash CEO or just at like an engineer inside the company?
Sean: So, I think the reality of how growth works, whether people want it to kind of cohort it this way or not, it’s the collection of kind of all of the things that people are doing in product, which includes the engineers, which includes sales people,
[00:07:00]
Sean: which includes marketers and really they should be obsessed around that kind of journey that the customer takes to becoming a valuable customer of the business and so everybody who participates in that growth or in that value creation process should be interested in this book and CEOs in particular should be interested because how do you coordinate those efforts across a group and we’ve really distilled that down to a process where you can effectively manage growth across the really powerful growth levers to expand customers and revenue in a business.
Mike: I did notice when looking through the book that you did have sections in there where it was really aimed at people who were trying to implement it and some of your comments around that were specifically that you really need to have that executive level or management buy in order to make this stuff happen. Talk a little bit about that because I’ve seen things in larger companies where to get anything done almost requires CEO approval but is that the same thing in smaller companies as well??
Sean: Well so yeah, the bigger the company gets
[00:08:00]
Sean: or the older a company gets the more set in their ways they are and they’re not going to be able to kind of break down some of those functional silos that are just kind of historically how companies have been built without the CEO really playing a big role in that and so I think that’s what’s prevented a lot of bigger companies really embracing growth hacking as an effective way to growing their business. It’s really powerful so I think overtime they will make the transition to more of a cross functional full customer journey and work all of the levers of growth but in the short term it’s really what holds it back is basically a lack of kind of buy in necessarily from the CEO and then there’s a lot of things that you can do once you have that to make it effective and that’s a lot of what we cover in the book.
Mike: So, I guess to start with the outline of the book, you’ve got it broken down into 2 parts, the 1st part is the method of implementing it so it’s more or less a process and it talks about building the growth teams, determining what your type of product is, whether it’s a must have product
[00:09:00]
Mike: or something else and identifying the different growth levers in the business and then it talks about testing it and then in the 2nd half of the book you refer to it as the growth hacking play book where you talk about hacking customer acquisition, activation, retention, monetization and then bringing all of that collectively together to help create a cycle. Could you talk just briefly about what you mean about having that cycle in place and how that all ties itself together?
Sean: Yeah, so what you see in really effective growth organizations and growth companies is that they end up really building a rhythm around growth where they understand sort of how growth works within the business, what are the key drivers of growth within the business and they manage those and continue to optimize them but as a team they’re constantly figuring out new ways to enhance growth, so it’s basically analyzing the situation, prioritizing all of these ideas that they can generate to improve that situation and then running those tests and through the tests they learn and so continuing
[00:10:00]
Sean: to just run this process that helps them learn new, more effective ways to drive growth in the business is ultimately the outcome that everyone should be shooting for and what we’ve gone through in the book is how to really get all of the pieces in place to where you can get into that really high testing tempo rhythm as a team that’s a common element that you see across all of the really fast growing companies.
Mike: So that’s really like a systemization of growth hacking, so that you put all of these different pieces in place and then you just repeat them as quickly as possible, right?
Sean: Exactly and you’re just accelerating that fly wheel of growth and that comes from a deep understating of how growth is working and through testing you’re just keep learning new, more effective way to drive growth and you also learn what doesn’t work through the testing because not everything is going to be successful when you’re testing it but every test that you run you get smarter about what it takes to grow your business.
Mike: Could you talk a little bit more about the types of things that fail and 1 of the things that I’ve heard from people or their criticizing of the whole
[00:11:00]
Mike: concept of growth hacking is that they’re like oh there is not silver bullet, you know you can’t just growth hack your way out of anything, it doesn’t work that way and I think to some extent the critics are right when you phrase it in that particular way but I also think it’s important to realize not everything is going to succeed or there’s going to be situations where you don’t have a clear understanding of whether something is even working, if it’s moving the needle for you. Can you talk briefly about those types of situations and how do you recognize those?
Sean: Well so the 1st part that we really cover in the book that’s a critical prerequisite for growth is making sure that you have value in the 1st place, so if growth hacking doesn’t work or if you get kind of fleeting spikes of growth and then it comes crashing down it’s usually because the finish line for the customer is not a worthy finish line and there’s no reason to sticking around and keep using the product and if you can’t retain users it’s very hard to grow a user base, you’re basically just replacing customers month after month and in a SaaS
[00:12:00]
Sean: business you really see the pain of that, other businesses it might be less clear. So that’s the starting point, it’s just making sure that you have a product that’s a must have for users and then once you understand that, it’s about breaking down that path that gets people to that spot of becoming a must have user and then figuring out ways to improve the journey from consideration all the way to saying gosh I can’t life without this product. So, when you talk about silver bullets and hacks along the way, we definitely are not recommending that, here’s 6 things to do that are going to work every single time. I think there are certain principles that help govern what’s going to work and what’s not going to work. So, like if you read [UNKNOWN] there is some really good kind of examples of just human behavior but the individual programs and experiments that you run, you don’t know if they’re going to work until you run them and so you need a really good process for prioritizing which ones you’re going to
[00:13:00]
Sean: run and be focused on the area of your growth engine that should have the most focus because you have the most opportunity for improvement.
Mike: That makes a lot of sense, so the thing that I really wanted to drill into with you on this episode was the idea of hacking customer acquisition and you and I talked before on the podcast about identifying something that our listeners are probably not going to hear in other places. So, in digging into the hacking customer acquisition, 1 of the examples you threw out was Dropbox, that was kind of the 1st example that I came across in that section and the commentary in there was that there were initial cost of acquisition was around 400 dollars but they were only making about 100 per user each year, so clearly, they need to find some other acquisition strategy to make that type of business work. Can you talk a little bit about that process of identifying what was going to work for them, because you were there very early on in the process for Dropbox, so it’s not as if you weren’t directly involved in this, it’s not as if it’s a historical look from an external source?
[00:14:00]
Mike: I mean you were right there.
