Sometimes Prospects Just Aren't Ready to Buy

I get it:  For marketers, it’s all about “conversion.”  

The marketer’s job is to convert visitors into leads, convert leads into a qualified opportunities, and convert qualified opportunities into paying customers.  The job is to shepherd as many prospective customers through this process as possible cost-effectively, and quickly.

But what the marketer needs to do and the prospective customer wants to do aren’t always in sync.

Just because a prospect attended a webinar or downloaded a paper this morning, does not mean they’re ready to buy this afternoon.  

No matter how many follow-up emails you send or phone messages you leave, they’re just not ready - not ready to buy and maybe not even ready to talk.

Delays and interruptions are to be expected

Sometimes these prospects are just at the beginning of the evaluation process.  They’re not sure what a SaaS solution could do for them, or they’re not sure how to evaluate a solution. 

In fact, they may not even be sure that they need to replace their existing system at all. 

It’s also possible that these prospects have been interrupted by other priorities.  Remember, most of the time these people have day jobs (See "Your prospect has a day job."). 

They run HR or Finance or Marketing or some other vital function in the company; they’re not assigned full-time to evaluate SaaS solutions.  When more urgent issues pop-up, they put the evaluation on hold.

Moving the process along

OK, I realize that I can’t just tell you, “Be patient.”  I’ve spent most of my career in marketing, so I know that’s not so helpful.  You need to be doing something to push more prospects through the pipeline and to do it faster.

A few tactics may help:

Be helpful; don’t just sell.  For people still near the beginning of their evaluation, they’re trying to learn more about automated solutions.  Instead of just touting your solution’s features, you can help educate them.   

An offer to attend a webinar or read a white paper on “Five Keys to Effectively Deploying an [HR/Finance/Marketing/Sales] Automation Solution”  will probably be better received than another “Did you get my last email?” email.     

Establish your credibility as a trusted expert.  Before they entrust some vital function of their business to an outside vendor, prospects need to trust you.  Sharing examples of successful customers or talking about your experience in the market may overcome their reluctance to move ahead.   

Create a sense of urgency.  Prospective customers only have time to focus on a handful of priorities at any one time.  You can try to push one task - “evaluate my solution” - toward the top of their priority list.  (See "You're biggest competitor may be "doing nothing."

Point out that every quarter, every month, every week that the prospect tries to stumble along without a new system is costing them money, losing customers, adding risk, or otherwise hurting their business.

Stay on the radar screen.  Sometimes prospects do go “radio silent.”  It doesn’t mean they’re not going to buy at some point, but for now at least, other priorities have gotten in the way.  Sending along helpful educational material is a way to stay in front of them; when they are ready to move ahead, you’ll be top-of-mind.  

Check for gaps and bottlenecks.  For most enterprise solutions, your prospects are navigating a multi-step evaluation process.  It’s not an impulse buy.  You should be tracking prospects’ progress through the entire process: from visitor to lead to qualified opportunity to paying customer, measuring conversions and yields from one stage to the next.  You might find that prospects are getting stuck somewhere in the pipeline.

You can and you should try to accelerate the purchase process and boost conversions.  But do keep this thought in mind:  Prospects will act when they are ready to buy, not when you are ready to sell.

 

 

SaaS Marketing is Not a Numbers Game

"If we just dump enough names in the top of the funnel, some paying customers are bound to come out at the bottom of the funnel!"

Wrong.

This approach to customer acquisition - sucking in as many suspects as possible - is costly and inefficient.  In other words, it's a very bad fit for software-as-a-service (SaaS) companies.

For one thing, collecting all those names isn't free.  Adword campaigns, website optimization, list purchases, or any other tactics you might use to attract possible leads cost money.

And then cultivating those contacts - qualifying and nurturing them into legitimate opportunities - costs even more money. 

Working on bad leads actually costs money; it doesn't make money.  (See "When Lead Generation is a Bad Thing.")

Low yield doesn't work for SaaS

This "strategy" - pull in as many names as possible and then hope that at least a small percentage of them eventually convert to paying customers - creates a tremendous strain on the SaaS business model.

On the expense side of the equation, it means substantial sales and marketing costs that are incurred up front.

On the revenue side, it means small and uncertain income collected over a period of time.

Relative to expenses, revenues are too low and too slow.

Timing vs. quantity

The goal is not to get as many names into the top of the funnel as possible. 

Instead, companies should be trying to get the right names into the funnel and move them through it as quickly as possible.

SaaS success requires turning "suspects" into paying customers as quickly and efficiently as possible.  The goal is to shorten the conversion cycle.

SaaS customer acquisition is actually a timing game, not a numbers game.

Accelerating the SaaS Purchase Process

Inbound marketing can be very cost-effective, but it can also be slow.

Inbound marketing relies on prospective customers making contact with vendors.  That's the other way around from traditional marketing, where vendors try to make contact with potential customers.

What that means is that by the time the vendor engages with a prospective customer, that prospect is already fairly far along in the evaluation process.  They're already familiar with the vendor and the solution.  In other words, they've qualified themselves.

That’s perfect for software-as-a service (SaaS) vendors.  They can focus their sales and marketing activity on well-qualified prospects.  

That fits well with the SaaS business model which demands that companies spend their sales and marketing resources wisely.  (See"SaaS companies can't afford to sell")

Finding customers in the short term

But it’s not so perfect for SaaS vendors in a hurry.

While inbound marketing makes sense - and the process usually works over time - it can be a long journey.  The prospective customers move at their own pace, not the vendor's pace. 

If you're a SaaS vendor that needs to close business in the short term, you need to add in some other tactics.  Inbound marketing may not have the instant impact you need.

Friends & family

There’s a reason most vendors’ early sales are to friends & family.  These folks already have some connection to the vendor.  They might be a previous employer, an investor, or former colleagues, for example. 

Vendors looking to quickly sign on some early customers should focus their efforts on these friends & family. 

These folks are already familiar with the vendor, which means they’ve already passed through the early stage of the evaluation and purchase process.  They're more likely to buy the solution in the short term.

The early adopters

In most markets, there is usually a cadre of early adopters, folks that are actively looking for innovative solutions. To gain a competitive advantage and bolster their credentials as market leaders, they are more willing to try technology solutions before they become mainstream. 

