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How to Price Software

I recently had to do a B2B pricing exercise for a company.  Here’s how I went about it – I triangulated based on three factors.

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Competition: I picked as many direct competitors or closest competitors or nearest substitutes or things my customer would compare us to as a frame of reference.  I then picked where I wanted to price my product relative to the constellation of data points.  I tried to do this for a 5 year cost of ownership.  This gave me one data point (high-low range) for the top corner of my triangle.

Cost Plus:  I considered my development costs and how many customers I wanted to get to recover my development costs. I then added my cost of sales and my company overhead to calculate my total cost (R&D + sales & marketing + finance & administration + profit).  This gave me the lower right corner data point.

Customer ROI: I considered how much money the customer would save if they purchased my product.  I tried to structure it so the customer would see a 9 month return on investment.

The above gave me 3 points on the triangle to consider.  Surprisingly, they were not very far apart.  In the end, I weighed the ROI calculation quite heavily in my analysis.

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I did the above as a total cost over 5 years.  Then I considered if I’d like this to be priced as an enterprise software (capital expense) or a recurring license (operating expense).

Good luck with yours!

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SaaS Economics

CIR SERIES: BUILDING YOUR ONLINE BUSINESS

Saas Economics

Welcome back! Let’s quickly recap the story so far.

Step 1: Plan and build a great Software-as-a-Service, or e-commerce site.

  1. Define a customer-centric product concept;
  2. Create a workflow to optimize the user experience;
  3. Test your product concept before you build it.

Step 2: Optimize your landing page.
Step 3: Improve your conversion from unqualified to qualified by becoming more trustworthy.
Step 4: Generate lots of leads

Previously, we explored the gamut of lead generation strategies available to online businesses. But clearly, all lead generation strategies are different and some are better than others.  This week, we’ll explore the economics of lead generation and it’s impact on your sales and marketing budget. Specifically, I’d like you to answer the question: How much should I be spending on customer acquisition?

THE ECONOMICS OF LEAD GENERATION

To start with, let’s define some key terms (see here for more information):

Average Sale Price (ASP): The average amount spent by your customers on your website.

Let’s say that a typical customer spends $100/month on your website. ASP = $100/month

Customer Churn Rate (CCR): The percentage rate at which customers stop buying your service.

Let’s say that 1000 people sign up for your service and 120 cancel the service within the first 6 months.  CCR = (120/1000)/6 = 2% per month.

Life Time Value (LTV): The expected lifetime revenue per customer

LTV = ASP/CCR

Let’s say that a typical customer spends $100/month on your website and the Customer Churn Rate is 2% per month.  LTV = $100 / 2% = $5,000

Customer Acquisition Cost (CAC): Your sales and marketing costs to acquire a new customer.

For a sustainable and growing business, your CAC should be less than 33% of your customer lifetime value.

CAC < LTV/3

If your LTV is $5,000 then a sustainable business would have a customer acquisition cost of $1,667.

Any sophisticated investor will ask you these numbers.  Know them off the top of your head.  If you are pre-revenue, they’ll ask your expected values. When they look at your financial assumptions, they’ll study these numbers carefully. If you have revenues already, they’ll ask for your metrics.  Work with your CIR to calculate and present this information most effectively.

Now back to your sales funnel statistics we worked up a few weeks ago here and here.

Let’s say that 1,000 people hit your website; 300 people reach the qualified stage; 10 try your product; and 1 customer buys your product.  Continuing with our example, above, you can afford to spend up to $1,667 to acquire that one customer. Which translates into a budget of $1.67 per visitor to your website.

If you want to generate $1M of new revenue, your lead generation budget should be ($1,000,000 / LTV) * $1,667 = $333,400.  (Note that this $1M is over the customer lifetime.  You can use a modified formula to calculate your lead generation budget based on yearly revenue from new customers. Revenue_Target / Annual_Revenue * CAC.

Using this model:

How much should you be spending on lead generation today?
How much are you actually spending on customer acquisition?

I’m guessing that you need to invest more in customer acquisition.

Talk to your CIR to measure your CAC, establish CAC targets and develop a plan to monitor and hit those targets.

I hope you enjoyed this series.