Sean: Right and that’s one of the great things about the book is we do bring in a lot of examples from other companies and you know talking with other growth leaders but a lot of it is based on my own experience and what I’ve done specifically in these companies to drive growth and Dropbox in particular, what we wanted to do with Dropbox was kind of explore the edges of possibilities around different channels and so we did do some exploration in basically the Google ad words, kind of paid search marketing just to see what the economics look like there and we quickly saw that the economics were not good in that area but at the same time we saw that there were all of these other great opportunities for growing the business and the 1 that was working literally, so I started the week that Dropbox launched at Tech Crunch, kind of the equivalent of Tech Crunch Disrupt, I think it was Tech Crunch 50th at that time but they launched the product, they got some good momentum, they had a pretty good user base during the beta but this was when it 1st became available to
[00:15:00]
Sean: the public and what I saw was there was a lot of passion for the product in that early user base and so that was 1 of the 1st things we did, was how can we tap into that passion to grow the customers and really trying to just break down how is growth happening already and what 1 of the thing we did was we found that growth was coming through a number of channels, so like if somebody wanted to share a file inside Dropbox, that was pretty effective. Somebody would share a file, the person on the receiving end would click on a link to get the file and they would be able to lightly experience Dropbox, so there was a small flow of people coming in from there, there were people coming in from shared folders and then there was just a lot of natural word of mouth was well and so it really started with trying to understand what the motivations were behind those people, ultimately people who love the product and were sharing just through word of mouth about the product, trying to understand those people and then kind of connecting the dots. How do we
[00:16:00]
Sean: get someone who discovers through a file share to actually, eventually understand the 360 view of what Dropbox could do for them and then end up loving Dropbox. So a lot of it was documenting initially and then really capturing what was our data around each of those on boarding flows and then a lot of surveying I think I probably had feedback from you know hundreds of people every single day through different surveys I was running, just to figure out what were the motivations and ultimately perceptions that people had throughout their journey, depending on each of these paths and then that informed our ability to prioritize where should we experiment 1st to try and increase those flows. So not just increase people coming in through those flows but how those people actually convert and become those active users on the product.
Mike: So, what were some of the leading indicators that you used to determine that you wanted to hack the acquisition process versus like activation or
[00:17:00]
Mike: retention or monetization, because I mean you said you experimented with the acquisition through paid ads and clearly it wasn’t going to work but what was it that pointed you in the direction of acquisition versus those other channels?
Sean: So we really didn’t just focus on 1, we were optimizing across the full path but the starting point was just figuring out how are they discovering this product and depending on the path that they came in, understanding what were their motivations on that path and it just seemed like the good opportunity initially was what could we do to, so in a sense you actually could say that we were more focused on activation for those channels initially and then as we improved that activation, then we started to think how can we get people to share more files, how can we get people to do more folder sharing and ultimately we built in a incentivized referral program so that people even started to just do natural word of mouth more often but we built
[00:18:00]
Sean: kind of incentives across each of these paths that were already happening and that really helped to accelerate them.
Mike: So, you just talked about how you had done like a lot of surveys and you had hundreds of them coming in everyday that you were looking at and trying to parse through. What was it that you were trying to find with those surveys?
Sean: So 1st thing I’m generally trying to figure out is intent, so like intent is this really powerful force for a marketer to work with and marketers have their own agenda. They’re like love me for this, but the other person is like in strong momentum looking for something specifically and so it became really important to understand what that intent was and then we were also trying to figure out at which point did they realize that they wanted the product more, it was more than just wanting the file that somebody had shared with them, but they wanted the product for sharing files and so really trying to understand what that transition point was and kind of crowd sourcing it with people who were making that
[00:19:00]
Sean: discovery on their own and the more that we understood those people, that gave us a clear picture of what was happening. So, 1 of the things that we kind of experimented with early on was very quickly, depending on whatever their intent was, telling them about all of the benefits that they could get from Dropbox and when you think about it, like probably the biggest barrier to the adoptions of a technical product is complexity. That’s probably more of a barrier than even price and so just like giving them a list of all the things they could do with it was actually causing a lower conversion rate than when we really kept it focused around what their intent was and trying to convert their intent 1st and then ultimately give them more of a 360 degree view of the product once they were more locked on than what their initial intent was.
Mike: Is it something that you would generally recommend for most business, especially when they’re starting out because it seems like to me the place most people start out when they’re launching a new product is there focused on the features page
[00:20:00]
Mike: and everyone is like no, no, no you don’t want to do that, you want to pitch the benefits and of course from there’s it’s like okay well now instead of the benefits what is it that the people are actually trying to accomplish.
Sean: Yeah, so again it’s this idea of test, test, test, experiment, experiment, experiment. That’s what you see kind of through this whole process, so initially what I’m trying to do in a company is like kind of get out of my own head and just get enough people coming through the funnel so that I can try to figure out who is going to stumble in to what the product does that’s really valuable to them and get outside of those assumptions because I think it’s really hard to guess that ahead of time. You can have a bit of a vision as you build the product but a lot of the most successful products end up being valuable for unintended reasons, we definitely saw that at LogMeIn for example. So, the best benefit that I had with DropBox was through the beta, the team had done such a good job to build the flow of traffic coming in there that I didn’t have to focus on building the initial flow, I could right out of the gate
[00:21:00]
Sean: focus on understanding the flow. So the place where I actually start, like at the heart of things is I find that people who absolutely love the product, and I’m able to uncover that by just asking existing users on the product that are using it pretty regularly how they would feel if they couldn’t use the product anymore and I’m trying to hone in on the ones that they would say they would be very disappointed without the product and when they say that, that tells me like they’ve discovered something so valuable that they’re not going to churn and they’re telling me that they consider this a must have, if they would be very disappointed without it and so understanding that, that’s going to be the key to basically being able to build an overall benefit or promise of what the product will do for people that sets the expectation on what the product is truly great for and I think that’s 1 of the mistakes that a lot of marketers make, is that they initially kind of build that promise just on their own guy or own the founders vision
[00:22:00]
Sean: or whatever it might be but if it’s a promise that’s not aligned with what the product is truly great at delving it’s going to attract the wrong type of people who aren’t viscerally passionate about the product. So, start with understanding what that must have experience is, figure out the benefit that reflects that experience and then working externally to get hat into the message to set the right expectations goes a long way in just building a more passionate customer base and it starts to inform those customer acquisitions efforts as well.
Mike: So, when you’re trying to I guess hone in on what that compelling message is, is that the place where most people should be focusing their efforts early on?
Sean: So, it really depends, like I said I had the luxury at Dropbox of already having a decent flow of customers, so early on for most companies it’s that the initial efforts are how do I actually get any kind of flow of customers into the product and so that can be a really manual process. I wouldn’t obsess over ROI at that point, I think that’s another mistake that
[00:23:00]
Sean: people make in the very early days is they’re trying to tweak the economics of that customer acquisition, I would essentially say this is my learning budget originally and sometimes you don’t even have to spend anything at all, you can get more through just manually going out and recruiting users but it’s not about trying to find that big scalable challenge that’s going to pay, you know give you a great return on investment. Early on you’re just trying to convince some people to come in and experience the product or you can figure out if you have something that’s worth them sticking around on and then if you don’t you have to hit the reset button in the business and kind of go back to square 1 where you’re working on product market fit, but assuming that you do have that. Then what I would do from there is then to start to optimize that 1st user experience just enough so that by the time that you’re focused in trying to get the economics right in some channels that you don’t have something that it’s like it’s just
[00:24:00]
Sean: so, convoluted to get started with a product that you’re going in and you’re trying to do those ting with both hands tied behind your back and your odds are stacked against you. So, you want to get the basic kind of low handing fruit out of your on boarding funnel so that by the time you’re starting to do some channel testing where you’re actually trying to find that scalable way of trying to find customers it has a fighting chance of working.