If you're looking to close business in the short term, seek out these early adopters.

Where do you find them?  Look at the press announcements for vendors selling solutions that are complementary to yours.  See who’s speaking at relevant conferences.  Find out who's publishing a blog that describes their experience using new technologies.   

Leverage the early adopters

One of the reasons early adopters want to be out front is that they like being known as innovators.  They want others to take their advice and follow their lead. 

So once you've secured one of these folks as a customer, enlist their help to find others.  They tend to have a wide sphere of influence.  They post, they speak, they network.  And they’re often willing to help.

Don’t abandon inbound marketing

Do keep one thing in mind:  While you’re focused on closing a few deals in the short term, don’t forget about inbound marketing.  That's what you'll need to attract the prospects that will fill your sales pipeline over the medium and long-term. 

These are the customers that will get you “across the chasm” and help you establish a sustainable revenue stream. 

Yes, it may take them some time for these prospects to get to know you, assess their needs, and evaluate how well your solution fits their requirements and budget.  (See "Winning SaaS customers requires patience.")

But when they do eventually get there, they’ll be well-qualified and ready to seriously evaluate your solution.  You just can’t rush the process.

Winning SaaS customers requires patience

"Eighty percent of success is showing up."  — Woody Allen.


For most companies, buying a software-as-a-service (SaaS) solution to address a critical business need isn't a decision they take lightly.

Evaluating a solution to support HR, CRM, finance, marketing, or any other important part of the business takes a good amount of deliberation.  It could involve a demo or a trial.  There might be several people involved in the decision.  It could require a series of meetings or presentations.  In other words, it takes time.

And time is in short supply.  Prospective customers don't have a lot of it.

What's urgent for you isn't necessarily urgent for the customer

While you, a SaaS vendor, thinks your solution is the most important priority, the customer has other items on their to-do list.  And the particular problem your solution is addressing just might not be at the top of the list right now.

That doesn't mean they don't have a problem that you can solve.  It doesn't mean they don't like your solution or your company.  And it doesn't mean they've already bought a solution from some other vendor.

It just means they're not ready to evaluate your solution and make a purchase decision right now.

Two options:  Push or Wait

So what's a SaaS vendor to do?

One option is to push.  That is, try to move the problem and your solution higher up on the priority list.

Create a greater sense of urgency and convince the prospective customer that every day they delay, they're losing money, losing customers, exposing themselves to risk, or some other bad outcome.  (See Practical Advice on SaaS Marketing newsletter: "Turn 'nice to have' into 'need to have.'")

Another option is to wait.

But waiting doesn't mean sitting on your hands and doing nothing. It means staying in front of the prospect, so that when they are ready and able to spend the time to evaluate solutions, you'll be there.

Guidelines for waiting

Waiting isn't easy, especially when your company has sales goals to meet.  But there are a few guidelines to doing it effectively.

Be consistent:  Staying in front of a prospective customer requires a long term commitment.  It can easily take a prospect many months before they fully engage on an evaluation of your solution.  And you'll probably not know precisely when that moment arrives.

That means you need be in front of them consistently... maybe not once every week, but certainly at least once every month.  A "one and done" approach won't work.

Educate your prospect:  The most effective way to stay in front of prospects is to provide something useful for them.  Publishing an insightful white paper, a blog post, benchmark data, or some other valuable content reinforces your credibility and makes a positive impression.

By the way, keep in mind that just because someone's on your contact list isn't an invitation to harass them.  A high "opt-out" rate will tell you've crossed into "spammer" territory.

Keep costs low: All of this effort to stay in front of prospects while you wait patiently isn't free.  It's part of the customer acquisition costs that make the SaaS business model so challenging.  (See "How to cut customer acquisition costs.")

But there are ways to keep the costs under control.  Email newsletters, white papers, and blog posts, for example, are fairly inexpensive to distribute.  On the other hand, on-site visits from sales executives are expensive and probably not the most efficient way to stay in touch with prospects who are not yet ready to fully engage.

This stuff does work

I recall work I did with one particular vendor to assess whether this "stay in front of prospects" strategy really works.  We looked at the deals we had won and worked backwards to examine the entire life of the relationship with the customer.

In most cases, we found that the process extended over many months and involved at least ten "touches" with marketing material.   That is, we got in front of the prospect ten times over the period: sent a white paper, invited them to a webinar, delivered a blog post, etc.  All that activity happened before the customer seriously engaged in an evaluation of the solution and began working closely with a sales person.

Believe me, I know patience isn't always easy.  But if you're selling important solutions to enterprises, plan for it.  It's just the way the process works.





How SaaS Marketing has Changed

Over the 10 years since salesforce.com went public, a few things have changed in the way we market software-as-a-service (SaaS) solutions.

For one, companies are getting more comfortable with the idea of running critical business functions in the cloud.

Not too long ago, people marketing SaaS solutions spent a lot of time trying to convince prospective customers that putting key applications and data on the cloud was OK.

We put together plenty of documents - white papers, fact sheets, policy and procedures documents, and more - explaining that SaaS solutions were reliable and sensitive information stored there would be safe.

Fewer concerns about "the cloud"

I don’t hear many of these concerns anymore. 

Companies have grown more comfortable with the idea. 

Maybe the hosting companies have earned more trust, building a solid record of security and high-availability over the years. 

Or maybe the benefits of cloud-based solutions now simply overwhelm the possible downsides.

Of course when companies evaluate SaaS solutions, the IT professionals still care about security, performance, and integration issues.  They need to do their due diligence and ask the tough questions.  And solution providers need to have solid answers.  (For more on addressing these concerns, see "SaaS Security:  Don't Ignore It.")

Smarter buyers

As the SaaS market has matured, buyers have become more knowledgeable.  In some markets, they are now on the second or third generation of solutions.  These companies are often replacing existing systems, not adopting automation for the first time.


With this experience, buyers have a much better idea of what features and functions they really need, and what they’re willing to pay for.

To package and promote their solution effectively, SaaS marketers need a much better understanding of these more sophisticated buyers. There's no point in highlighting features and benefits that prospective customers don't really care about and aren't willing to pay for.

