We recently had the honor to have Sam Mallikarjunan, Marketing Fellow at Hubspot, as a guest to one of our webinars. In the first part, Sam shared super valuable lessons that e-commerce can learn from world-class SaaS companies. In the second part, he and Valentin Radu, our own CEO, had one of the most interesting and insightful conversations around growth, retention, global economics and the future of our planet.
This post covers the first part of the webinar: Sam’s presentation packed with insights from his experience as a marketer from the time when he was working for other companies up to his recent years with Hubspot.
Without further ado let’s dive right in.
How to know when you’ve found product/market fit
Both of these companies on the left and the right here are adding the same number of customers per month, but you see that eventually if you have bad retention, you reach a point where you can’t add customers faster than you’re losing customers.
And this is where we end up in that really frustrating growth plateau most of us in e-commerce, in fact, most of us in SaaS or almost any business, have had to deal with breaking through these sorts of plateaus.
And it’s rarely because we have hundred percent market share, it’s usually because we’re losing customers who aren’t sticking around. So if you want to see that continuous healthy growth, you have to focus on retaining those customers as you see on the right.
Because retention from each cohort is asymptotic to the x-axis, you can have this long sustainable growth curve. Now the really interesting thing about this is in the world of SaaS; this actually guides what products and features we’re going to offer the customers.
The quote at the bottom is a quote from our CEO at HubSpot. So back in 2011, we had really good top of the funnel tools traffic, like blogging, SEO, social media, etc. We had a pretty mediocre middle of the funnel tools, things like email automation, drip marketing, and all that stuff. And what we found was that customers who used the middle of the funnel tools even though they were pretty bad, customers who used that were more likely to stick around.
So we said OK. Even though more people want top of the funnel tools – like driving more traffic is the really popular topic – instead of focusing on those top of the funnel tools, just because lots of people say they want them, we’re going to focus on those middle of the funnel tools. Because that’s what keeps customers around, that’s what helps us build that long-term retention curve.
And so now obviously we have world-class middle of the funnel tools.
So this is what I encourage you, especially if you’re an entrepreneur or even if you have a small team.
Marketing – Growth
Most of us think of marketing as driving awareness and acquisition, we’ve got to get more people to the website, lower cost per click, do more SEO, rank higher on Google, etc. But if you really want to think in terms of growth like world-class growth teams at SaaS companies, you have to combine that whole funnel. It’s not just about getting traffic, you have to convert it. E-commerce focuses on that, but then it’s that activation, that retention loop, and that referral to keep people coming back, keep them around.
So when we talk about SaaS economics, software-as-a-service economics, we talk about it a little differently than transactional economics, like traditional e-commerce. We usually talk about gross margin per transaction and things like that, cost per click. In SaaS economics they use a customer-centric framework, so you’re not putting a dollar into selling a $2.00 item, you’re putting a dollar into acquiring a $2.00 customer.
So COCA here is the cost of customer acquisition, CLTV is the customer lifetime value. Because they’re really good at keeping customers, they get to think in terms of lifetime value. And we look at these as a ratio. So a dollar in and $2 out, that’s a 1 to 2 ratio, that’s a sane ratio.
That means you can spend more money on the really interesting marketing like the world-class SaaS companies, or you could be more profitable, two dollars in and twelve dollars out. That may mean that you’re not investing enough in growth. You may be able to grow faster and have more innovative marketing, have better content, have a better experience for your customers if instead of a 2 to 12 ratio maybe we spent $4, so that’s a 1 to 3 ratio, $4 to 12.
So I’m looking at it from “I’m not spending money to sell an item, I’m spending money to acquire and monetize a customer.” This creates competitive leverage. Most of us, especially in the e-commerce world, look at our businesses like the yellow line.
We have to make a little bit of profit on every single customer, and because of that, we don’t spend a lot of money to acquire those customers. SaaS economics on the other hand, or anybody who’s confident their customer is going to come back, can actually lose money to gain a customer. So for example, if you have $100 a month subscription you might spend $1,000 to acquire that customer. That’s not at all unreasonable, that would be the green line. Because you know that they’re going to stick around and eventually you’re going to have a superior sort of long-term monetization.
Now the worst thing you can do is be that little red line there, where you lose money to acquire a customer but then you’re not good at keeping those customers around. This is sort of where HubSpot was when I joined in 2010-2011. We were really good at getting customers, but we hadn’t super focused on keeping the customers, or we hadn’t focused enough on keeping them around, and we were losing them because we weren’t focusing enough on customer success.