Mike: Yeah and I think that’s sometimes pretty difficult to go through that process and realize how I spent all of this time building this product and working on it and it’s really not making any money and I would like to get to that point quickly and the solution is not necessarily a ton of traffic at it because if it’s not, when it converts everybody’s going to fall out and you’re just kind of spending a lot of money and a lot of effort for not good reason.
Sean: Right, so you go from this kind of period of when you’re trying to get product market fit, that’s a super patient process, so until you’ve created something that people care about, that’s where you just kind of blasting a little bit of traffic at it and those people don’t seem to care and
[00:25:00]
Sean: and then you’re sending more, you make some iterations, you send more but once you get that signal that it works, you do start to get some more urgency once you get the signal that somebody considers this product a must have, then you do have some urgency about pretty quickly trying to run some experiments through your funnel to figure out where it’s broken and so things like user testing dot com can be super valuable at this time of just giving someone a task of trying to come in and sign up and use your product for the 1st time and being able to watch videos of them coming in, super insightful. You can make a lot of really easy usability fixes there and then over time you want to start to AB test kind of different paths to go in there, but that requires a lot more traffic so some of it’s going to be more the usability testing to get those initial lists and then once you go out and you start to build traffic and you actually have volume coming into the funnel, that’s where it’s a little bit of a back and forth between the acquisition and activation, so if you’re really having a hard time with your acquisition
[00:26:00]
Sean: channels, maybe you need to work a bit more on the efficiency of your conversion and your funnel and then go back and then work the challenges again but it’s a little bit of back and forth but you usually at that point you’re back and forth between activation and acquisition.
Mike: So, if I were to ask you what sorts of examples of acquisition hacks that you’ve seen or that you’ve used before or that you found to be extremely helpful in the early stages of the business, like what sorts of things would fall into that category and I realize that these things are probably not going to be able to apply across the board to every type if business but I think there are probably some common ones that I think most people could start out with. So, let’s kind of break it down and say look okay if you’re just starting out what sorts of things would you try 1st?
Sean: So, the 1st question I would ask in any business is there active intent for this product? Do people know this category exists and they’re looking for solutions or am I doing something that’s really innovative that kind of nobody knows it exists? In that case, you’re not going to get any benefit from like going to
[00:27:00]
Sean: Google and starting to buy some search keywords for example just because no one even knows to search for it. So that would be the highest level, is just are there people looking for this type of solution or are they’re not? If there are, usually a good place to start is trying to kind of tap into that existing intent, if there’s not then you need to get into demand generation mode and it gets a little harder on the demand generation mode what’s, again, very category dependent as you were saying. It’s going to be different for companies but like in the marking technology space a lot of times a good place to start in that case, if a demand generation of people aren’t looking for it would be with constant marketing where you’re really writing your vision about how this enhances the life of a marketer or whatever it might be, but if there’s kind of some education where you have to set the context for your product then content marketing can be pretty effective but you can’t expect that you
[00:28:00]
Sean: can just write that content and people are going to stumble upon it so then you still need to market that content, so it’s this idea of you ultimately need to start to stack some of these things on top of each other, so probably the staying with the kind of frame work part that I was talking about initially. Initially you’re really trying to get that birds eye view on what types of channels might be useful for this business and there are so many choices that you need a pretty good process for figuring out where am I even going to start with this. 1 mistake that I do see with a lot of people is that they kind of try to test all of them and most of these channels are too hard to figure out if you’re just testing it like, oh I’m going to spend 15 minutes to try and figure out this channel and oh I’m going to run 1 ad in there but that didn’t work, I’ll move on. You really want to narrow it down to 1 or 2 that you really think will be effective, work that for a while, if it’s not then you have your back up channel and then your back up channel after that
[00:29:00]
Sean: you are kind of working across to, just ultimately your goal is to find 1 single source of customer acquisition that’s going to work for you and ultimately scale.
Mike: So, when you say work that for a while, kind of what is your mental benchmark for how long you should be spending on that or how much effort you should put in, because I think most of the people listening to this are probably not in a position where they can spend 40 hours a week on something. So, let’s say you’re spending 10 hours a week on it, like how long should you be running some of these experiments?
Sean: So, if it’s search, you can generally figure out if it’s going to work for you pretty quickly, if you feel like you’ve got a better mouse trap in a category where people are already searching or maybe not even a better mouse trap but just an additional mouse trap, if they’re searching for it then that means that they don’t necessarily a great solution and so like for example at LogMeIn, search was a great lever for us. So, we had a competitor go to my PC at the time that was spending hundreds of millions of dollars essentially promoting
[00:30:00]
Sean: their solution that was a pretty expensive solution and so we were able to basically draft off of that, spend that they had and we had a premium solution that was half of the price and then we actually even had a free version that could soak up some of that demand that they were creating that their high price wasn’t able to absorb. So, let’s say they had a 10 percent conversion rate to a purchase on their sign ups, that meant 90 percent of the people were interested in the category, they just the value proposition wasn’t strong enough and so there was a lot of search volume around remote access to your computer, you can control your computer from anywhere, so just being able to buy those keywords, we were able to get some good initial traction doing that. At Dropbox, it was a lot harder, like we did try to test some of the keywords as we talked about, like maybe well Dropbox is kind of like Backup but when we went and tried to buy the Backup keywords you’ve got these big enterprise backup solutions that we’re paying
[00:31:00]
Mike: a lot of money to generate a click and they had a high enough price point on their product where they could actually do that in a cost effective way. So, a premium Dropbox product just really couldn’t compete on those keywords. So that’s kind of that initial part is you just, I think in the case of search you can generally figure it out pretty quickly. Facebook is a channel that tends to work for a lot of companies, mostly because if you think of Facebook there’s like 1,000 or more targeting combinations that might work for your business. So, people in this city that are this age, that are this gender, that like this product, that generally if you test enough combinations you’re going to find something that works but even knowing how to test those combinations requires some familiarly with the platform itself, there’s a lot of kind of complexities and tricks within Facebook to really kind of make things work for you. So, your question
[00:32:00]
Sean: of they don’t have 40 hours to invest in figuring it out, then they’re going to be competing against people who do have 40 hours a week to figure it out, so that’s going to kind of be the trade off there.
Mike: Right but it sounds to me like your general strategy in those cases is just to drive enough traffic and enough eyeballs so that you can get the conversations going so that you can ask people questions and start honing in on that message and then from there, that’s like your optimization strategy is figuring out what the message to those people is, what will actually resonate and then that allows you to drive your cost of acquisition costs lower because you’re able to be more targeted.
