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Marketing Handbook
UNDERSTANDING THE WORLD OF SAAS AND HOW TO MARKET IN IT
The strategies described here are not limited to SaaS; they apply
to any subscription business. Marketers promoting a platform or
infrastructure as a service (IaaS and PaaS, respectively) can make
use of the techniques described in this eBook—likewise for those
who sell cloud applications. The buyer and unit of licensing (per user
versus per gigabyte or per instance) will change, but the techniques,
or acquisition and retention, are fundamentally the same. Acquire
customers as quickly and cheaply as possible, and hang on to them
for as long as you can.
Name – As the generic nature of the term suggests, this is just a name marketing has qualified to some level and is ready to turn over to
on a list or in a database. At this point, marketing has performed sales. The qualification process varies from company to company,
little, if any, qualification—except perhaps that this person matches but typically comprises a combination of profile (demographic, role)
the desired demographic or buyer profile. and activity (video watched, eBook downloaded). For example, you
Note that MQL, SAL, and SQL are more common in B2B SaaS sales and marketing organizations.
Self-service B2B and B2C SaaS may simply use the terms qualified lead and opportunity.
Annual Contract Value (ACV) – This is the annual value of a while a five percent churn leaves 29. Churn can also be measured in
customer contract. dollars—termed “dollar churn.” And “negative churn” means that
your company is expanding sales in existing accounts faster than it’s
Annual Recurring Revenue (ARR) – This is the annual revenue
losing revenue from those who don’t renew. Negative churn is the
that is expected to renew (recur) for a customer or set of customers.
ultimate goal.
ARR is the total contracted revenue of all customers, minus the
percentage that won’t renew—the churn. Note the difference
between this and ACV, which doesn’t include churn. ACV is useful
when discussing an individual account or when building your funnel
for new business. ARR is useful when discussing the state of a
company’s overall business.
* According to the “2014 Pacific Crest SaaS Survey,” the median unit churn for SaaS companies is eight percent. I think this survey paints a rosier picture than that of
reality, as do some prominent VCs—like David Skok. It really depends on your business, but a unit churn of under 15 percent is pretty good, while under ten percent is
very good.
On the following page is my SaaS Marketing Maturity Model, and egg problem, and there can be a lot of finger pointing. Is it the
developed while I’ve held three SaaS head of marketing positions. marketing or the market? Do you need to change the product or get
The idea is to demark which stage your company and product are in, more people to try it? Why can’t sales close more deals?
and therefore what is required of marketing. It can feel like a chicken
In order to achieve better team alignment, I recommend using these five stages. Agree among your team what [mark|goal|measurement|target]
you are trying to solve for, and agree when you are ready to move from one stage to another. In general, marketing will need to provide content,
some degree of public awareness, and some demand generation in all five stages, but your level of investment and tactical focus will vary. For
example, demand generation in the initial Product/Market Fit stage may simply comprise setting appointments for your CEO and head of
product to discuss possible directions with prospective customers.
Stage
Focus
Exit Criteria
Timeframe
Figure 3: The five stages of the SaaS Marketing Maturity Model, shown with focus, exit criteria, and timeframe by stage.
* Sean Ellis, a well known SaaS marketer, uses less stringent criteria, requiring
40% of customers to be “very disappointed” if denied your product.
sure you can afford each channel by comparing it with your CLV. programs to reduce it as much as possible. By this stage of maturity,
Eliminate any channels that are ROI negative over the customer your ARR has become a big enough number that high (or growing)
lifetime, and shift investment into those that are ROI positive over churn is a problem. To reduce it, marketing might invest more in
is to move beyond just supplying enough leads, maturing so as to the product team to develop features that increase your product’s
know which channels produce the best leads. stickiness. Achieving negative dollar churn through aggressive upsell
and cross-sell might even be possible. By this stage, marketing should
Exit Criteria: Organizations can exit this stage when they know
have matured enough to measure leads by channel and by cohort.
their top conversion channels and marketing assets, and know that
money invested in these will produce more demand and profitable Exit Criteria: Organizations can exit this phase when they have
FREEMIUM
This is a portmanteau of the words free and premium, i.e., from
free to premium. Here, customers are provided a useful piece of
free software, with the option to purchase a premium version having
additional features. Some SaaS companies build in a viral aspect to
DEMO
Not all SaaS vendors want to offer trials, even if they’re possible.
For example, offering a trial for complex products requiring user
training—such as accounting or ERP software—can sometimes
backfire – by confusing or frustrating users – and thereby hurt
conversion. The high-touch sales model may be dictated by such a
product, so a demo performed by a trained SE or salesperson may
be required. Some companies offer assessments where they run their
software for the client, then show the prospect their before and after
results.
In a no-touch model, you do not need account managers, and may or may not need ISRs.
Here is an example. Let’s say you have a net new ARR target of
STEP 5: Now determine how many initial inquiries you need to
$5 million. Your company is relatively young, with new ISRs and
produce 800 MQLs. You know that about 50% of them convert to
little carried over pipeline, so the assumption is that marketing is to
MQLs. 800 ÷ 0.50 = 1,600 inquiries required.
generate 100 percent of the leads for new ARR.