“SaaS” by itself isn’t a selling point

In many markets such as HR or CRM software being “SaaS” doesn’t, by itself, distinguish one solution from others anymore.  The benefits - faster deployment, no local servers, access from anywhere, regular enhancements, lower cost, etc. - are now simply “check box” items for prospective customers.  They expect them from all the solutions they’re considering.

Of course, vendors should include the benefits of SaaS in their marketing messages, but it may not make sense to put them at the top of the list. 

(A brief commercial interruption:  Contact me if you need help understanding your prospects and preparing your marketing messages.)

Some things stay the same

Though there have been some changes, some of the challenges of marketing SaaS solutions have stayed the same.

When a company’s evaluating a SaaS solution, there’s still a broad mix of folks involved in the process.  Along with IT and procurement, there’s the business owner, the department head, and the end user.  In fact, it’s often the department head - the executive responsible for Sales, Marketing, or HR, for example - that initiates the process. 

We folks marketing SaaS solutions need to reach each of these audiences and address their particular concerns.  The head of HR or the head of sales needs to hear different messages than the IT executive.


SaaS marketing is still expensive

Another constant is the high cost of acquiring customers.

In its most recent financial statement, salesforce.com reported it spent 53 percent of annual revenues on sales and marketing.  By far its largest single expense, sales and marketing costs have kept it from net profitability.  And this is for a SaaS company that is already well-known and well-established.

Yes, there are ways that SaaS companies can keep their customer acquisition costs under control - inbound marketing tactics, low-touch sales models, etc. - but sales and marketing is still going to be a substantial expense.  (See "Customer Acquisition Spending: Lessons from Workday")


It takes a lot of work and money to build visibility and credibility, generate leads, nurture leads into qualified opportunities, convert them into paying customers, and then retain and up-sell those customers.

That's an effort and an expense that hasn't changed for SaaS companies.

Listen to your SaaS customers

Companies get more from software-as-a-service (SaaS) solutions than just lower cost.

So says a recent study conducted by IBM.  It reveals that companies find that the greatest benefits from SaaS solutions are more collaboration, a better customer experience, and faster time-to-market.

For anyone that’s been marketing SaaS solutions for any amount of time, those finding aren’t terribly surprising. 

What is remarkable is that IBM actually asked customers about their SaaS experience.  Companies
don't do that often.  For some reason or another, many just don’t get around to asking their customers why they bought their solution.

Too bad.  You can hear a lot just by listening. 

I know that sounds remarkably simple (and like something Yogi Berra would come out with.)  But it’s true.  

Why do people buy your solution?

I work with many companies to help them figure out why people buy their solution.  At the risk of giving away a trade secret, here’s how I pry that information out of customers:

I ask.  And then I listen carefully.

Here are the kind of things you can learn:
  • What problem were these people trying to solve?
  • How big or costly was the problem?
  • Where did they look for solutions?
  • What alternatives did they consider?
  • What’s been their experience with the solution?  
  • Were the original problems resolved?

It takes some practice, and there are advantages to having an outsider ask the questions.  People know I’m not trying to sell them something.  And they say things that they might not share directly with the solution provider.

Don't waste money pushing out the wrong message

Without this kind of information, it’s difficult - no, make that impossible - to develop a compelling value proposition and messages.  How can a SaaS provider tell a prospective customer that they have a solution that the customer needs... if they don’t really know what the customer needs?

And without a compelling value proposition, SaaS companies can waste a lot of money on marketing campaigns that don’t work.  Given the way the SaaS business model works, that’s money most can’t afford to waste.

SaaS Marketing Requires Focus

There's a guy in my town who advertises himself as "The Bulkhead Man."  What he does is install the entryways that go from the outside of a house into a basement.  Most are heavy steel doors that are mounted onto the concrete foundation.  Here's a photo of mine, partially obscured by a very healthy holly bush.


I assume "The Bulkhead Man" could probably handle a lot of other construction projects around the house: build a deck, hang new cabinets, replace siding, whatever.  He could rightly call himself a "contractor" or "handyman." 

But that would be a bad idea.

Then he'd be just another guy in the long list of other "contractors" and "handymen" who advertise in my local paper.  His ad would be stuck in with about two dozen others, instead of being the one and only "bulkhead man."  

Companies want solutions for their particular problems

If I needed a new bulkhead, believe me, "The Bulkhead Man" is the guy I'd call.

And I'm probably like most people in that way.  Most of the time when we're looking to fix something, we're looking for someone with particular expertise, a specialist in delivering just exactly what we need.

This same logic applies to people searching for business solutions.  They're usually not looking for something that can "do anything for anybody."  They're looking for a solution to their particular problem.

How can software-as-a-service (SaaS) companies can take advantage of that logic?  One word:  Focus. 

Focus lets companies build visibility and a reputation as experts in their particular niche.  It lets them distinguish themselves from the pack.

When someone searches for solutions like theirs, they rank at the top of the list.  When someone sees them at a show or receives an email from the company, they pay attention.  "Hey, these folks have something that's exactly what I'm looking for!"

Focus on a problem, a customer, a geography, something

A SaaS company can focus on a particular problem or task.  For example, "our solution is specifically designed to help eCommerce companies more quickly and accurately update the inventory they present online."

Or it can claim that its solution is developed for a particular kind of customer, as in "this product is built for companies with teams of 5-40 customer support reps."

A company could even claim a specific geographic specialty.  For example, "our solution is designed to help public school administrators meet the unique reporting requirements of the State of Florida."

If you think about it carefully, you may find other ways to identify your particular market segment.  Contact me if you need help.

Focus isn't easy

Believe me, I know it's difficult to narrow in on a specialty and there's lots of temptation to present yourself as "we can do anything for anybody." 

I talk with a lot of companies that are rightly very proud of what they've built, all the things it can do, and all the markets it can serve.  "Yes, it solves that one problem well... but wait.  It does so much more."

My advice in most cases: focus.  Or at least take on a carefully selected handful of well-defined segments.

Focus is especially important if you're competing in an established market with a few 800-lb gorillas.  In the market for CRM solutions, for example, if you get head-to-head with companies like salesforce.com, they'll easily out-spend you with their vast marketing and sales budget.  You'll be buried.