Sean: Exactly, so you’re just looking for signals early on, my gosh for every dollar we spend on this channel in this pretty narrow targeting we’re generating 90 cents back on that dollar, like that’s pretty close. We haven’t done a lot of optimization of the landing page or maybe even the ad in there and you know if you see that kind of signal
[00:33:00]
Sean: that might be a channel to keep working, where gosh I’ve invested 150 dollars into this channel over here and we don’t have a single person who’s signed up for our product or even visited our website, like you could have such low signal at that point it doesn’t make sense to keep investing but that’s part of the balancing act that you’re playing is that if you don’t figure this out you’re going to fail. If you don’t figure out how to acquire, convert and monetize customers you’re going to fail and so it is a high stakes game that you’re playing in figuring these things out but you have to be pretty driven and experimental in getting the formula right.
Mike: So, when you’re experimenting the different things to try, how do you decide which ones to go after 1st, like what’s a prioritization strategy that people can use?
Sean: I think 1st thing you want to do is list out all the channels that you think could be potentially useful for you and we have a couple of good templates in the in the book for helping you
[00:34:00]
Sean: pick channels and prioritize them but basically the main thing that’s in the template that we have in there for this is essentially look at the channel across a number of criteria, so cost, targeting, control, so like is it something that you have to do weeks of advance, like looking at the control did you kind of weeks of advance and planning and once it started you can’t stop it or tweak it, that would be a low control channel. A high control channel would be something like Facebook or AdWords where you can hit the pause button, make a change, restart it, hit the pause button, you can do that over time. Similar to the control would be your input time, so if you wanted to test television it could take months to produce a television ad that you would have to put on the television, so that would be a really high input time where even if you were going to test a banner somewhere it’s still is a pretty high input time to design a banner that kind of that looks good enough that somebody might click on it versus if you’re going to do a Google ad, you can literally
[00:35:00]
Sean: write a Google ad in 5 minutes or even a Facebook ad that’s pretty easy to pick an image and build a Facebook ad in just a few minutes, so that would be a really low input time and that’s important. Then output time would be how long until I know that, that channel shows some promise. So how long does it take to start to read the potential of that channel and then the final criteria would be scale, so if this thing works is it something I can continue to invest in and scale a lot, like radio would be an example that if you can get radio working in 1 market, there’s a gazillion radio markets and there’s a gazillion radio stations and so you could really make that work effectively if you could get it working but you’re going to miss some of the control and maybe the targeting pieces that we talk about on these other criteria.
Mike: Won’t using these types of prioritizations kind of drive most people who are in similar places in their business into the same areas?
Sean: IF there’s an opportunity in those areas to generate a positive
[00:36:00]
Sean: return on investment, they’ll be fine. What I would weigh it towards is whether it’s a new emerging platform, what you’re not going to have in those platforms like say Snap Chat been around for a while now but the early days of Snap Chat, you’re not going to be able to just go download 6 articles on great ways to make Snap Chat an effective customer acquisition channel, you’ve got to literally go in there and kind of invent it. So, in that case it’s going to be hard but if you can invent it then you’re going to have a bit of a much less competitive environment in there because other people haven’t figured it out where if you compare that to Facebook, yeah you have massive scale on Facebook, it scores well across each of these but the down side of this is that there are super sophisticated marketers in there that are going to be hard to beat and so that’s again, part of the trade off that you’re making.
Mike: Yeah, I think the 2 things that kind of stand out for me from all of these things that you’ve just kind of touched on is the fact that iteration time alone is almost worth its weight in
[00:37:00]
Mike: gold when you’re trying to figure out what your marketing message is and you’re trying to drive eyeballs to figure out what’s going on and why people are using your product and why they would and what resonates with them and then the 2nd thing is that those emerging platforms, partly because they’re so low cost at that point, people aren’t really tapping into them and I can think of a specific example of somebody who literally doubled their revenue from 1 to 2 or 2 and half million dollars basically overnight on Instagram marketing, it was just insane looking at the graphs, it was just crazy how much.
Sean: That’s awesome, yeah because there’s not that many people that can effectively grow off of Instagram so that it makes sense that if you figure it out you’re going to have a pretty unique opportunity there.
Mike: Right and this was about a year before Instagram had any sort of paid advertising, they’d like figured out their own system and they had all of these spreadsheets. It was really quite interesting.
Sean: I have 1 quick example that really highlights the importance that you just touched on why you need to get your activation right in some of the lower funnel things to make your channel work,
[00:38:00]
Sean: we touch on it in the book but when we 1st were investing in search for log in it worked pretty well, like I mentioned there was a lot of intent for that type of solution and we were able to scale to about 10,000 dollars a month with a positive return on investment but I couldn’t scale beyond that and when I looked at what was outside of my control as a marketer I could see that 90 plus percent of the people who were signing up through my marketing campaigns were never using the product, so if they didn’t use the product they weren’t going to pay us any money was so I wasn’t going to get that return on investment. They’re not going to tell their friends so we’re not going to get any of the organic growth that is really important in companies, so just basically everything that is based on them using the product so I presented that data to my CEO, my CEO said oh my gosh you’re right, we’re going to have a really hard time growing the business if we don’t get this 1st user experience figured out and he put the overall product road map out on pause, put every product person, every engineer
[00:39:00]
Sean: on that 1st user experience to get it right and then within a few months we were able to 10X the number of people who signed up and actually used the product and what that meant from that channel in Google that had scaled to 10,000 dollars to a month now scaled to a million dollars a month, so if you think for like every dollar I was investing on some key words if I’m only getting 90 cents back I would cut them, now I’m getting 9 dollars back on that key word if you just take that increase in conversion rate to usage and assume that follows through to revenue and across all of these channels suddenly search became this massive channel for us and again now that I had people using the product they were going to talk about it, refer the product and because we have a freemium model that’s 1 of the big factors in a freemium model is that people should be spreading the word about this great deal on this free version and so by the time I left LogMeIn a few years later we had about 80 percent of our new
[00:40:00]
Sean: customers were coming in through word of mouth and so you take this million dollar plus a month being spent and that’s only account for a small fraction of the users and everybody else is coming through this word of mouth, so that’s really what we kind of talk about in the end of the book where it’s this fly wheel of a bunch of stuff really going well and that’s the goal that you need to get too but it’s the interdependency of these different growth levers and how they work together to ultimately build a really powerful growth engine.
Mike: Yeah, and I will say like I’ve looked through, I haven’t read the entire book but I’ve looked through a large amount of it and it’s extremely dense, there is a lot of information in here.
Sean: Yeah, my recommendation is somebody not try to read it cover to cover but instead really kind of try to get the big picture of the book, the beginning really kind of gives you a pretty good big picture and then just do deep dives on a few of the chapters, like just really try to like now I’m going to be all about acquisition and then really like absorbs and read that chapter 2 or 3
[00:41:00]
Sean: times and study the graphs and study the other parts and then after that, and put it into practice as you’re reading it, like use it as a kind of study guide as you’re working that part of the business and do the same thing for activation but like the more that you can kind of repeat this, repeat and really drill down into the chapters you’ll actually get a lot of value from the book. Just cover to cover it is so dense that it might be actually hard for a lot of people to read it that way.