Lead Generation: Adding Fuel to the Engine

Welcome back! Let’s quickly recap the story so far.

Step 1:  Plan and build a great Software-as-a-Service, or e-commerce site.

I.         define a customer-centric product concept;

II.         create a workflow to optimize the user experience;

III.         test your product concept before you build it.

Step 2:  Optimize your landing page.

Step 3:  Improve your conversion from unqualified to qualified by becoming more trustworthy.

If you’ve made it this far in the series, you should have a compelling value proposition that’s been tested with prospective customers. You’ve also optimized the workflow up front.  Your landing page is looking good and you’ve built strong trust elements into the system to encourage conversion.

Phew!  That was hard work, but now that we’re done and the orders should be rolling in, right?

WRONG.

If I had a nickel for every company I’ve seen that built a great product only to be shocked that it didn’t take off, I’d be able to buy an extra shot venti latte by now.

Just because your web site is up and you’re open for business does not mean the orders will come flying in.  In fact, it’s quite the opposite.  The hard work is just beginning (sorry).

Everything we’ve done up until now is about building a “solid, high performance engine”, an analogy I used in my first post in this series.  Now that we’ve built a performance engine, let’s put some fuel in the tank and run some laps.

Lead Generation

This post is about filling the top of the funnel. It’s about lead generation – generating unqualified leads to fill the top of the funnel so that prospects can work their way through to qualified leads and ultimately to paying, happy customers.

Let’s consider your typical customer.  When they look for a product like yours, where do they go?  Do they go to their favourite search engine? Do they go to their favourite website to read about potential solutions?  There are dozens of different ways you can generate leads that send people to your website.  The best part is that many are free or have low entry costs. Let’s explore some lead generation sources:

 

 

Search Engine Optimization:

Part 1:  The first step in search engine marketing is to make your site search engine-friendly. This function can be outsourced for $3,000-$5,000, or you can do it yourself to conserve cash.  Here’s a great resource.

Part 2:  Create valuable content that others will want to read, share and link to. Publish weekly. Keep the information interesting, fresh and share-able.

Advertising:

Google Adsense and Pay Per Click (PPC) campaigns can be very expensive and a significant money-losing proposition if not done with significant prior experience or extensive research.  Having said that, when used effectively, Adsense can be a very powerful tool to drive traffic to your site. If you’d like to experiment, here’s a blog I particularly like.

Blogging:

Outbound Blogging:  Create a blog on your site and publish interesting content that your customers will appreciate and learn from.  Make it interesting, actionable, and insightful.  Publish regularly to keep the information fresh.  Make sure it’s easy for your readers to follow you and to share with email, RSS feeds, Facebook Likes, Tweets, etc.

Inbound Blogging: Reach out to third party bloggers who are writing about your industry. Contact them and let them know who you are and what you do.  Suggest that the blogger’s readers might be interested in your product or trends you see in the industry or interesting customer case studies.  Find a hook that will get them to write about you and your product.  Technorati and Google are good resources for finding the most influential bloggers in your industry.

Social media (Twitter, Facebook, Pinterest, etc.):

These days, social media is a must for any online business. Generally, B2C businesses may consider Facebook and Pinterest strategies most effective whereas B2B businesses may find Twitter and Blogging more effective social media strategies.

It can take six to twelve months to build a strong following. I recommend you blog once a week and tweet or post up to 5 times a day. Make your posts relevant and insightful.

Contributed articles:

What trade magazines, journals, papers do your customers read? Go to the publication website and see if they accept contributed articles.  If not, contact reporters or the editor to tell them about your product. Suggest that their readers might be interested in your product or trends you see in the industry or interesting customer case studies. Find a hook that will get them to write about you and your product.

Trade shows:

For the most part, I consider tradeshows a terrible waste of money for startups since they are expensive and typically provide very low quality leads.

YouTube:

Video is one of the most engaging and powerful lead generation sources. Product introductions, demonstrations and chalk-talk presentations can be a very effective resource for building awareness, interest, trust and buying intent.  Here’s a good explanation on how to promote your business on YouTube.

Webinars

Webinars are an outstanding way to raise awareness, interest, and trust in your product – particularly products with a more complex product offering. Involving customers or industry analysts in your webinar can be a particularly effective approach. The finished product is a great educational tool for your website.