Focus is essential to the SaaS business model

The key to survival in the SaaS world is getting your money's worth from what you spend on customer acquisition.  (See "Marketing Spend;  How Much is Enough?") Once you've spent money on developing your product, sales and marketing expenses are likely to be among your largest on-going expenses.   For your business to thrive, the return on that spending - the long-term customer value - must exceed the acquisition costs.

With focus, a company can distinguish itself from competitors, make itself easier to find, attract more leads, and close more business.

What does that means in terms of the "customer acquisition cost (CAC)/ long term customer value" (LCV) formula?  If the company spends $1 on sales and marketing, it's got a better chance at earning back much more than that in long-term customer value.


Don't just be another company that does everything that everybody else does.  Be the one and only "bulkhead man."




 
Creative Commons License

This work by Peter Cohen, SaaS Marketing Strategy Advisors is licensed under a Creative Commons Attribution 3.0 Unported License. Images obtained via iCLIPART.com.

How not to waste $30,000 on marketing

An entrepreneur who's just been accepted into a start-up accelerator that provides cash for young companies asks:

"How would you spend a $30,000 budget for marketing an SMB software-as-a-service (SaaS) application?" 

He's selling into "a huge but highly competitive market."  Based on feedback from about 10 active users, he explains, "I feel confident my application is ready to go to market."

Now it's just a matter of where to spend the $30,000.

Don't spend a dime yet

My advice:  Put the checkbook away.

Sure, the company could try several marketing tactics that might be helpful and reasonably cost-effective:  search engine optimization (SEO), Google adwords, PR, and others.

But in a highly competitive market, $30,000 won't go far.  The company could easily spend that amount on adwords in a single month, and good SEO or PR professionals need to get paid.

Before it spends any money on specific lead generation activities, the company should first figure out why anyone would buy its product.  And in a highly competitive market, why would they buy it from them?

If the company is facing well-established and well-funded competitors, it'll need to articulate a significant advantage over these other solutions.  A few extra features aren't nearly enough.

A new solution can't just be better; it needs to be a lot better.   

Don't promote before you know what you're promoting 

There's a lesson in here for all SaaS companies:

Don't spend money on search engine marketing, PR, or any other channel, until you have a
compelling message to promote.

Once the solution is built is not the time to start marketing.  Companies should think through these messages and their value proposition much earlier in the process.

If you're interested in building a viable business, developing a compelling value proposition is just as important as developing a sound technology solution.  Marketing and messaging are not after-thoughts. 

If you don't know who should buy your solution, what problem it solves, and why it's better than anything else out in the market, no amount of money - not $30,000, not $300,000, not $3 million - will help much.

When marketing gets creepy

A company I'll call "NotAGreatIdea.com" is spying on me.

They know I've wandered onto their website and watched a video demo of their product.  I didn't provide my name or email address.  But somehow they think they have permission to contact harass
me.  

Perhaps "harass" isn't exactly the right word to describe the email that arrived a few minutes after my visit to their site.  It addresses me by name and mentions that they know that I've checked out their video.

Maybe "creepy" is a better word.

Nothin' for nothin'

Companies can contact me when I've asked for something from their website, like a white paper.  I actually expect that.  It's a fundamental principal of inbound marketing.  You give me something of value, and in return I give you an opportunity to connect with me.

Done well, this mutually valuable exchange can be a vital part of an effective customer acquisition strategy.  It can help companies earn credibility and move prospects along a path toward purchasing a solution.  And it can be designed and executed to fit within software-as-a-service (SaaS) companies' business model.  (See "SaaS companies can't afford to sell," November 2012) 

But when I've not explicitly provided my name and contact information, as in the case of my anonymous visit to "NotAGreatIdea.com," the company has not earned the right to contact me.

A productive relationship doesn't start with stalking

In fact, their intrusive email completely soured me on the idea of learning more about the company.  I have not the slightest interest now in taking them up on the invitation "to arrange a short meeting to answer any questions you have and to show you how NotAGreatIdea.com's easy to use patented technology can help take your marketing to the next level." (Name changed to spare public embarrassment.)

If by "take your marketing to the next level" you mean that my company too can use your technology to identify visitors - who thought they were anonymous - and try to establish a trusting and productive relationship with them... no thanks.  That sounds worse than spam; it's stalking.

Look, I'm not naive about what marketing technology can do.   I know you can use clever solutions like these to track all my comings & goings on a website, count my downloads, and even discover my name and email address.

But just because you can do it, doesn't mean you should do it.


Creative Commons License

This work by Peter Cohen, SaaS Marketing Strategy Advisors is licensed under a Creative Commons Attribution 3.0 Unported License. Images obtained via iCLIPART.com.

Making free trials work: 3 tips

Lots of software-as-a-service (SaaS) companies offer free trials.  But in even the best cases, only about a modest portion of the free trialers actually convert into paying customers.

In fact, many times the free trialers don't even try the free stuff.

People download the trial, but then they get distracted.

Or they don't have the time to use it.

Or they don't have the data they need to get started.

Or they decide it's a hassle.

Or they lose interest.

Or whatever.

Totango calls these folks "accidental trialers:"  prospective customers who sign up for a free trial and then do nothing.

After a few weeks, the trial expires - a complete flop for both the prospective customer and the SaaS provider:

The prospect gains little experience with the product and misses the opportunity to see how it might be helpful.

The provider has little opportunity to convert the free trialer into a paying customer.   They've invested in finding and cultivating a prospect, but they can't close the deal.

How can SaaS providers avoid this?  How can they get prospects to actually try the free trial?

Tip 1:  Don't make the trialer work too hard

Just because your solution is free doesn't mean your prospective customer's time is free.  If you ask them to do lots of work - track down data, configure forms, set-up work flows - they're likely to bail out.

Instead provide completed templates, default settings and benchmark data already filled in.  The trialer, of course, can make changes, but they're not starting from a blank page.

Tip 2:  Don't overwhelm the trialer

You're proud of your solution - every bell and whistle of it.  And your paying customers may grow to love every bell and whistle too - eventually.  But your free trialers probably aren't yet ready to see every single feature and function, and they may be overwhelmed by a walk-through of the entire product.