Mike: So, I think that’s probably a good place to leave off. Do you have any other closing thoughts for the audience?
Sean: No, probably the biggest 1 that I would just say is again, this is super experimental just be prepared to test a lot and focus on learning from every test whether it works or it doesn’t work in the way that you intended, get smarter about every part of the growth kind of function in the business and if you do that you will figure it out if you’re like dedicated to it and you absorb what you’re learning through each test and just keep working to increase that cycle of testing, then that’s really critical for growing a business.
Mike: Awesome.
[00:42:00]
Mike: Well thank you very much Sean, I really appreciate you coming on today. In the show notes we’ll have a link to the book over on Amazon and it’s called Hacking Growth. If you have a question for us you can call it in on our voice mail number at 1 888 801 9690 or you can email it to us at questions at startups for the rest of us dot com. Our theme music is an exert from We’re Out of Control by Moot and it’s used under creative comments. Subscribe to us in iTunes by searching for Startups and visit Startups for The Rest of Us dot com for a full transcript of each episode. Thanks for listening and we’ll see you next time.
[00:42:28]
Episode 294 | Back of the Envelope Business Model Test
Show Notes
In this episode of Startups For The Rest Of Us, Rob and Mike talk about back of the envelope business model test. This episode is loosely based on chapter 2 of the book, Scaling Lean: Mastering the Key Metrics for Startup Growth. Some of the points discussed include defining your minimum success criteria and converting revenue goals to customer acquisition.
Items mentioned in this episode:
Transcript
Mike [00:00]: In this episode of ‘Startups for the Rest of Us,’ Rob and I are going to be talking about back of the envelope business model tests for revenue. This is ‘Startups for the Rest of Us,’ episode 294.
Welcome to ‘Startups for the Rest of Us,’ the podcast helps developers, designers, and entrepreneurs be awesome at building, launching, and growing software products; whether you’ve built your first product or you’re just thinking about it. I’m Mike.
Rob [00:25]: And I’m Rob.
Mike [00:26]: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. How you doing this week, Rob?
Rob [00:30]: I’m doing pretty good. I’m coming off a series of split tests that we’ve been running on the homepage of Drip. And actually Zack on my team took that over recently. And after I had run a couple split tests with – basically the normal result of a split test is that you’re not going to have an improvement. If you run ten split tests you’re going to get improvement on one or two that’s significant. And so, my split tests were just chugging along and just taking forever to run. And then the first one Zack runs, he made some more dramatic changes, he saw a 41 percent improvement in the click-throughs. And so now we’re taking it another step and we’re actually installing – something we should have done from the start – but we’re installing the pixels. So we actually know if it’s not just click-throughs but it’s actually leading to trial sign ups and that kind of stuff. But it was pretty cool to see that kind of jump because that’s definitely a notable percentage.
Mike [01:19]: Nice. Now that you’re doing that and when you go back, are you going to track everything through because obviously you have to have some sort of a benchmark, right?
Rob [01:25]: Yeah. We’re going to track it through. We didn’t talk today about whether we’re going to rerun the same test now that we have the revenue pixel in place, or if we’ll just use this as the new benchmark and start from there. But either way this stuffs always fun. I geek out on it because it’s like the engineer – this is engineering marketing. Nowadays it’s called growth hacking but this is what we’ve been doing for ten, 12 years, where it’s like applying the engineering mindset to marketing. Which isn’t something that was commonly done, or maybe it just wasn’t talked about very much, except for by direct response guys before a few years ago when kind of this growth hacking thing became popular.
Mike [02:03]: Cool. Well, I just recently kicked off my Twitter ads for Bluetick again. And I’m hoping that they aren’t completely messed up like they were the last time. I think that I talked about that a little bit on the podcast, where just before MicroConf I had put a bunch of new ads out there on Twitter and people were tweeting back to me and commenting to me like, “You’re doing it wrong”. And I was just like, “What ae you talking about?” And I didn’t really think to go back and look to see what it was. I just thought it was people trolling a little bit. I got enough of them that I went back and took a look at it and, of course, the Twitter lead cards were all screwed up and it was like people had to click on them and then click on them again. It was just messed up so I had to redo not the entire campaign, but at least different parts of it. Hopefully things will go well this time.
Rob [02:42]: Good luck with that. It’s always touch and go when you first start any type of ad campaign, especially if it’s not proven because you just have to monitor it really closely. Once you get to that point where you have something that’s working and you have history behind it and numbers behind it, it’s so much more – I don’t know, comforting. Or it’s just less nerve-wracking I guess when you start it up. Because you generally know the range that it’s going to fall into. But at the start, man, you can turn it on and be paying crazy click amounts or you can just get no impressions and not know why and stuffs always frustrating when you’re trying to figure it out.
Mike [03:11]: What happened before was I was getting lots and lots of impressions but very few click-through rates. So I wasn’t actually paying for very much, which on one hand that was nice, but on the other hand I just wasn’t seeing any sort of results that I was looking for and I just hadn’t had time to go look at it at the time. At least now I have a benchmark of what I should not be getting.
Rob [03:30]: For sure. Cool. So what are we talking about today?
Mike [03:32]: Today what we’re going to do is we’re going to go through back of the envelope business model tests. And this is loosely based on chapter two of a new book that just came out called Scaling Lean: Mastering the Key Metrics for Startup Growth. And this is by Ash Maurya. And he’s written a couple of other lean startup books or at least books that are in that particular realm or genre so to speak.
But what I wanted to do was go through chapter two specifically and take a look at what some of the different thoughts are from him about how to look at a business model and determine what the forward looking plateaus are going to look like. And you can use this either for an existing business or for a brand new business that you’re getting off the ground. Some of the calculations that he has in the book are especially relevant just because they greatly simplify what he calls ‘customer throughput,’ which is your customer acquisition. And it kind of measures that against your customer churn rate as well, on a yearly basis. So taking those two things into account, you can sort of look at where your business plateaus are going to be and figure out whether or not you’re going to be able to have enough of a customer acquisition channel or channels in place in order to be able to just maintain the business – whatever your revenue goals are for the business.
Rob [04:43]: And keep in mind that unless you’ve run a business before and you kind of have some loose rule of thumb numbers that you use, some of the stuff we talk about today is going to be less applicable if you have no business at this point. Because you’re just pulling numbers out of the sky and you’re going to find that you’re pretty far off. But if you’ve already started and you have at least a few thousand a month in revenue, you have some numbers and you know your kind of trial to paid, and you know how something should go, you can be much, much more accurate with these calculations because you just have a concept of where you are and where you need to get to. Realizing that the numbers will change but in much smaller increments than if you’re just kind of throwing darts at a dart board as you would if you really do have a business with no customers to date.