Email campaigns:

To earn email addresses from visitors to your web site, make interesting content like market research reports, white papers and best practices available for download when visitors give you their email address.

If you have built an inventory of email addresses from trade shows, your web site and other sources, you can use mailchimp to keep in touch with your contacts and stay top-of-mind.  Make sure you’re adding value with each email, providing high value content or special offers.  The mailchimp website has lots of best practices to consider.

I realize that’s quite a long list of lead generation options.  Your homework for next week is to research any three of the above for your business.  Divide the responsibility among three people in your company to report back with their findings. Which do you think will have the highest return on effort for your business?

Remember, the more effort you put in to lead generation, the more you’ll get out of it.  I can’t stress enough:  This is a critical success factor in any business.  Make sure you’re dedicating a minimum of 50% of someone’s time to generating leads.  Plan to grow the time investment steadily as you start to generate results.

The next article in this series will focus on the economics and metrics of lead generation, so stay tuned.

Part 2b: What’s your Trust Score?

A startup recently came to me concerned with the high bounce rate they were experiencing.  We discussed two key tactics:

  1. Optimize the home page, (the subject of an earlier post) and
  2. Do more to build trust (the subject of this post).

In the real world, people are more likely to buy a brand name product or buy from a friendly, helpful, knowledgeable salesperson who stands behind the product.  While brand names pack instant credibility, your online visitors don’t know if they can trust you or your product. Consequently, you’ve got to give them many proof-points to demonstrate trust.  Here are a few for you to consider. Keep count. If you score higher than 10 out of 16, trust is probably not a barrier to sales.

Do I trust your site and your business?

The very first thing I want to know is if I can trust your site.  What reputation are you conveying?  Do I trust that you’re not going to sell my contact information? Spam me? Compromise my credit card? Is your site secure enough that someone won’t be able to hack in and steal my credit card or other confidential information?

There are several ways you can quickly and confidently convey trust on your website:

  1. Display a customer count.
    • There’s nothing like seeing “over 50,000 customers” or “over 500,000 widgets under management” to make someone feel good that they’re not alone – that your site has lots of happy customers.
  2. Show customer quotes.
    • Show customer quotes or tweets in a small scrolling window. If you’re a B2B product, show some of your customer logos.
  3. Media mentions.
    • If trade or general media have written about you or mentioned you in articles, show the publication logos with a link to the article.  If you don’t have any media mentions, consider reaching out to key publications that your customers read and tell them about your business. But before you do, make sure your pitch is polished and ready to go. And that you’ve got a reference customer who will speak to the media. See this pitch workshop for how to structure a pitch.
  4. Partnerships.
    • If you have partnerships with established, brand name companies, mention them somewhere on your web site.
  5. Awards.
    • If you’ve won any industry awards, show the award logo with a link to the announcement.  If you haven’t won an industry award, set this as a marketing objective.
  6. Blog, speak and contribute.
    • Perhaps one of the best ways to establish your reputation is by positioning yourself as a thought leader in the industry.  Blog, speak at conferences and contribute articles on trends you see in the industry; key problems customers are facing today and the sorts of solutions that are available today; or anything related that your customers would be interested in that establishes you as a thought leader and trusted information source.
  7. Trusted certification.
  8. Social Media.
    • Show your viewers your Facebook Like counter.
  9. Team.
    • Show off the bio’s of key executives, investors, board members and advisors.  If they’re credible, customers will be more likely to trust your business.

How did you score?

If you scored 7 out of 9 or higher, you’re doing well.  Your visitors are likely to consider your site trustworthy.

Do I trust that your product does what I want it to do?

It’s not enough to show that your site is trustworthy.  Does your product do what I want it to do?  There are several ways to ease your visitor’s concerns.