When your process gets more mature, you should measure the ratio
To keep the math simple, your product will sell for the non-negotiable
of inquiry to MQL by channel and create a weighted average. For
ACV of $25,000. Inverting the funnel for emphasis, Figure 5
example, display ads may convert less frequently than pay-per-click
illustrates this reverse-calculation process.
(PPC) ads, so calculate a weighted average for overall conversion that
STEP 1: Start with a target of $5 million. takes this into account. (Hopefully, in this case it goes without saying
that you should shift your spend to PPC as well).
STEP 2: Divide this total by the average ARR ($25,000) to determine
the number of customers you need. $5,000,000 ÷ $25,000 = 200 STEP 6: Our final step—and potentially the most discouraging—is
closed opportunities. to factor in your direct mail response rate and that of the free trial on
your website. Let’s say this rate is 2%. 1600 ÷ 0.02 = 80,000. Thus,
STEP 3: Calculate the total number of opportunities, or SQLs, you
to obtain 1,600 inquiries you need a combined 80,000 prospect
need to generate 200 closed opportunities. Your VP of sales believes
names sourced from both your database and website visitors.
his reps can close one out of every three potential deals. Thus, 200
× 3 = 600 SQLs.
Also, it’s worth noting that the marketing team may have a role to
play in renewals. Unlike on-premise software sales, where the bulk
of the revenue is made upfront and then the customer is essentially
trapped into paying annual support and maintenance fees, SaaS
renewals are a more significant piece of the revenue. A customer,
not having made such a large upfront investment, has more freedom
to leave, and the financial impact is greater on the SaaS vendor. So
while the inverted conversion funnel is a useful way to visualize how
to calculate net new ARR, your team will need some programs for
renewals.
Below are some of the metrics I think a SaaS CMO should share, weekly and monthly (and daily once you get your monitor mounted)
Putting this all together, Table 1 below allows you to show all of your metrics in a way that’s easily understandable and with enough detail for
a good discussion.
Conv % Conv %
Marketing Closed Velocity
MQLs SQLs MQL-- Avg. ACV SQL --> Cost CPMQL ROI
Channel Won (Days)
>SQL Closed
Table 1: Showing performance of marketing channels by conversion, cost, and deal velocity
What was the CAC for the January cohort? Why was it lower? Did However, note that delineating cohorts by month can be meaningless
you optimize the landing page or reduce your ad spend to acquire if you haven’t made any changes in your product or process that
them? How about the churn? Did December’s product improvements would cause people (e.g., site visitors) to behave differently. Likewise,
have an effect on the January cohort? And so on. some other factor that indicates higher revenue potential,
Cohort analysis is especially important in SaaS because customers or the likelihood of cancellation, may be more powerful than the
pay monthly, the marketing team is changing acquisition tactics month they signed up. You can, for example, group customers by
monthly, or because the product is changing monthly. Or all of those who used a certain feature or responded to a promotional offer.
these. Measuring quarterly or annually may mask important trends
THE MAGIC NUMBER, A.K.A., CAC RATIO
that you should continually know about (so as to be able to react
The magic number is a metric that can be used to determine the health
more quickly).
Here is how it works: Divide your new recurring revenue by the sales
You subtract Q3 recurring revenue from that of Q4, so as not to
and marketing costs required to generate it. Your CFO should be
count renewals. Plugging in some simple numbers, let’s say Q4
able to tell you the annual sales and marketing cost—the CAC—
recurring revenue is $2,000, while that of Q3 is $1,000. The new
which includes your marketing programs plus all sales and marketing
ARR you acquired in Q4 is $1,000 × 4 = $4,000. You spent $4,000
salaries.
in marketing programs, plus the sales and marketing staff salaries to
Assuming leads from Q3 close in Q4, the calculation is: generate it. So your calculation is:
((Q4 recurring revenue – Q3 recurring revenue) × 4) ÷ sales and $4,000 ÷ $4,000 = 1. This means you make your money back in one
marketing cost year. Not bad, and if the CLV is three years, or $12,000, it’s a pretty
profitable customer.
* N.B.: There are many variants of the CAC ratio and the magic number. The first big difference is whether you base it on revenue or gross margin. I prefer revenue,
because it’s easier to get these numbers. Also, as Dave Kellogg points out, the CAC ratio measures the efficiency of acquiring customers—how many dollars to earn a
dollar—while gross margins have more to do with the overall efficiency of the business, including hardware, networks, engineers, and many other factors. Some people
flip the ratio, putting cost in the numerator (top) position, and revenue/margin on the bottom. Just be clear how you calculate CAC ratio with your audience. Obviously
you are talking about two very different numbers if you put costs in the numerator versus denominator! If you are raising venture capital, find out how the firm you are
pitching calculates it and use their method.
Figure 7 shows these three magic numbers in chart form. You can
easily see the payback period for the $4,000 investment in acquiring
a customer. Keep in mind that most companies would expect a two-
to-three year CLV, assuming a churn of less than ten percent, so all
of these customers will be profitable.