The other thing I wanted to mention is keep in mind with books like this that they are written for a broader startup audience. And so not everything – if you do go buy the book, which I’m guessing is pretty good – if you do go buy it you got to take some things with a grain of salt. And we’ll try to point some things out specifically with chapter two, here, that I think may apply more to bootstrappers or ways that these could be shifted to people who are self-funded rather than the examples of the ten million dollar ARR after three years. It’s like that’s just so irrelevant to our audience in particular. We’ll try to call that out as we go through.
Mike [05:55]: Let’s dive right in. And the first step of chapter two is to take a look at the business itself and define what you would consider to be the minimum success criteria. And as I said before, the business model that’s shown in here can be applicable to either an existing business or to a new business that you’re trying to get off the ground and you’re trying to figure out whether or not it’s going to be a viable business. Take a look about three years out and try to think about what the business looks like specifically in terms of revenue. Now those two different things are extremely important. The first one is that you’re looking no more than three years out. And the second one is that you’re looking specifically at a revenue dollar amount so that you can make some sort of calculations.
If you try and go out further than three years, you’re probably not going to be nearly as accurate. And in addition, if it’s a business you’re trying to get off the ground, three years, trying to look beyond that and plan beyond three years is not going to be helpful to you because the business may just not be there or you may have a really hard time getting the customers. So looking at those in a much shorter time period, essentially time boxing your problem so to speak, is going to be really helpful.
The other side of it is being able to take a look at a firm dollar amount. You can adjust that later on, but the idea here is that you want to have a dollar amount in terms of the yearly recurrent revenue that you want to shoot for, that you can base most of your other calculations on. And we’ll talk a little bit more about how you can play with the numbers to kind of reach that revenue target based on lifetime value, customer acquisition rate, how long those customers stick around, etcetera. But those are just the two basic things that you need to think about when you’re talking about the minimum success criteria.
Rob [07:24]: And I’ll admit, to even think about thinking three years out feels crazy to me. It feels very MBA to even be talking about 36 months out because so much is going to change after you launch. When I’m first starting a business I tend to look six months out and think what can we get there. And if we hit product market fit where can we be at 12 months. With that said, this exercise, by the time we get to the end of it, it gives you a cool formula that I’m impressed with. It’s a high level way of trying to find plateaus and figure out where the business is going to plateau based on lifetime value and based on how many customers you think you can pull in.
So there’s a give and a take here. I don’t love the idea of looking three years out because I just think that you’re going to be way off. Even with the business as consistent as Drip, if I looked three years out I’m going to be way off and I know the numbers like the back of my hand. Take that with a grain of salt and realize that if you are projecting out and you’re thinking I need 120k per year, and maybe you want that after the first 12 months and you want that to be you quitting your job. But then you want the business – you’re thinking you want it to go to maybe double in the next year, and then go to 360 of 500k, kind of in that range is ambitious but I’ll say it’s not impossible for a bootstrapper to get there. Those are the kind of numbers that you should probably be thinking about in terms of this exercise. Assuming that you’re not going to have funding at the start and then you’re not going to try and grow a seven, eight figure business super-fast in the style of Silicon Valley; that you’re going to build it like a real business and hire based on profit and that kind of stuff.
Mike [08:56]: The second step is to take that revenue goal that you came up with and convert it into what he calls customer throughput. And this is your customer acquisition rate over time. And there’s a number of different steps to doing this. And the first step of that is if you’re building a new product you have to come up with some sort pricing on it. And if you don’t know what your pricing is, the recommendation is to use some sort of value based pricing to estimate the base price. This is essentially pricing your solution on the value of what it provides, not on what it costs to build and deliver. So that’s a difference between the solution value to your customers versus the cost structure on the back end to you.
Something else that you might look at is using cost based pricing, which is essentially taking your costs to deliver the solution, and then adding a margin on top of that. There’s a lot of business models that fit this particular mold of a service based model of any kind; productized services. Those tend to fit that. But those tend to fit that particular type of model. But if you can get away with it, if you can provide some sort of a value based pricing, you’re much better off. And going back to what we said before, if you have an existing business in place, you already have your pricing. You can essentially just use that number.
Rob [10:02]: For SaaS, I’d say it goes without saying that you’re going to want to shoot for value based pricing. That’s just kind of the way it’s done. You look at the value you’re providing, figure out if there is any competitors that are doing similar things and you either price above them if you want to be premium, or you price similar to them if you just want to be a better product. And I think another example – you mentioned consulting and such of using cost based – another example of that is kind of metered pricing, like how Amazon EC2 does it. I’m sure that they just look at their costs and then add some kind of margin on it. So, I think for the purposes of bootstrappers and folks listening in this, value based is 99.9 percent going to be the direction you want to go.
Mike [10:39]: The second step is to calculate the total number of customers at the end of the time period that you want in order to identify what your active customer base needs to be in order to make your ends meet for the revenue target. So let’s say that your revenue target is $180,000 a year, if you’re charging $30 a month then you need 500 customers in order to be able to reach that revenue goal of $180,000. That’s the kind of calculation that you need to be able to do. And this is why it’s so important to come up with not just the time periods but also what you are selling your product for and what your average price point is going to be for your customers. Obviously, if you have different pricing tiers then you kind of have to guess a little bit. So if your pricing tiers are $50, $100, and then $200 a month, your average price might be something like $75 a month or $90 a month. It really depends on where in the pricing spectrum the largest number of your customers fall. And obviously it can go in the other direction, too. You might have an average price point of $175 even though you have a bunch of people on the $50 a month plan. So take those things into account, but you’re trying to get down to an average price point per customer, and a lifetime value.
Rob [11:48]: Lifetime value is very hard to calculate if you don’t have a product. I think we’ll come back to that point. If you really are spit balling this, you’re going to have to use some rules of thumb and you’ll be off by a factor of two or three. If you already have a product this is much each because then you should know this like the back of your hand.
Mike [12:03]: I think if you don’t have a product at all, then using benchmarks from other similar companies to get to an estimate or just using what their pricing models look like – again, going back to what Rob said about determining whether or not you want to be a premium priced product or commodity based product or something along those lines. Just use a conservative estimate if all else fails. If you’re really not sure, come up with some sort of a conservative estimate for most of these numbers.
Now that said, once you have the numbers for your lifetime value and for the yearly target that you’re trying to reach, the calculation that he offers up is to get your customer throughput. And to do that you would take your yearly revenue, divide it by the customer lifetime value. And this comes out to the number of customers per year that you need to add into your business in order to be able to maintain the business at that level, at that point in time. Now that’s not on day one. It’s not on the 12 months in. It’s at that multi-year mark that you came up with in the beginning. So the recommendation was three years, if you’re using three years. And for sake of an example let’s go through that. If you’re trying to get to $500,000 a year at year three and you have a $50 a month product with a two-year lifetime value, your lifetime value is very easy to calculate, it’s $1200 lifetime value. But your customer throughput is that $500,000 divided by your lifetime value. And that comes out to 417 new customers per year that you need to add.
