- If you're building out a SaaS business,
there is two metrics that every investor looks at
to figure out if you've got a healthy business,
if you've got healthy growth.
If you've got a way of building out this business
that's actually scalable.
The two metrics are Customer Lifetime Value
and Customer Acquisition Cost.
On this video, I'm gonna be digging into
Customer Acquisition Cost.
I'm gonna explain exactly what it is,
why it's important, and the three strategies
that you can use to actually reduce that cost.
Intro.
(upbeat music)
What's everybody, welcome to Unstoppable.
I'm TK, author of the book,
"How to Punch the Sunday Jitters in the Face,"
entrepreneur, star founder and angel investor.
On this channel, I help star founders like you
build and execute on an unstoppable strategy
across your life and your business.
I drop an episode like this every single Sunday
with the TK energy, so be sure to hit the subscribe button
and the bell icon so that you get notified
when I drop an episode.
So as I was building out my SaaS business,
ToupApp, which I took from zero to 7 million a row,
which we then sold to Marketo
and then I worked at Marketo
to help build out that SaaS business
and sell it to Adobe for $4.75 billion.
I learned a thing or two about what makes
for a healthy SaaS business through the twists
and turns in the road and what I learned
is there are two sets of metrics.
There's a set of metrics that you actually
look at to navigate the path to growth,
to navigate your product to product market fit
and there's a separate set of metrics that investors
look at to actually understand
if you've got a healthy business.
Now the thing is one is a leading indicator
and the other is a lagging indicator.
They're both important.
On a prior episode, I walked through
the five SaaS metrics that I use
to actually diagnose and understand
how to scale the growth of a SaaS business.
They were acquisition, activation,
revenue retention, referral.
These five metrics actually tie
into a flywheel and if you look
at them together as a flywheel with your ICP,
your Ideal Customer Profile in the middle,
they actually help you navigate
this path to product market fit.
To help you understand what's working and what's not,
there are leading indicators to really start
to understand, all right, how do I ship code or close deals?
Those are the two levers that matter the most.
If you wanna dig more into what the SaaS metrics
are and how this actual flywheel works,
you can check out this video where I go more
into these SaaS metrics, I'll link to it below.
You don't have to leave right now,
but on this video I wanna talk about the lagging indicators.
Here's the thing, what I learned
is you can have an insanely successful product.
You can have really high engagement metrics,
but still not have a successful SaaS business
in the investor's eyes, there's a difference.
What that means is, and we've seen this
not just in like our own experiences.
You can look at Uber, you can look at Lyft,
you can look at WeWork.
Customers love these companies
and the products that have to offer.
However, investors gauged them on a completely
separate set of metrics to understand
if they're profitable businesses.
And that's where this dichotomy
comes between your five SaaS metrics,
which is really driving for a user engagement
and user growth and user value
and that product market fit
and whether it's a healthy business.
This is why the two metrics that matter
the most is Customer Acquisition Costs
and Customer Lifetime Value.
These two metrics which are lagging indicators,
you can't predict them upfront
until you really get this flywheel going,
really gauge whether your building
and bringing in customers and serving
them in a profitable way.
So on this video I'm gonna really dig
into Customer Acquisition Cost.
In Customer Acquisition Costs,
I'm gonna walk you through what it is,
why it's important, three strategies
that I use to actually reduce it.
On the next video I'm gonna dig
into Customer Lifetime Value.
Customer Lifetime Value again,
what is it, why it's important
and how to actually increase it.
So be sure to hit the subscribe button
and that bell icon, that way after this video,
you learn everything about Customer Acquisition Costs.
You'll also know how to actually optimize
for the Customer Lifetime Value as well.
If you're excited, dig in also smash
that like button and let's get right into it.
Customer Acquisition Costs,
I mean I don't wanna overcomplicate it.
All that really is is how much money
you're spending in over a period
of time to bring in customers
and there are different variations
on exactly how you calculate it.
A link to some resources below
in my Unstoppable Guide To Product Market Fit,
which you can download.
We go into some details into how to actually calculate
and their variations of it, but the gist of it
is for a given period of time,
how much would you spend in sales?
How much did you spend in marketing
to actually bring in the number
of customers that you brought in?
That's what Customer Acquisition Cost is,
and needless to say, you wanna bring
that as a low as possible, and the benchmark
for this is it needs to be lower,
way lower than the lifetime value of the customer.
Meaning if you spend a dollar
to bring in a customer and that customer
only pays you 50 cents through its lifetime,
you have a terrible SaaS business.
However, if you've spent $1,000 to bring in a customer
but over the lifetime value, on average,
the customer actually spends 50,000
or 100,000 or $1 million with you,
then you've got a great SaaS business.
Now there's nuances to this.
Now that you know exactly what CAC is and what LTV is
and why it's important, why investors obsess over it,
you're probably asking all right TK,
I'm with you, how do I actually reduce my CAC?
I'm glad you asked.
I'm gonna give you the three strategies
that I've consistently used to actually
reduce CAC for your SaaS business.