At this stage, it's better to focus the prospect on accomplishing a few simple, common tasks.  Show them how easy the solution is to use and how quickly they can achieve worthwhile results.  Get them as soon as possible to an "Aha!" moment.

Tip 3:  Offer help

Even with the simplest, most intuitive solutions, the prospect might need some guidance.  These folks aren't dense; they're just busy.

Give them a guided tour through the trial, a step-by-step guidebook, a recorded tutorial, or one-on-one coaching.

Yes, helping free trialers can be expensive.  But remember, you've already spent time and money to get prospects this far in the purchase process.

Spending more to push them one final step - and convert them from trialers to buyers - might be a worthwhile investment.



Creative Commons License

This work by Peter Cohen, SaaS Marketing Strategy Advisors is licensed under a Creative Commons Attribution 3.0 Unported License. Images obtained via iCLIPART.com.


  
  
 


Customer Acquisition Spending: Lessons from Workday


According to a business adage, you need to spend money to make money.

According to a SaaS business adage, you need to spend a lot of money to make money.

Workday recently made public its S-1 filing in advance of an initial public offering. The document reveals what it takes to succeed in a market dominated by Oracle and SAP. Specifically, it illustrates the need for software-as-a-service (SaaS) companies to spend money - lots of it - on customer acquisition.

In its early years, Workday spent well in excess of its annual revenues on sales and marketing. In 2008, it spent 2.5 times more on customer acquisition than annual revenues, and in 2007 it spent nearly 18 times more than annual revenues.


With only $455,000 in revenues in 2007, Workday funded a direct sales force and a professional marketing effort costing more than $8 million. I saw first-hand the company's significant presence at that year's HR Technology conference, where the company's booth and a front stage presentation by co-founder Dave Duffield made for an impressive coming out party.

Sales & marketing costs still represent the single largest expense for Workday. It's selling a critical solution via an expensive direct sales force to large enterprises, and usually competing against well-entrenched competitors. A typical sales cycle can extend over 6-9 months.

Though the cost of customer acquisition relative to annual revenues has declined steadily, on-going customer acquisition expenses will continue to keep Workday in the red for some time. According to the S-1, "we do not expect to be profitable for the foreseeable future."

So what is Workday getting for its money?

What's the payoff from this significant and on-going investment in sales and marketing?


High growth: Workday's revenues grew at a compound annual growth rate in excess of 300 percent from 2007 through 2011. The company has attracted about 325 customers over that period, mostly large enterprises with thousands of employees.

Strong customer lifetime revenues: Most of Workday's customers are on 3-5 year contracts. And in addition to the subscription fees, many pay for implementation, training and other professional services. (It would be helpful to calculate the average customer acquisition cost relative to customer lifetime revenue, but the S-1 filling doesn't appear to provide the required data.)

Visibility and credibility: Its high marketing spend has established Workday as a leader among SaaS ERM providers. When large enterprises consider potential solutions, Workday is usually on the short list.

Success requires funding, courage and patience

Here's one important lesson we can all take away from Workday's experience:

SaaS companies that want to grow need to spend money, sometimes a lot of it, on customer acquisition.

Often SaaS companies will need to commit to high sales & marketing costs even at the expense of profitability, at least in the short or medium term. Companies with an effective customer acquisition plan in place, however, can generate high, sustainable, and eventually profitable growth.

To put a sharper point on this lesson:

SaaS companies without the funds, courage or patience to pay for a well-functioning customer acquisition effort over a sustained period will have a difficult time growing their business.


Creative Commons License

This work by Peter Cohen, SaaS Marketing Strategy Advisors is licensed under a Creative Commons Attribution 3.0 Unported License. Images obtained via iCLIPART.com.


When lead generation is a bad thing

Most marketers are fixated on generating leads. It's not uncommon, in fact, that their compensation is related to how many leads they bring in.

This fixation on leads is particularly true for us software-as-a-service (SaaS) marketers. Cost-efficiency and a high return on marketing expenses are critical to a successful SaaS business model. (See "Ten Essentials of SaaS Solution Marketing.")

But generating leads isn't always a good thing. You can get too much of a good thing. Here's how:

Unqualified leads

Leads that consist of people that are unqualified - that is, they have no real need for your service - aren't worthwhile leads. The fact is these leads don't make you money; they cost you money.

Think about it. You're spending money on SEO, pay-per-click, PR, webinars, or other marketing programs that bring people to your door. But if those people have no need for your service and no compelling reason to purchase anything, the money you spent to attract them has been wasted.

That's not to say that 100% of leads should convert into actual buyers. But most leads should at least be potential buyers.

One clear sign that you're generating unqualified leads is a low ratio of qualified opportunities-to-leads. It indicates that few leads convert into real opportunities and eventually paying customers.

Here's a second sign. In an organization that sells through a sales force, you'll hear about "worthless leads" loud and clear from the sales people. You won't even need to check the ratios!

Leads that get stuck in the pipeline

If you've spent all your money and effort bringing leads in the door, much of it will be wasted if there's no process in place to nurture those leads into opportunities and paying customers. Those leads get stuck in the pipeline.

To get them "unstuck" requires building a system that moves prospects through the complete acquisition process - from initial interest to lead to qualified opportunity to purchase to renewal. Generating leads is only the first step.

Again, tracking the leads-to-opportunities-to-paying customers ratios is one way to identify a pipeline problem.

Remember: Generating leads isn't the goal; paying customers is the goal.


Creative Commons License

This work by Peter Cohen, SaaS Marketing Strategy Advisors is licensed under a Creative Commons Attribution 3.0 Unported License.

Don't waste marketing money: all thought, no action

I pulled up behind a step van at a stop light and read on the back door, "Need a spark? Call Mark. Mark Olsen, Electrician"

OK, it's not Shakespeare. It's not even Ogden Nash, but kinda catchy. I thought it could work for other tradesmen too. "Sprung a leak? Call Dominique." "Need concrete? Call on Pete."

(OK, it was a long light.)

The silly tagline did part of its job. It got me to think.

What it didn't do is get me to act.

Why not?

There was no phone number. No 1-800-SPARK-ME, no 1-800-POWER-UP, no nothing.