Now again, this assumes that your business is at year three. And if you just look at the raw numbers of the customers who are paying you on a monthly basis, your business would need 833 active customers to get to 500k in yearly revenue. But if you also take a step back and you look at that lifetime value, you’re churning out 417 of these customers every year. Which means that at 500k a year you need to add 400 every single year in order to just maintain the business at that level. And this is really where those calculations start to come into play and you can start figuring out where your plateaus are if you’re going to hit them at that particular level.
Rob [14:00]: And when I first saw this calculation, which again is called customer throughput, and it’s your yearly revenue target. So, like Mike said, that 500k divided by your lifetime value. And when I saw that my first question was why are we dividing by lifetime value? Shouldn’t we be dividing by the annual revenue per customer? And as Mike and I batted this back and forth offline, and in fact this formula works, the one that he’s given works. And he’s doing some clever math and canceling some things out, but suffice to say we tweaked around with different lifetime values, different lifetimes and different monthly price points and in all of them the math works. So, what I like about this is it’s a high level thing. Don’t get me wrong, this is not something that you’re going to sit down on day one and it’s going to dictate everything about your business. But what I like about this is it’s pretty fast to calculate.
And based on when I’ve launched products, you have a general idea of what your price is going to be. You know it’s going to be maybe around 30 bucks, or around 50, or around 75. You know that your average revenue per year should kind of be that based on what you’re launching into. And then you can always take a guess at your lifetime. When in doubt go with 12 months. That’s kind of been my rule of thumb for people who are starting a new business. You’re going to start off way lower than that when you kick off because you’re not going to have product market fit, your customer lifetime’s going to be like four or five months. But as you improve it you’re eventually going to hit that one-year mark and move beyond it. So a one-year lifetime is reasonable, and a two year means you’re doing pretty well.
In certain spaces like, let’s say Web hosting, where people just don’t churn out nearly as much, you might have a four year LTV or even a five year LTV. And big enterprise software is also like that. Maybe a HubSpot or a Salesforce, those guys have these really long customer lifetime values. And with lower price point software, typically let’s say average revenue fees are 20 to 99 bucks a month. You’re just going to have higher churn, you always will. So you’re going to have between, let’s say a one and three-year customer lifetime. So it’s pretty easy to kind of run a couple different scenarios on this. If it’s 50 bucks a month and you’re doing one year, then it’s $600 lifetime. And if you’re doing three years then it’s $1800. And then you can pretty quickly get an idea of how many customers you’re going to need to bring in each year in order to replace the people that are leaving and to maintain that revenue level.
This is not a projection of where you’re going. That’s a whole separate conversation. To project where you’re going you want to sit down with an Excel spreadsheet and it’s a whole different set of numbers. But what this is telling you is where the business is going to plateau based on your customer acquisition. So if you see this number of 400 new customers per year, if you’re already in your business and you’re trying to grow this thing, it’s going to be pretty obvious to you whether or not you can bring in 417 new customers per year. Because you know your numbers. And you know your traffic sources. And you know your trial to paid. And you know how many trials you get based on unique visitors and you can pretty quickly see you’re either going to be above that or below it and where you’re going to plateau. That’s the fun part.
From here I would actually take this estimate – it is a higher level, more ballpark estimate – and I would dive into real numbers so to speak, of like your exact churn rate. Because I have a big Excel spreadsheet that I use to do this but anyone can put this together if you have your true trial to paid and your true visitor to trial and your true first 60-day churn and post 60-day churn. It’s just much more complicated though, and it’s going to take you a few hours to put together. And you’re going to see an exact projection. But the cool part is that this one that you can throw together in like five minutes is going to be within the ballpark. Close enough that it’s a nice first cut to give you an idea of where your business is going to plateau if you’re accurate enough with your churn and your lifetime value numbers. So this could be more useful when you’re first starting out if you do use those benchmarks of other existing businesses you might be competing against. If you can get any idea about their pricing and their churn and that kind of stuff this can give you an idea of how many customers you need to acquire right up front. And just give a sanity check on, “Boy, can I really bring in 4,000 customers a year if that’s what it takes to maintain that revenue level?” It just stands as a decent five-minute sanity check, I think.
Mike [17:47]: The other thing that I think that this is really helpful in showing you is that because you have that high level number of – whether it’s 400 or 4,000 new customers that you need to add per year – you can backtrack a little bit and say let me divide that by 12 and figure out how many new customers I need to add per month. And let’s say that if comes out to 100. If you’re only adding two customers a month or three customers a month right now, then you know that looking forward to that particular point in time that it’s probably going to be really challenging to find enough customer acquisition channels to get from two to a 100. So it does give you that ballpark sanity check that you may need in order to be able to determine whether or not this is a business that is going to take you to where you want to go. Or whether it is something that you should probably offload and go look for a different business or just try a completely different business to start with depending on whether or not it’s an existing business that you have or an idea that you’re trying out.
Let’s move on to the next step. Once you have this customer throughput number, then you can go back and take a look at revising some of your previous estimates. And the first one that you can obviously adjust is that high level revenue target. That’s probably the last one that you want to adjust but it’s the first one that shows up on the list because that’s the high level, big, hairy, audacious goal that you’re trying to reach. You can adjust that; you could up or down. Chances are probably good that based on your estimates it will most likely end up going down. But that is one option.
The other option is to take a look at the lifetime value and try and figure out whether or not there are ways to either increase the lifetime of the customer, which is going to raise your lifetime value. Or raise prices in such a way that it also raises the lifetime value. And those are essentially the two ways that you can adjust this number. It’s either adjust that revenue target or increase the lifetime value. And those are really your only two options available to you.
Rob [19:30]: And again, if you’re doing this on paper before you started a business it’s harder because you’re just guessing at the LTV. But if you are a year or even six months into a business, you’re going to have a reasonable idea of your LTV and probably some ideas about how to increase that, whether it’s by reducing churn or increasing prices.
Mike [19:47]: The one thing I do like about this particular piece of it though is that – even if you are at a pre-revenue stage and you’re trying to validate things – if you have to look at your lifetime value and ten X it or 20 X it, or raise prices by ten or 20X then chances are good it probably points to the fact that this may not be a viable business model at all for you. Obviously, there’s probably other costs and stuff that you’re going to take into account. But again, you want to be using conservative estimates to begin with. So if these numbers do not pan out on paper then they’re probably going to be significantly more difficult to make work in real life.
That kind of leads us to our takeaway. And that’s the first takeaway. If you can’t make this business model work on paper then you’re never going to be able to make it work in real life, barring some form of miracle in terms of doubling your LTV or quadrupling it. Because those things are going to be very difficult unless your initial estimates were way off. Which is possible, but you also have to take into account that when it comes to math like this, if you have a bunch of estimates – there’s various theorems out there that say if you have all these different estimates or a number of different data points – chances are really good that your final number, because it’s an average, it’s going to come out in an average range. It’s not going to be at one of the extremes.