This is where I always go back to my flywheel.
I'm starting to call this my unstoppable
flywheel for SaaS growth.
I like to give it names and I kinda like this
and the whole idea, again, a link to the video.
This is the video, the SaaS metrics video.
I'll link to it below, you can check it out after.
Basically it explains each of these metrics
but the whole way this works is you have
your Ideal Customer Profile,
which is like the core group of people
that you really wanna go into
and then as as you bring people
from your Ideal Customer Profile
and you acquire them into your product
or your sales process, you measure acquisition,
which is when they get into the process.
You measure activation, when they start using the product.
You measure revenue, when they actually pay you money
post the trial or a sales process.
You then measure retention to figure out how long
they stuck around and the measure referrals,
how many of them actually refer other people
to join your company or your product.
That is basically the flywheel
and you can check out the details
in the video that I linked to down below.
When it comes to reducing CAC,
the natural inclination for most founders is to start here.
They'll start to say, well, I've got this ICP.
Maybe I'm running ads, maybe you have a sales funnel,
maybe I'm cold calling, cold emailing.
Let's focus on this and make sure
we're hyper efficient here.
That's usually where I say, you know what,
don't focus on that in the early stages yet.
That should be number three
and I will get to number three strategy.
The first places you really wanna focus
on are the people that are already
in your funnel or in your ecosystem.
Meaning these are people that already trust
you enough to be in your product
or actually becoming clients and customers of yours.
They trust you that much, they already paid you money.
The easiest ways to actually start
reducing using Customer Acquisition Costs
is by leveraging the people that are already trust you.
So my first strategy that I always give clients
that are part of the Unstoppable Startup Accelerator
and people that I work with and advise
in the SaaS business that I've ever worked on
is actually focusing first on referrals, this piece.
This piece from referrals.
These are people that are already customers.
They've already paid you.
They're staying, they're using your product.
You wanna actually start doing
referrals and asking for referrals.
The biggest thing I learned about driving growth
for SaaS businesses is that it's actually
pretty simple principles but as it always goes,
simple is not always easy.
Yeah, it's a little bit hard
to gather up the courage to go up
and say, hey, do you have three
other people that would love our product?
Because here's the thing,
if you're selling to a certain type of ideal customer,
say you're signing the VPs of sales,
at ToutApp we sold the VPs of sales,
they hang out with other VPs of sales
and they talk about the tooling that they use.
So being able to go up to them and say,
hey, we are doing a lot of value for you.
I hope you're happy, I understand that you're happy.
It would be awesome if you can refer
me to three other VPs of sales
that would love our platform
and love our product because we wanna bring
on more people onto our platform.
It's hard to do and it takes a bit of courage,
but once you start doing it,
you're leveraging your most rabid fans.
If you're kinda in the lower end in the market,
and by the way, I did a whole video
on market segmentation that you can check out,
I'll link to it below.
If you're in the mid market or in the lower in the market,
not in the big enterprise,
you can start to run incentives even,
inside your product to drive for referral.
Have a general referral button
and a referral bonus and give them
an extra quarter free if they're actually
bringing on a customer into your platform.
So you can start to do a lot of things on driving referrals.
My favorite thing to do, which wasn't my favorite before,
is to actually host client dinners.
This is a trick I picked up from a book by Marc Benioff.
He talked about how in the early days of Salesforce,
he held these client dinners
and he would bring a mix of people
that were clients and people
that were prospective clients
and also mix with people
that were just brought along by existing clients
because they would be a good fit
for Salesforce as well.
And that was super, super powerful.
There was a caveat though.
I'm generally an introvert.
I'm kind of an ambivert and I was a deathly
scared of doing these dinners.
My then VP of customer success, Cliff Kate was like,
"TK, we gotta do a dinner,
we gotta bring these people together.
It'll solidify our position with our clients,
but also it'll get us new pipeline
because they're gonna bring friends.
So we've got to do this dinner."
And I'm like, a clear look.
What are we gonna do in this dinner?
What do I talk about?
If you're doing dinners and you're kind of scared of them,
I have something for you, this is sort of an aside.
I ended up inventing this game for these dinners.
I call it truth are bullshit
and the truth or bullshit game
is there's a very specific way
to do it and they ended up driving
the most successful client dinners.
It gave me a framework to go into this room
and talk to this group of people
and play this game and got everyone talking.
So that's part of this whole referral strategy.
Either ask them for it or bring them
into this client dinners
and if you're afraid of doing these things,
if you're afraid of hosting a client dinner, just do it.
- Do it, just do it.
- Its gonna be super valuable
but also play the truth or bullshit game.
Luckily for you, I love this game
so much and it's so valuable.
I play it all the time when I host dinner parties,
even with clients, I did a whole video on this,
the dinner party game, the truth or bullshit game.
You can check that out, I'll link to it below.
You can check it out after this video,
but that's what that looks like.
That's strategy number one, drive for more referrals.
Don't start to optimize on this whole
acquisition piece, get that later.