  1. Recommendations.
    • It’s well-proven that friends and colleagues that recommend a product are the most trusted and therefore the highest converting lead source.  What can you do to encourage people to recommend your product to their friends?  Price breaks? Special offers? Special status? A thank you email? One example I’ve recently come across encourages customers to a Tweet a recommendation (including a predefined a hash tag) and the vendor would give users a free upgrade.
  2. Product reviews and analyst reports.
    • Independent reviews from industry analysts, journalists and bloggers that describe your unique approach to solving customer problems is a valuable tool for establishing credibility and trust.
  3. Customer testimonials, case studies.
    • Write customer testimonials and case studies showing how your product solves customer problems.  Here’s an example from Ricoh.
  4. Product tour.
    • YouTube is a wonderful source for leads.  It is also an excellent tool to show customers how your product works before they buy.  Provide a simple online demonstration or walk-through of your product. If your product is more complex, create a series of videos to demonstrate various aspects of your product.
  5. Freemium Pricing.
    • Freemium is a well-accepted sales model. Many B2C companies give away a limited product to engage the customer and build trust in the hope that the customer will upgrade to a paid version to access increased capabilities.  A Freemium pricing model typically requires a large addressable market and typically achieves a 2-4% conversion from free to paid.
  6. Try before you buy.
    • A time-limited or seat-limited version allows customers to try the product, verify the fit, functionality and quality of your product before they buy. This pricing option often works well for B2B sales.
  7. Money back guarantee.
    • Finally, offering a money-back guarantee may be a good option to catch any last doubters.

How did you score?

If you scored 4 out of 7 or higher, you’re doing well.  Your visitors are likely to consider your product is trustworthy.

Part 2a: Qualify Your Visitor

In Part 2: It’s All About Sales, I gave the analogy of a shoe store.  Let’s say you’re walking past two shoe stores and you look in the windows.  Which of these stores are you more likely to enter?

 or 

Clearly, a store where the product is nicely displayed and easy to navigate is more appealing for consumers.  The same is true for your website.

Again, which of these web sites is likely to do more business?

  or  

A successful landing page should exhibit five key traits:

  1. In five words or less, you know exactly what the product does in a language that everyone understands and without puffy superlatives: Learn to code;
  2. You know why you want to use their product or service: to program websites and more;
  3. You know what’s special about their product: you can learn with friends and track your progress;
  4. There’s a clear (and only one) Call-To-Action: get started with no financial barriers ;
  5. The page is neat, concise, very light on text and includes a demonstration, video or screen shot that gives visitors a taste of what you do.

How well does your landing page convey these five traits?  You’re probably too close to your product, so ask someone who doesn’t know what you do to answer the above questions.

Landing Page Optimization

Let’s keep it simple and consider this hypothetical example:

From this Online Business Metrics Spreadsheet , we can see that 30% of visitors that hit our landing page click-through to learn more about our product.  What happened to the other 70%?  In this example 700 visitors (70%) leaked through the funnel.  They hit our landing page, looked in “the window” and either weren’t interested or didn’t like what they saw.  Losing 70% of our visitors is clearly an important priority to address.  How do we go about optimizing our landing page to reduce the lost business?

Unbounce is a wonderful tool that allows you to do real-world customer testing using quantitative, A/B comparison tests.  With Unbounce, you can create two versions of your landing page. Send half your visitors to one page and the other half to a different page and see which one leaks less. Keep the one that performs best and throw the other one away.

According to Unbounce, each test run should last one to two weeks and involve close to 1,000 visitors to get a high degree of confidence.Each A/B test should involve changing just one element to isolate improvements. Over successive weeks, try varying a line of text such as your Call-To-Action or your Value Proposition; your colors, fonts or your images and iterate to better and better results. Look at other websites for ideas – both competitors and those in other lines of business that you admire. Change one thing. Run a test. Keep/Discard. Repeat.

In general, a bounce rate of 30%-40% is considered good – i.e. we want to keep 60% – 70% of visitors on site so they can move to the next stage in the sales funnel.

Okay.  Now get to work testing your landing page.  What’s your conversion rate now?  Run a series of tests and continuously reduce your leakage at the top of the funnel until you have close to 70% of visitors staying on your site.  Assign this task to one individual in your organization and let them report results weekly.

Here’s a great summary of Landing Page Optimization strategies.
Here’s a great blog with lots more information on landing page optimization.

We’ll come back and revisit Landing Page Optimization in a later posting when we’ll discuss lead generation campaigns.  In the mean time, start optimizing!