Here I've been invited to "call Mark," but haven't been given an easy way to actually do that. He got me to think, but not do. Mark the Electrician never closed the circuit. (Sorry.)

SaaS marketers can't afford to waste time and money

SaaS marketers sometimes make the same mistake - not closing the circuit, not connecting thinking to doing. And for SaaS companies, where maximizing the impact of every marketing and sales effort is critical, this kind of mistake wastes precious time and money.

We pay good money to reach the right prospects - execute a search engine marketing program, run an email campaign, host a webinar.

We successfully capture the attention of a prospective user, present a compelling value proposition, invite them to contact us.

Missing the next step

But then after all the up-front work and expense, we miss the next step.

We don't offer a clear path for the prospect to do something: call us, sign up for a free trial, download a paper, subscribe to our newsletter, whatever.

That's money wasted, prospects squandered, revenues lost.

The problem often comes from forgetting about the overall goal of the customer acquisition process, namely to acquire customers. (See "SaaS marketing, baseball and the batting order.")

Instead we fixate on a single portion of the process: build a beautiful website, host an inspiring webinar, deliver a clever tagline.

But that's just part of the process. They get prospects to think.

Now we need to make it easy for them to act.



Creative Commons License

This work by Peter Cohen, SaaS Marketing Strategy Advisors is licensed under a Creative Commons Attribution 3.0 Unported License.

SaaS profits: who cares

There's a story about accounting that wouldn't really pass as funny - even by accountants' standards- but it is instructive.

A CEO was interviewing two candidates for an accounting position. He provided each with the company's most recent financial data and asked each of them: "What would you report for our company's profit?"

The first candidate pored over the numbers, pencil and calculator at hand, carefully constructing an accurate income statement. After that protracted exercise, he dutifully walked the CEO through his arithmetic, subtracting expenses from revenues. The remainder, he proclaimed, would be the company's reported profit.

The second candidate kept his pencil and calculator in his briefcase and, in fact, never even glanced at the numbers. He looked at the CEO and said, "The company's profit is whatever you want it to be."

So much for the unassailable truth of whatever is reported as "profit." Calculating it and interpreting it can be much more elusive than the cold, hard numbers would suggest.

"Profit" isn't especially meaningful, in particular for SaaS companies

Interpreting "profit" is even more elusive when assessing software-as-a-service (SaaS) companies. The problem is timing. Profit is calculated by subtracting costs incurred during a given period from revenues generated during that same period.

For most SaaS companies, though, they incur expenses in the current period, but the revenues are realized over many periods in the future. Costs now yield revenues... but not until later. (See "SaaS market consolidation: Blame Wimpy.")

The largest of those costs tend to be for customer acquisition. Sales and marketing expenses in a given period can often exceed 50% of revenues during the same period. Adding in support, operations, development, general & administrative costs, and other expenses, there's not a lot left for profit. In fact, a reported loss is far more common.

If not "profit," what really matters?

So if profit isn't a useful measure of success for SaaS companies, what is?

Metrics like "cost of customer acquisition/customer lifetime revenues"(CAC/CLV) can give a much better picture of a SaaS company's performance. For every dollar that the company invests in sales and marketing, how many dollars in revenue are earned? And how long does it take to earn them? (See Joel York's "SaaS Metrics Guide for SaaS Financial Performance" or David Skok's "SaaS Metrics" for additional metrics appropriate for evaluating SaaS companies.)

To amend the story about the CEO and the accountants, the best answer to the question "What would you report for our company's profit" wouldn't be "revenues less costs," or even "whatever you want it to be."

For a SaaS company, the best answer might be, "Who cares?"


Creative Commons License

This work by Peter Cohen, SaaS Marketing Strategy Advisors is licensed under a Creative Commons Attribution 3.0 Unported License.

SaaS solutions for business are not an impulse buy

I don't know who first thought to put gum, candy and Slim Jims next to the checkout aisle, but it was a stroke of genius. While I'm standing there waiting to unload my shopping cart is the perfect time to tempt me to toss in a few inexpensive items that aren't on my list. I give in to the impulse.

Software-as-a service (SaaS) solutions for businesses are not gum, candy or Slim Jims. People do not buy them on impulse.

Most business software is bought after careful consideration. Sometimes it requires input from several decision-makers. Even buying a relatively inexpensive SaaS solution - if it's important to the business - usually takes time and follows a deliberate evaluation process.

A long term purchase process requires a long term sales & marketing process

Your marketing and sales process should match this deliberate evaluation process. If it requires several weeks or months to make a purchase decision, build a customer acquisition process that extends over several weeks or months. If a decision requires buy-in from people in several roles, build a process that reaches people in each of those roles.

Who hasn't heard a story like this? A gung-ho marketing team posts a compelling white paper on its web site. Dozens download the paper daily, providing their email address to do so. The happy marketers call those email addresses "leads" and shove them off to sales folks.

The overwhelmed sales people sort through this pile - gmail addresses and all - desperately trying to find a speck of gold among the dross. Good luck with that.

Getting from "downloader" to buyer is not a one-step process

A lot of these white paper downloaders probably are prospective customers... but not yet. They're still at the front-end of their decision-making process, just getting familiar with the options available to them. They have a long way to go before they're legitimate leads or qualified opportunities.

Next step for the "downloader" might be to look at the experience of others with this product and with alternatives. They'll want to hear customer stories. Then they may need to go through a technical assessment to answer questions about security and reliability. Next perhaps they'll download a trial or work with a freemium version if one's available. And after that... well you get the idea.

Don't waste expensive sales talent

Marketers should build a nurturing process that keeps prospects engaged and committed throughout this entire, multi-step process. Emails, webinars, white papers, blogging, customer stories or events might all be part of the program. Try some out and see what works best for you.

Be careful not to push the names of prospective customers over to sales executives too quickly. You don't want expensive sales people to do all the work to move "downloaders" into "qualified leads." You'll have a tough time keeping your customer acquisition costs under control, and you'll end up with an ugly finger-pointing marketing vs. sales battle. Who has the time or stomach for that?


Creative Commons License

This work by Peter Cohen, SaaS Marketing Strategy Advisors is licensed under a Creative Commons Attribution 3.0 Unported License.