And as I showed in that sort of plateau graph that means that there’s going to be a ceiling on how fast and how far you can grow. So, thinking of it this way is not just a semantic distinction, it creates actual growth leverage. I can spend more money to get customers.
So I have one quote that I want you to remember, if you haven’t listened to anything I’ve said so far or you don’t listen to anything else later, just remember this one quote:
“If you’re good at keeping customers, you can spend more money to get customers.”
That is the core bit of leverage in SaaS commerce. So we look at this as a similar funnel, but we start with what our customer lifetime value is, and work our way back.
So if your customer lifetime value is $1,200 if you have a twelve dollar monthly subscription with one percent churn, and you want a ratio of one to three, you want to grow relatively aggressively, you could then break it down into your funnel and know how much you can spend in each stage. So that means, if your customer lifetime value is $1,200, your target ratio is one to three, that means you can spend $400 to acquire a customer, $40 to acquire a lead, $2 to acquire a visit if your funnel looks precisely like that.
By modeling this, now we can find these points of leverage, and at $2 per visit, there’s some pretty interesting stuff that you can do if you can afford to spend $2 to drive a visit to your website. Don’t worry about the specific numbers here, it’s the way of looking at it as a funnel, but not a funnel to sell a transaction, it’s a funnel to acquire and monetize a customer.
So Starbucks is one of my favorite examples of this.
Starbucks is obviously a famous global brand in coffee and breakfast sandwiches etc. Starbucks has an average transaction value of about six bucks. They have an average customer lifetime value of approximately $14,000. So if you’ve ever been to a Starbucks and wondered why they have great Wi-Fi, and they’ve got big comfortable leather couches, and they don’t care if you hang out there all day, it’s because the Starbucks marketers know that they’re not trying to spend $2 to sell a $6 cup of coffee, they’re trying to spend $ 2000, maybe $3000, maybe $5,000 to acquire and retain a $14,000 customer. That opens up all kinds of opportunities, leather chairs, Wi-Fi, big fun things that you can do for your customers, big fun marketing.
This is the power.
There is an important danger that comes up when you start looking at your business this way. I delivered this line in Turkey by the way, and it didn’t translate culturally, so forgive me if it doesn’t translate culturally here. But if you study finance in the U.S., eventually you’ll come across this phrase which is:
“Cash flow is more important than your mother”
What that means is that if you’re losing money to acquire a customer, even if you’re really really good at keeping them around, you’re really really sticky, you can grow yourself out of business. I’ve seen it happen with lots and lots of startups. You acquire so much revenue, but because you’re spending more money to acquire those customers faster than their they’re reaching their payback period, you run out of cash, and you go out of business.
So this is a common complaint with e-commerce companies:
“We could never afford to lose money on acquiring customers.”
It’s either because you’re not getting them to pay back fast enough or because you don’t have enough cash on hand. You look at a lot of the SAS startups, and you wonder why they raised so much money right when they have a very healthy model. The reason they raise so much money in investment capital or whatever is so that they have enough cash on hand to acquire the customers so that they can have that long-term monetization.
Amazon is a great example of this. Amazon makes 300 thousand dollars a minute, every minute of every day, but with very little profit, because they continually invest in new innovative things like their web services but also in customer retention rate and acquiring and growing new customers. They’re investing that product back in that. So Amazon has it a little bit easier than most e-commerce companies because Amazon has everything to sell. So it’s easy for them to know that people are going to come back and buy from Amazon, it’s easy for them to have lots of things.
I used to work at a company called “BuyLighters.com,” which sold little lighters. The problem with highly verticalized e-commerce sales like that is that it’s very hard to create a model where the customers keep coming back and keep buying more and more and more. So we tend to, in e-commerce space, have this inclination to go deep and have every possible thing that somebody could buy. If you feel like you can adopt the SaaS economics, odds are unless you’re selling almonds by the monthly supply or on a monthly subscription, odds are the better way to design it, it’s going to be to go wide.
Find somebody, find a buyer persona and own everything that buyer persona wants to have in their life. So you can keep upsell, resell and cross-sell and that’s that element of customer retention that drives e-commerce.
A favorite quote on this and the reason that companies like Amazon or SaaS companies do such good marketing is from Jeff Bezos. When he originally decided to add negative reviews to the Amazon website he got a nasty letter from his investors.
His investors said “Listen, Jeff, we know you think this e-commerce thing is going to be big and all but you obviously don’t know how to run a business. You make money when you sell things. Why would you do anything to discourage people from buying from you?”
