Hyper-spending on Customer Acquisition: The Wile E. Coyote Effect

For software-as-a-service providers, hyper-spending on customer acquisition is a race against time. Your goal is to build a large enough customer base and revenue stream to cover your costs, and to get there before you run out of money.

In my SaaS Marketing Strategy Maturity Assessment (tm) model, I put a label on companies that spend most or all of their annual revenues on sales and marketing expenses: “Wile E. Coyotes.” Remember he’s the too-clever predator who persistently, but futilely, pursues the Roadrunner around the desert. Consumed by his zealous quest, he’s usually tricked into racing past the Roadrunner and right out over the cliff. The fun part is that as long as he keeps moving his feet and doesn’t look down, he can stay airborne… at least for awhile.

Can this work with SaaS companies? Can they keep moving their feet fast enough and not look down long enough to stay airborne? It depends mostly on deep pockets and spending wisely.

The deep pockets bit has to do with the capital structure of the balance sheet. I’ll let the VCs and CFOs deal with those issues.

The spending part, though, must be a top concern for marketers. As much you might prefer to be immersed in web site animation, tag lines, booth layouts, and the creative process, a big part of your job is to manage the costs of customer acquisition. Sorry.

Yes, I know that all companies, SaaS vendors or otherwise, need to pay attention to the return on their sales and marketing investment. (A Google search on “marketing ROI” returns 5.8 million results.) But it’s especially important with companies working in the SaaS model. For most enterprise solutions (CRM, ERP, talent management, etc.) offered as a service, the formula runs like this: spend the money up-front on customer acquisition and earn it back over the next few years over the life of the subscription. Invest now; payback later.

This is much different from most on-premise models in which the large up-front customer acquisition costs are covered by even larger up-front license fees. That gives the marketing folks more latitude. Not to claim they can be careless, but their less productive investments are more easily covered.

Marketers in SaaS providers don’t have that kind of cover. What that means is we need to think that much harder about the yield on investments. What’s the payback on the webinar series, the conference sponsorship, the pay-per-click campaign? If we’re spending $1 to acquire a customer, and generating $3 in revenue over the term of their subscription, that may be a prudent investment. But if we’re spending $3 or $4 or $5 to acquire a $3 revenue stream - well it may be that the canyon floor could be heading up at us very, very quickly.