Old marketing tools in a new marketing world

I was talking yesterday with a friend who I know from the old days doing public relations. PR back then was about preparing announcements, backgrounders and glossy photographs, arranging press and analyst tours (usually under embargo), and pitching stories over the phone.

Moderate success was a few column inches and a color screenshot in a trade publication. Big time success was positive coverage in The Wall St. Journal or The New York Times.

Things change... but not entirely.

The new PR

I work with clients who still use PR to generate visibility. Now press announcements are heavy with keyword phrases and sprinkled with links, and we send along photos as a .pdf or .gif. They're sent on to bloggers and news aggregators as well as to the shrinking pool of journalists with more traditional publications. The press announcements are also "self-published" via the company's own blog, newsletter or website.

Live events still live

Companies still do live events, too. Though there are plenty of options for people to virtually connect, sometimes face-to-face contact is better. Though events can be expensive - exhibit space, booth set-up, shipping & drayage, plus travel expenses - they can be effective if you clearly understand where events fit in the overall customer acquisition process. Though you may only talk to a handful of prospects at a regional event, if 3 or 4 of them convert to paying customers, it may be a great investment.

Events have also been infused with newer, social media elements. Nearly all of them label themselves with a Twitter hashtag, and the online conversations about the proceedings are every bit as rich as the in-person presentations. Sometimes more so.

Outbound calls are "social selling"

Even outbound telephone calling has had a social media facelift. There's a new concept known as "social selling." In contrast to the traditional cold call, outbound sales people use social media to better target and prepare for telephone conversations.

Here's my point:

Don't rule out marketing tools that you think may be too "traditional." PR, events, and outbound telephone calling techniques have all been "social media-ized," making them more "modern" and more effective. Try them, measure the results, and see if they fit into your SaaS marketing mix.


Creative Commons License

This work by Peter Cohen, SaaS Marketing Strategy Advisors is licensed under a Creative Commons Attribution 3.0 Unported License.

Marketing numbers can lie

I barely passed an accounting course in college. The only thing I remember was a joke about "debits by the window and credits by the door."

I didn't understand the joke then, and I'm still confused by T accounts now.

Thankfully, in a stint as a bank credit analyst, I did finally gain some fluency with business numbers. I learned to cope with, if not exactly love, current ratios, inventory turnover, and return on equity calculations.

This experience with numbers can come in handy in marketing.

Measure, measure, measure

There's plenty of room in marketing for creative designers and copy writers. But if you're managing a marketing group, you'll also need to know your way around a spreadsheet too. Measuring is a big part of the job.

Marketers, and software-as-a-service (SaaS) marketers in particular, can't afford to make decisions based solely on gut feelings or anecdotal evidence. They need hard, quantitative data:
  • Which marketing programs are driving the most traffic?
  • What keywords are producing?
  • What's the free trial-to-purchase conversion rate?
  • What's the return on social media?
Proceed with caution

Yes, gather and analyze quantitative data, but proceed with caution. Be careful in how you measure and what you measure.

One common measurement flaw is assigning a lead to one particular source. Salesforce.com and other systems have wonderful mechanisms to identify the source of each individual lead. It will tell you tell how many leads were generated by each source. And using that data, you can calculate the cost per lead per source and then make decisions on which programs to continue funding and which to stop funding.

The problem is that identifying a single source for any particular lead isn't really as simple as that. The fact is that over the course of the purchase process, most business customers are likely to touch your company through multiple sources, not just one.

The first contact may be through a keyword search, but later they'll read your newsletter, download a white paper, attend a webinar, and perhaps meet you at a tradeshow. How do you identify which single one of these activities is the sole "lead source?"

Leads are just the start of the process

The focus on leads and lead sources can also distort your view of what programs are really having an impact on your business. "Leads" are only the entry point in the sales pipeline. "Leads" need to be nurtured into "qualified opportunities" and then converted to "closed wins" in order to generate revenue.

If your entire focus is on counting "leads," you may be missing the bigger picture. Besides calculating "leads per campaign" and "cost per lead," marketers should also be tracking "cost per qualified opportunity" and" cost per closed win." You may find that campaigns that generate few leads actually produce many qualified opportunities and paying customers.

Remember, the goal of marketing isn't "leads," "followers," "friends," or "contacts." The goal is revenues.


Creative Commons License

This work by Peter Cohen, SaaS Marketing Strategy Advisors is licensed under a Creative Commons Attribution 3.0 Unported License.

How not to calculate a SaaS marketing budget

I hear this question often from software-as-a-service (SaaS) providers: "How much should we spend on marketing?"

If these marketers have experience working in the traditional, on-premise licensed software world, they're usually familiar measuring marketing spend as a percentage of annual revenue.

That metric is often used to allocate and track marketing budgets for licensed software companies, and they typically spend somewhere between 5 and 8 percent of annual revenues on marketing.

Unfortunately, in most cases neither that metric nor that benchmark are very useful for SaaS providers.

SaaS marketers are usually better off with a metric more appropriate to the unique SaaS business model: marketing spend as a percentage of the lifetime value of the customer.

That measure better accounts for the fact that revenues extend over the life of the subscription, and they aren't recognized in a large up-front license fee. (I've written extensively on this topic and the impact on marketing. See, for example, "Three deadly SaaS marketing mistakes.")

But what if you choose to stick with the old standard marketing as a percentage of annual revenue? What are the consequences of using the wrong metrics and benchmarks? A few bad outcomes are possible:
  • Under-funding: A business fixated on measuring marketing as a percentage of annual revenue is likely to under-fund marketing and choke off the fuel for customer acquisition.
  • Over-pricing: To bump up annual revenues to better cover customer acquisition expenses, the company may over-price their solution relative to the value perceived by the customer.
  • Over-promising: A business plan that shows artificially low spending on marketing relative to annual revenues may be attractive to investors on paper, but disappointing in reality.
  • Under-funding: A plan that expects an unrealistically rapid return on marketing spend is likely to be under-funded and unable to sustain marketing activity over an extended period of time.
  • Inadequate attention to renewals: A SaaS company focused on annual revenues vs. lifetime revenues may be ignoring existing customers and securing renewals in favor of attracting new customers.
  • Swinging for the fences: A focus on high short-term returns may lead companies toward magic bullet, quick-fix marketing solutions and spending a burst of money on programs that will likely flop.
Bottom line: If you measure the wrong thing, you'll probably do the wrong thing.