This is a common thought: any money is good money is a common thought that we have especially in the e-commerce business. When you start looking at your model from a customer-centric perspective though, you start to see the lie in that. Because you can acquire customers and if they’re not sticking around, you’re actually going to lose money, you’re going to have bad retention.
Bezos replied with “We don’t make money when we sell things, we make money when we help customers make purchase decisions” and that’s what the Amazon experience is oriented around for customers. Not just selling you things, but helping you make a decision.
Now they have a harder job, and this is their disadvantage because they’re the everything store, they can’t have the deep content, deep nurturing experience that you might have if you own a single buyer persona. Then you can make much much better decisions and help people make those decisions.
The e-commerce Marketing Sousaphone
But the way you want to look at it is instead of that funnel which I showed you earlier; I call it the e-commerce marketing sousaphone because the bottom of the funnel there forms an infinite loop with the middle of the funnel. As you get customers in through the top, your goal is to keep them buying, keep them upsell, cross-sell and resell.
So the inbound commerce framework has what you might call an amalgamation of these various frameworks.
So you’ve got this “attract, convert, close, delight”, that’s the standard inbound marketing framework. But then you take these people who are in the relevance phase, people who cannot buy from you, who may never buy from you, but you need to build an audience of those people.
We wonder a lot of times with blogging, we’re getting traffic, and maybe not all of them convert immediately into sales. And e-commerce likes PPC, and they really like SEO. The thing is SEO and PPC are a freaking bloodbath!
You’re just trying to destroy your margins with PPC as much as you can, and with SEO everybody’s going after those “where do I buy cheap butane lighters” sorts of keywords. If you can go beyond that and focus on building an audience of people to whom your product is relevant, then you can be competitive earlier in the stage of the buying cycle and own that decision-making process. This is one of the reasons why being able to spend more to get customers is valuable because content is expensive. That sort of marketing is very, very expensive!
But if you’re good at keeping customers, you can spend more money to get customers. Then obviously people go through that decision-making process. The reason I like this graphic is because the arrows go both ways.
It’s not a funnel where we just beat them in the face until they move towards the next piece, towards purchase. E-commerce companies are as guilty of this as anybody. What do we call it? Email marketing. We spam our entire list three times a week with a coupon; we call that email marketing. This has no respect for where somebody is in this phase.
Our job is to help find out where someone is and balance the content that we’re sending them.
So if somebody is bouncing back and forth between a bunch of different product detail pages in the same category you know they’re in the comparison phase. You should send them content or deliver an experience that’s designed to help them make that decision.
And then once they purchase, it doesn’t end there. That’s where the upsell, cross-sell, re-sell, the repurchase phase that customer success phase comes into play. And then, of course, using them to acquire new customers getting those reviews.
So this company in Boston doesn’t consider it a cost center if people call their customer support team because they know that if they can get people on the phone with their customer support reps, they are way more likely to stick around long term. So they actively solve for getting companies to call their support team, they’ve got their text for their customer support team because they know that people are going to stick around.
So that first half, all of this is the customer cost of customer acquisition all the way through to purchase, and then this bottom half is the customer lifetime value.
Now I want to touch on just really briefly one weird quirk of this. So Amazon, these different marketplaces what they’re doing is they’re leveraging something called platform strategy which is very popular with SaaS companies. So Facebook, Google, Salesforce, HubSpot all of these are platform companies where you’ve got this app marketplace, and people build features on the app marketplace.
And that helps the company know without having to build a power dialer, it helps them know that “ok, not that many people are interested in power dialers but there’s somebody out there that can build that feature and have that.”
When you’re selling on Amazon, when you’re selling on eBay or one of these marketplaces what you’re doing is helping them test which of these use cases, which of these product lines are the most profitable. Because then they know which ones are most likely to keep people sticking around for a long-term, for a long time. Then they know that they can start doing some of that themselves, they can start selling their own branded products. This is the evil genius of a platform strategy.
If you’re really good at selling on Amazon and those customers stick around for a long time, you’re going to find yourself competing with the Amazon marketplace.
So that is the end of my abbreviated crash course on SaaS economics. The fundamental precept again, that I want you to take away is that if you’re good at keeping customers you can spend more money to acquire customers, and that lets you do the really interesting marketing that creates long-term growth.
This is where Sam’s presentation ends. You can watch the whole webinar below and also look out for part 2, the conversation between Sam and Valentin about retention, growth, the role and impact of the big players such as Google, Facebook, Amazon in the world and the future of our planet.