Your product is ready for prime time — but is your sales model scalable and sound? Matrix Partners‘ David Skok shares four SaaS customer acquisition best practices to ensure your approach isn’t actually a disservice to your bottom line.
As the launch-day excitement fades and reality sets in, take a long, hard look at your sales model. Without the right balance between marketing, on-boarding, support, and price, you risk losing money every time a new customer signs up.
David Skok, General Partner at Matrix Partners and author of the popular blog For Entrepreneurs, warns that a scalable sales model requires more than a skilled team with resources behind it. Below, he shares four best practices for improving your customer acquisition strategy and leading the way to scalable growth.
— David Skok, Matrix Partners (Tweet this quote)
First, Calculate Customer Acquisition Cost and Lifetime Value
When assessing the profitability of a sales model, Skok recommends that you look at the average cost that it takes you to acquire a customer, and then how much profit the average customer brings in. In other words, you need to consider customer acquisition cost (CAC) and compare it to customer lifetime value (LTV).
First, calculate your Customer Acquisition Cost (CAC) by dividing all of your sales and marketing expenses for a given time period (Q3, for instance) by the number of customers you signed up.
Ex: Let’s say your company spent $100,000 on salaries and marketing programs and acquired ten new customers.
CAC = $100,000 / 10 = $10,000.
Calculating Lifetime Value (LTV) can be trickier — it really depends on your software model. Perpetual-license products are easy, since it’s a one-and-done affair, but if you are like most SaaS companies and operate on a subscription-based model, you’ll need to look at the monthly or annual payments and work out how long you expect the lifetime of that customer to be. From there you need to multiply that dollar amount by the gross margin associated with that relationship.
Ex: With a customer you expect to keep for four years paying $20,000 per year for a high, 75%-margin SaaS product, the lifetime value would land in the $60,000 range.
LTV = ($20,000 x 4 years) x .75 = $60,000
4 SaaS Customer Acquisition Best Practices
1) Lifetime Value > 3x Customer Acquisition Cost
When you sign up a new customer, make sure your sales process is not running at such a high cost that it’s losing you money. Skok admits that may sound obvious, but it’s surprising how many startups find themselves spending too much money on customer acquisition and not making enough of it back to make their business viable.
If your LTV isn’t at least 3x CAC you should revisit your model and look for ways to a) raise your prices and/or b) reduce your costs.
2) Aim to Recover CAC in Less than 12 Months
Want more advice for your sales model?
Listen to the full interview with David Skok on The Keys to a Balanced, Profitable SaaS Sales Model
Skok also suggests looking at the time it takes you to recover your costs. It may be easier said than done, but your goal should be to establish a sales process that allows you to recover the cost of customer acquisition in less than a 12-month time period.
The shorter your time to recover CAC, the more capital efficient your business will be. Many startups require 15 to 18 months to recoup the acquisition costs on a new customer, which puts an enormous strain on capital. Unless your investors are willing to keep pumping in cash, focus on keeping your CAC low enough to be recovered in a year.
3) Identify and Target Your Best Customers
With CAC and LTV to guide you, Skok explains, finding your most profitable customer segment becomes easier. As soon as you have enough data to draw conclusions confidently, you can identify which customers segments cost the least to acquire and which drive the most value in the shortest amount of time.
4) Keep Spending as Low as Possible When Starting Out
Skok also warns against thinking that you can buy your way into a repeatable, scalable sales model. Before you start adding people and throwing money at your sales department, make sure you have concrete CAC and LTV data to prove that you have a scalable model.
“Keep spending low initially,” Skok says. “Try using the founders of the company on as many sales calls as possible. After all, they have the ability to change the messaging, change the product, and react to what they’re discovering in failed sales calls.”
Once the founders have zeroed in on a sales process that is successful, repeatable, and profitable at scale, then you can confidently hire salespeople and expand aggressively.
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Photo by: Patrik Nygren