How to Cut Customer Acquisition Costs

  • How much should we spend on tradeshows?
  • Should we spend more on search engine optimization, or pay-per-click?
  • Are webinars worth the cost?
As a marketing adviser, I suppose I should charge a hefty fee to address these inquiries. But I'll share the answers with you right here, right now, for absolutely nothing:

I do not know.

That may not be something you often hear from an expert, but it's the best short answer I can honestly offer.

Here's a longer answer:

I don't know which specific programs will be cost-effective for your business and which ones you should eliminate, but I do know how to figure out the answer.

Articulate the goals for your particular organization

Know what you need to achieve with your sales & marketing efforts and be specific. How many deals do you need to win to hit your revenue targets? Work backwards from that number to calculate the number of opportunities you need, and then work further upstream to calculate the number of interested prospects required. (More on understanding this funnel later.)

I've actually managed marketing for a company that sold to a handful of large mobile phone makers: we didn't need to generate leads at all. Lead generation programs would have been a waste of money, so we focused exclusively on building market awareness and sales support tools.

Measure the value of each program

Track the number of leads, qualified opportunities and wins generated by each program. Then use the overall cost of the program to calculate the cost per each lead, cost per opportunity and cost per win. There are certainly flaws in this method - notably in designating a single program as the appropriate source for a particular prospect - but it's better than guessing.

A prerequisite for measurement is an agreement between sales and marketing on the precise definition of a "lead," a "qualified opportunity," and a "win." Further, they should agree on a process for moving prospects from marketing over to sales. Marketing's dumping unqualified leads onto sales is a sure way to waste money, besides creating ill will all around.

Understand the funnel

Know how many leads are required to generate one qualified opportunity, and know how many qualified opportunities are required to generate one win. Once you know these "conversion ratios," you can figure out precisely what's needed to make each stage of the sale process productive. You won't pay for leads you don't need, or sales people you can't feed.

Understanding the funnel can also help you identify where prospects are getting stuck. A low yield of leads-to-opportunities requires a different fix than a low yield of opportunities-to-wins.

It's not only about lead generation

Remember that in addition to generating leads, the marketing task typically includes two other important tasks: building visibility in the market and providing sales tools. Establishing thought leadership and winning the trust of prospects is especially important in marketing and selling SaaS solutions. (See "Lead Generation... ad nauseam.")

Cost-effective marketing is especially important for SaaS

Most SaaS companies will find that their customer acquisition costs (sales & marketing) will account for the single largest portion of their expenses. And under the SaaS business, sales and marketing expenses can often exceed one-third of subscription revenues. There is no margin for wasteful spending. (See "Hyper-Spending on Customer Acquisition: The Wile E. Coyote Effect."



Though I wish it might be otherwise, I don't believe there is an easy answer on how to cut your customer acquisition costs. Or least not an easy answer that's accurate. As H.L. Mencken put it, "There is always an easy solution to every human problem - neat, plausible and wrong."

SaaS and Indy Car Driving: Don't Lift the Accelerator

A race car driver who had just qualified for the first time for the Indianapolis 500 explained to me the most difficult part of navigating the 2.5 mile circuit: keeping the accelerator pushed to the floor. He said it's easy to do while driving down the straightaway; the tough part is when you're heading into the 90-degree turn at the end. If you lift the pedal, the car won't turn left in front of the concrete wall at turn one.

A quick lesson on race car aerodynamics. Indy Cars are designed like aircraft wings, only upside-down. In a plane, the faster it goes, the more lift is generated to carry it up into the air.

Indy Cars, by contrast, need to stay on the ground, not fly into the air. They are designed so that the faster the car goes, the more downforce is generated to hold it onto the track. Not enough speed means not enough downforce, means the car leaves the track surface, means the driver can't steer, means... you get the idea.

Marketing software-as-a-service (SaaS) solutions is a lot like driving an Indy Car.

The goal with SaaS marketing is to build a machine that generates lifetime customer revenue that exceeds customer acquisition costs. You want a process in place whereby every $1 of sales and marketing expense yields more than $1 in revenues over the life of a customer's subscription. (I discuss this in more detail at "Marketing Spend: How Much is Enough?")

Of course, those subscription revenues are recognized over the entire lifetime of the customer, often over several years. However, the sales and marketing costs are recognized immediately. You spend now to earn later. According to this formula, the faster you spend, the more short-term losses you generate.

As you're racing down this straightaway, running up big deficits, one instinct is to lift off the accelerator. Radically cut spending on sales and marketing. After all, these are probably the largest single expense items on your income statement. (I've shown how much publicly-held SaaS companies are spending at "The Risk of Spending Too Little on SaaS Marketing.") It's an instinct perhaps learned from experience with the business model for on-premise applications.

Resist the instinct to cut spending on customer acquisition

But if you've built an efficient sales and marketing machine, lifting the accelerator is exactly the wrong thing to do. If your finely-tuned customer acquisition machine is yielding $3, $4, $8 for every $1 in sales and marketing spend, keep the pedal to the floor.


If you cut back on spending, you lose visibility in the market, you can't generate prospects, and you can't support your sales efforts. The result: you can't acquire customers, and you'll fall further behind competitors until you're no longer a viable choice.

You'll lose revenue in the short term, and you'll lose revenue over the long term. Then you're unable to fund product development, customer support, and operations, so you lose your existing customers.

You may save cash by cutting expenses, but at the same time you've lost market traction. Like an under-steering Indy car heading toward turn one, the business slides into a drift, and at least figuratively, hits the wall.

Of course, keeping your foot on the sales and marketing accelerator requires enough fuel, in the form of capital, to stay in the race until the lifetime customer revenues come in over time. And it requires a well-tuned, efficient customer acquisition machine.

But it also requires courage. No doubt, the notion of accumulating big short-term losses is downright scary. Maybe not quite as scary as heading toward a reinforced concrete barrier at 220 miles-per-hour, but scary nonetheless.