Rob [20:59]: And to give you ballpark ideas about lifetime values, it ranges very broadly because if your churn is high and your price point’s low, you can pretty easily have lifetime values in the $100 range. Like if you’re charging, let’s say $9, $19, $29 a month, if those are your tiers, you’re probably going to have a lifetime value that’s between – assuming you don’t have just crazy churn – you’re going to be looking at around somewhere between 80 bucks and a 150 bucks because that’s just where lower prices apps tend to churn out more than higher priced apps. And getting something into that range, let’s say that the 150 to 250 range is harder to do than you might think.
Now with that said, if you’re able to build an app that businesses depend on and that they really are using as kind of a core piece of their business, you can pretty quickly jump that above $1000 to $2,000 is completely reasonable for a business or for a SaaS app that has a monthly fee. Maybe the tiers are 50, 100, 150 and even on up for enterprise. If you’re building something people are relying on and they’re sticking around for a couple years – two to three years – that quickly gives you a lifetime value in that $1000 to $3,000 range, let’s say.
And moving on up, of course, you get a Salesforce or a HubSpot of whatever, which have lifetime values of tens of thousands of dollars per customer. And some even into six figures. And that is because the price points are so high and because they lock them into annual contracts, and because their entire business if focused on it. And so that’s your real range.
But if you’re listening to this podcast and you’re just starting out, you’re probably going to want to think my LTV’s going to be between 50 and 100 bucks. 150 bucks once you know what you’re doing. But it’s going to start out really low. Unless I’d say if you’re a repeat entrepreneur and you kind of know more of what you’re doing, you’re going to be able to push it into the several hundred dollars and then potentially into the low thousands. These are kind of ballpark guesstimates based on all the apps that I’ve seen.
Mike [22:44]: Another key takeaway is that the calculation for the customer throughput is really heavily dependent upon the inputs and the outputs to the model. And those inputs and outputs help you to define what is and is not actionable. So when you’re taking a look at the lifetime value, for example, that’s one of the inputs into this. And you can take action on that. You can raise the lifetime value of the customer by either increasing prices or increasing the lifetime of the customer.
In terms of the outputs, the number of customers that you need to reach on a yearly basis, you do have influence over that, and it is dependent upon the types of marketing channels that you use, advertising, whether you’re doing some sort of affiliates or leveraging other people’s networks. A lot of those things you have some level of control over. But obviously the math itself has to work. If you can’t make those final numbers work for you based on the inputs and the output, then the business model itself is not going to work for you at that point in time.
Rob [23:36]: I think some other things to keep in mind are this type of calculation, it estimates the viability of a business. It doesn’t give you an exact answer but it does give you a ballpark sanity check on whether or not this thing’s going to fly. In addition, Ash points out that time-boxed goals are more concrete and thus better than kind of simple revenue goals of I want to get to 500,000. It’s like without it being time-boxed what does that mean? And that’s something that I’ve always liked. I look ahead, like I said, six to 12 months and have a spreadsheet that’s looking at that. Because without the timeframe, it has so much less meaning because you have no concept of how many customers you’re going to need and how low your churn’s going to need to be. And therefore, how many trials you’re going to need. And therefore, how much traffic you’re going to need. If you know one step to the next what the conversion rates are, you can just back calculate from a 12-month revenue goal, you can back calculate to exactly how many unique visitors you need per month in order to make that happen. And if you’re complex enough you can include things like churn and upsells and downsells, and upgrade revenue and downgrade revenue.
It gets complicated but the idea is that this calculation that we talked about is that first swipe at it to give you the sanity check, and then you can dig into it as you get numbers that are better and that are real once you’re into the business. And then you can start plugging those in and figuring out how to improve them and how close your original estimates really were.
Mike [24:56]: Now I don’t know if this is something that Ash covers in a different section in the book, but one thing I think that we should probably talk about is a little bit about the difference between something like this versus your growth targets and your growth goals and how to look at those. Because what this gives you is that back of the envelope test to say at such and such point in time what does the business have to look like, how many customers do I need to acquire and how many will be leaving at this particular time. But that can be heavily overshadowed by your growth or your current growth. So if you’re growing at a very fast clip right now, it can be very easy to be distracted and look kind of micro focused at the business itself right now; how it’s doing, how you’re acquiring customers, doing split testing on all these different things and onboarding customers, doing support. And not really think about this down the road because you’re so hyper focused on that three to six-month timeframe.
But if you don’t take a step back and look at something like this then you can easily run into a situation where your business essentially flip flops and you almost drive it into the ground because you’re not paying attention. You’re hiring ahead of the curve or ahead of the need because the business is growing so quickly and you don’t realize that 18 months, 36 months down the road you’re probably going to run into serious customer acquisition problems or business problems because your customer acquisition needs are going to become so high based on your lifetime values.
Rob [26:12]: That’s the key here. These are not growth targets we’re talking about. These are plateaus. This is a heads up about a potential plateau. And this is something you need to be looking ahead at constantly as a subscription business. We had Ruben Gamez from Bidsketch on 50 episodes ago, I guess, to talk about how to identify and overcome plateaus. And this is the biggest hurdle that I see new SaaS founders hitting is not looking ahead and projecting. Given my churn, given my average revenue per user where are we going to plateau and how do we get past that? And the answer can be add more trials into the funnel. Sometimes that’s what it is. Sometimes the answer is we know that our funnel has no optimization so it may be running a bunch of split tests because you should be, at that point when you’re projecting, that you should be at scale. And I don’t even mean big scale like venture capital scale, but even if you just have 10,000 uniques a month or something, you can start running some split tests or even just making improvements on conversions on the site.
So there are a bunch of different ways to do it, but the idea is that when you’re running this business you have to be thinking ahead and projecting when am I going to hit the next plateau? And that’s what this calculation is about rather than growth projections. That’s probably another episode entirely.
Mike [27:24]: Sure. And then once you’ve identified what those plateaus look like and where they are likely to occur, then you can backtrack to where you currently are, plug in your numbers into a growth model and say, “when do I think that I’m going to end up actually hitting that plateau?” Because the business model might say it’s two years out or three years out, but looking at where your business is right now, if you’re growth rate is much higher then you could very well hit it in 12 months. And you really want to be in a position where you are looking at how to adjust the lifetime value of your customers well in advance of that. As Rob said, if you’ve done all those optimizations and then there’s not really other ways to address that, then you can start looking at your lifetime values and say, “how can I keep customers on longer? Are there ways for me to raise my prices or offer additional services?” And what that will do is that will increase your lifetime value, which will essentially push out that plateau even further.
Rob [28:15]: That wraps us up for today. If you have a question for us call our voicemail number at 888-801-9690. Or email us at questions@startupsfortherestofus.com. Our theme music is an excerpt from ‘We’re Outta Control,’ by MoOt. It’s used under Creative Commons. Subscribe to us in iTunes by searching for ‘startups,’ and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening and we’ll see you next time.