Build Your Cap Table Online

I just came across a wonderful tool that lets you build your cap table online and do what-if scenarios.  Sure, you can do it in excel, but this is faster, simpler and prettier.  Thanks to the folks at SmartAsset!

Part 2: It’s All About Sales

In the last issue of Building Your Online Business, we talked about “assembling the engine”.  Specifically, we covered:

  1. The planning process for defining a customer-centric product concept;
  2. The importance of workflow to optimize the user experience around three key clicks and a minimum of entry fields; and finally
  3. How you can test before you build using PowerPoint to lower R&D costs while at the same time getting a more customer-validated product to market faster and on a lower budget.

This week, and over the next few posts, I’d like to focus on “tuning the engine”.  And to do that, we’re going to drill in to the wonderful world of metrics and site optimization.

Many forget that your online presence is ultimately all about sales. How do your customers buy?

Let’s say you’re walking down the street and see a shoe store. You look in the window and see a beautiful pair of shoes in the storefront window.  You walk in and look around. The store is clearly very trendy, nicely laid out and bustling with patrons. You decide to try on a pair of shoes and the store clerk explains to you how well the shoe is made, the fashionable style and that it’s available in a variety of colours.  The shoe fits well and it’s more comfortable than the one you tried on earlier that day so you decide to buy it.

Online sales are similar. For many businesses, the sales process can be broken down to five steps:

(1) Customers arrive at your landing page. Do I want to go into your store? Does your store look interesting? Do you solve my problem?

(2) Customers need to learn about your product and you need to establish some sort of a trusted relationship. What information do you provide to help your customers think of you as the expert – the most trusted vendor?

(3) Customers decide if your product solves their problem and sign up to learn more or to evaluate (trial) your product.  They’re very interested and are close to buying now.

(4) They’ve completed their research, checked out the competition and have decided to buy your product.

(5) They like your product enough to become a loyal customer, opting to rebuy and maybe tell their friends.

Inevitably, at each point in the sales process, potential customers are going to “leave your store” or leak from your funnel without buying.  Our first objective is to identify sources of leakage and to plug the biggest holes.  In order to do that, we need to build a metrics reporting system that allows us to measure our customer engagement as a baseline for continuous improvement.


Many of my clients use Google Analytics, a free tool to collect statistics.  KissMetrics is another powerful tool that’s very popular and incredibly powerful.

Here’s an example of a metrics report I recently developed for one of my clients.  Online Business Metrics Report

The report includes a roll-up page that summarizes the conversion rate for each stage of the sales process.  Each page covers a major source of traffic and includes three tables: (1) total traffic at each stage of the funnel, (2) percentage of users that advance to the next stage in the funnel; and (3) week-over-week trends.  Green is good, Yellow is okay and Red requires more attention.

Your management team should meet weekly with a set agenda where individuals are responsible for different points of conversion in the funnel.  The meeting Chair first reviews the overall stats: Good/Bad/Ugly.  Then each person presents the tests they ran last week, the results, conclusions and action items.  Then new tests are laid out for the following week.  All action items are formalize in keeping with a disciplined, metrics-driven “say what you’re going to do and do what you’re saying” culture.

We’ll spend a few issues talking about the various stages of the funnel starting next issue with your landing page strategy.  In the mean time, customize the metrics report spreadsheet for your business and implement Google Analytics or KissMetrics to start collecting results.

Continuous Improvement

It goes without saying that online businesses want to grow their user base and revenues.  But how? Where to focus time and resources?

There’s never been a better time to be an Engineer/Entrepreneur/Marketer.  Over the past few years, online marketing has become a very mathematical discipline built on the scientific method:  Hypothesis, test, measure, conclude.  In our case, we’ll modify this process a little:

 

 

  1. Identify an area we want to optimize,
  2. Build a test,
  3. Conduct side-by-side A/B testing,
  4. Measure results,
  5. Keep the winner and learn.

Repeat

 

The power of the Internet allows us to do this on a daily/weekly basis, building a very powerful culture of continuous improvement that permeates the organization.

With the newfound power of online metrics, you may be tempted to measure everything, but online optimization is like designing a marble sculpture.  It’s best to start with a course chisel to build the rough shape and use successively finer tools over time. Tactics need to continuously evolve to keep pace with a constantly changing customer and competitive landscape.