You really wanna optimize for people
that already trust you and start
creating space so that they can bring
more people into your movement,
into the software company that you're building,
that's this massive change agent.
The second strategy that I always highlight,
again to focus on the people
that already trust you is to really start
to focus on this activation to revenue piece.
This activation to revenue piece
is the second piece I want you to focus on
because they're already checking out your product,
they already kinda trust you.
Figure out how to actually increase activation.
Figure out how to actually increase revenue.
This is the best ways to actually drive
down your Customer Acquisition Costs.
Because remember, your Customer Acquisition Cost
is how much did you spend in say last quarter
and how many customers did you bring on?
So your costs will go down if you increase
the number of customers that you bring on
that you actually spend money getting into the conversation.
So the more these metrics go up,
the more effective your CAC is going to be,
your Customer Acquisition Costs.
So number one is actually ask for referrals
and create space and host dinners
to actually drive for those referrals.
The second one is actually improve
your activation and your revenue metric.
Because if you can do those things,
if you can actually tweak those
so more people that you already spend money
on to start to enter the conversation
and actually convert, then you CAC goes down.
So if you're starting to see this, the core principle,
the first principle around all of this,
both the two strategies around focus
on the people that already trust you
and get them to trust you more
and get them to bring more people
using their trust to actually into your platform.
If you started to see the brilliance in this
and why this makes so much more sense to reduce CAC,
can I just get a yes in the comments below
and also link me to your SaaS business.
I wanna check out what you're working on.
So those are the first two strategies.
The third strategy is where most people
would start but I always say leave
it to the end because that's the hardest to do.
It'll take some time and you can't over optimize
in the early days is your actual acquisition strategy.
This is the part where you're looking at your ICP
and you're actually acquiring these people
into your funnel, your Unstoppable Sales Funnel.
And by the way, if you're in that stage
where you don't quite have an Unstoppable Sales Funnel,
if you don't quite have a way to acquire
these customers into your product,
be sure to check out my video
of the Unstoppable Sales Funnel.
I'll link to it below, but that's what that looks like.
I go into the details of actually how to build
out this piece in a very specific way.
Now anyway, to reduce the CAC,
there's this thing that I've always done
in different SaaS businesses
or advise people to do is called the zoom in pivot.
What ends up always happening is there's a certain type
of customer, they're in a particular market segment.
There are certain type of customers
and there's a certain persona that a certain use case
that always is doing it better,
the cost to acquire them is actually lower
than most other people you're targeting.
This happened to me at TourApp.
At ToutApp we were acquiring BizDev people,
PR people, HR people, but turns out the salespeople
that were coming in through our funnel
actually paid the most, stayed the longest
and were the most excited about the product.
So we did a zoom-in pivot to actually say,
let's get more salespeople in.
That's what sells people on the homepage.
And that's really what got our flywheel
going faster and faster and faster.
So the third strategy I have for you to reducing your CAC
is to look at what type of customer,
which market segment is actually moving a lot faster
and it's actually cheaper to acquire
and if you can double down on
that so you can scale that one.
I go into a lot more detail into exactly
how to do this in my video on market segmentation.
You can check that out here or here.
I'll link to it below as well
so you can check it out after this video.
I know I linked to a lot of videos
to this video because I've just been thinking
very deeply about SaaS growth
and we've got a bunch of things that you wanna consider.
So when it really comes down
to actually optimizing for the lagging indicators,
these are the indicators that investors
really look at to see if you have a healthy business.
They are Customer Acquisition Costs
and Customer Lifetime Value.
On this episode I walked you through why
Customer Acquisition Cost is important
and the three strategies that you can use
to actually reduce Customer Acquisition Costs.
The first one is to focus on referrals,
host those client dinners, actually ask them for referrals.
The second one is to actually optimize
your activation and revenue conversion.
And the third one is to zoom in pivot
and focus on your market segmentation.
And for each of these there's a video
that you can follow down below to dig more into that.
Now this is just a component of driving SaaS growth.
There are a bunch of other things
that really go into driving the growth
of your SaaS business.
This is why I have my Unstoppable Startup Accelerator.
It's for early stage startup founders
that really wanna drive the growth of their SaaS business.
I work with you in a very specific way,
in a very structured way to actually drive that growth.
If you're interested in all the ways
that I actually help you drive that growth,
be sure to follow the link below.
I have a free unstoppable guide to product market fit.
In it, I share my exact secrets
that I follow and it guides startup founders too,
so you could follow that link download that guide
and you'll be able to see a full presentation
and full video and the full guide
on exactly how the whole thing works.
If you got value from this video,
it would mean the world to me and my team
if you smash that like button,
it just lets us know that you're appreciating
the content that we're creating,
just means a lot to us.
Also, I drop a video like this every single Sunday,
so be sure to hit that subscribe button and that bell icon.
In the next episode, I'm gonna be digging more
into the Customer Lifetime Value metric,
which is just as important to optimize for.
And lastly, remember, everyone needs a strategy
for their life and their business.
When you are with us, yours is gonna be unstoppable.
I'm TK and I will see you next Sunday.
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