The new B is sometimes called the challenger, while A is the champion. A/B A whole new crop of tools has emerged that lets SaaS vendors
testing can be used for web pages, landing pages, registration or sign up monitor a customer’s progress during trial, onboarding, and ongoing
forms, pay-per-click ads—almost anything marketing creates. While any use. They then alert the customer success team about issues such as
increase in conversion is good, new A/B experiments, to which they’re simply lack of use, need for training on new or advanced features,
referred, should be prioritized by the biggest potential gain. drop in engagement from key executives, or gaps in the customer
realizing benefits from your software. Customer success managers
may also play a part in the renewal process, depending on the
company.
Sysomos is a social media analytics and monitoring solution that why. By using Totango and the health scoring system, Sysomos was
provides context to the hundreds of millions of online conversations able to reduce its overall churn rate by 25 percent in just one year.
happening every day. The company had seen a steady rate of churn
over several years. It needed to understand why customers were
leaving so it could put programs in place to mitigate the problem.
At the end of 2013, its client experience chief was tasked with
implementing a new customer success strategy.
PITFALL #1 PITFALL #2
“[Person’s name] a [board member | personal friend | fellow CEO | next-door No money. Going back to Dispelling SaaS Marketing Myths, SaaS
neighbor] told me they are getting a [ridiculously high number] conversion marketing costs money. More often than not, the ways you generate
rate for [a dollar amount ranging from zero to implausibly cheap]. Why can’t conversions early—by tweaking the signup, SEO, and blogging—
we do that?” involves people, your most expensive line item. Once you are past
that stage, you need more people and money to grow. Be wary
Make sure you’re comparing apples to apples and you get
of a SaaS startup that doesn’t have significant money to invest in
documented proof of said conversion rate. People commonly
marketing.
confuse the following:
No or bad data. You’ll need software and people to gather and are less effective and require significant education of the executive
analyze data. Make sure you have staff, tools, and access to stats from team.
your website, product, and CRM. And you’re never done collecting,
PITFALL #5
cleaning, or analyzing data, so make it part of your marketing
Doing traditional marketing for a SaaS business. Trade shows.
routine, not an annual exercise.
Printed materials. Field marketing.
Corollary: Collect your own data and do your own analysis lest others
Change it up, lest you be considered a dinosaur.
do it for you (trust me, the analysis of others will never be better…)
PITFALL #4
Using marketing metrics with business people. Lesson: Use business
metrics.
BLOGS
Chaotic Flow, http://www.chaotic-flow.com/ (Joel York) – SaaS sales SaaS Growth Strategies, http://sixteenventures.com/ – Lots on
and marketing strategy, business models, pricing, and metrics. customer acquisition, growth hacking, and churn reduction.
For Entrepreneurs, http://www.forentrepreneurs.com/ (David Skok) SaaStr, http://saastr.com/ (Jason Lemkin) – SaaS sales and
– Advice on SaaS sales and marketing strategy. Detailed posts on marketing growth strategies. More coverage on the sales side.
SaaS metrics.
Thomaz Tunguz Blog, http://tomtunguz.com/ – The eponymous
Kellblog, http://www.kellblog.com (David Kellogg) – Lots of SaaS blog from this venture capitalist provides good advice on SaaS
business, S1 and IPO analysis, along with other observations on growth, in addition to analysis of SaaS deals and IPOs.
both growing a startup and Silicon Valley.
SaaS Sales Models Strategic and Organizational Choices, Joel York (2012)
– A useful guide to help pick the best go-to-market strategy for a
SaaS startup.
ACKNOWLEDGEMENTS
I owe a debt of thanks to a number of SaaS marketers and venture capitalists who looked at early drafts of this book, gave me constructive
edits and ideas on what to include. Thanks to Chas Cooper (Meltwater), Dori Harpaz (Incapsula), Chau Mai (Skyhigh Networks), Jon Miller
(Marketo, Engagio), Kaiser Mulla-Feroze (Totango, Salesforce), Tomasz Tonguz (Redpoint), Chris Rowney (Mod N Labs), and Joel York
(Meltwater).
And though I have never met him, thanks to David Skok (Matrix Partners), whose For Enterpreneurs blog was a reference for me as I learned how
to become a SaaS marketer.
If you work as a marketer, or hope to become one, you have a lot to know. The Professional
Marketer is your guide book.
The Professional Marketer is organized into six sections, starting with marketing strategy,
moving on to awareness, then to demand generation, working with direct sales and
channel partners, and ending with concepts key to running a marketing department.
“No book I have ever read in 30 years as a “The Professional Marketer is a great tool for CMOs “The Professional Marketer, which provides
marketer has so successfully woven the insights from looking to equip their teams with the marketing practical tools to help get things done, will be an
masters—past and present—into such a readable, strategies and techniques they need to win.” invaluable guide book for professionals who want to
cohesive narrative.” – Donovan Neale-May deliver under pressure.”
Executive Director, CMO Council
– Hugh Macfarlane, CEO of Math Marketing; – John Ellett, Author, The CMO Manifesto
Author, The Leaky Funnel