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Hubspot successfully analyzed over 1 million websites, 1 million Twitter accounts, raised another $16 million, and yet they only have 1750 customers.

Did anyone else notice this?

I’ve always been impressed with Hubspot, and I have much admiration for Dharmesh Shah and the other founders.  I’ve read just about all of their stuff on inbound marketing, permission marketing, conversion tracking and other juicy stuff.  But I was shocked to read the news about their $16 million in additional funding with less than 1750 total customers.  Boy, with all of the inbound marketing webinars and conversion improvement whitepapers, it seems as though Hubspot may need to eat more of their own dog food.  Don’t get me wrong – their customer growth rate looks like the “hockey stick” we would all love to have, and a 350% growth rate in revenue is not too shabby – but I expected more than 1,700 customers.  And it looks like it takes 2-3 months to acquire 250 new customers, some of which will churn I would imagine.

After the first two rounds of funding, they’ve essentially spent $10,000 to acquire each new customer, but as you will see further below, their average annual sale is only about $6,000. As good as their product might be, I’m sure they are not counting on customers sticking around for 20 months so they can break even, so they will need to sign up more customers faster than ever to decrease their cost per acquisition and get this thing profitable – and fast.  This is the risk by taking on so much funding – how much runway do I need to get our cost per acquisition down and our lifetime value up?  They spent the first $17 mil on engineering the product, perfecting it, building brand awareness, positioning themselves as experts with endless whitepapers, webinars, videos and more, and understanding the model to where they could go and raise more money.  Surely they know for every dollar they put into inbound marketing efforts, how much revenue and profit they will get on the backend.

Now, since this is their third round of funding, their gong to have to sell for about 10X their current value so the first two VC’s get their money out of the deal, at least so I am told.  Wow!  An “SEO Company” for $335 million?  I suppose they could always go public.  Remember when Rackspace (NYSE: RAX) did that last year?  I’m sure being in a niche space where comparisons are hard to come by makes it difficult for analysts to evaluate the company, and even harder for investors to invest in.

So if a customer today is costing them around $10,000, but they are only getting $6,000 per year per customer on average, how long will this model last?  Let’s take a look at their pricing model that is directly from their website:

If you segment customers across this type of pricing model, or a “freemium” pricing model, you will find that most of them  are in the low to mid tiers, with a handful at the top tier.  You spend most of your time trying to figure out how to upsell and convert your lower-tiered customers up into your higher profit top tiers.  Let’s assume Hubspot has a 60-20-20 split here from low to high.  So of their roughly 1,750 customers, that would put 1,050 at the low tier, 350 at the mid tier, and another 350 at the top tier.  If you do the math, that’s a little over $10.5 million in annual revenue, or $6,000 per customer per year, on average.

Hubspot claims an annual revenue growth rate of 350%, which to get to the $300 million mark is going to take about 2-3 years, assuming the growth is constant and they can get to about 50-60,000 customers.  So as you can see, the 250 new customers every 2-3 months isn’t going to cut it – they will likely need to get to around 750-1,000 new customers every month.

The guys at Hubspot are surely savvy enough and have enough brain power (and resources now) to pull this off, but it seems it will be a helluva feat.  Is Hubspot the next SalesForce?  Will they have to go public?  It seems like Hubspot is in the right position for extreme growth – a refined product, brand recognition, a seasoned team, cash in the bank – how could they go wrong?

Best of luck to ya, Hubspot.

Update 10/26/09: I just found this great blog post by Ben Yoskovitz: Raising Startup Capital is an Achievement, But Not the Most Important One.  He explains that Dharmesh is more of a “bootstrap guy” versus a venture capital guy, where he states “Closing a funding round is not value creation.  It’s the opportunity to create value.” – I happen to agree with Dharmesh on that 110%.  After you get your funding – whatever round or stage it is in – that’s when the real work begins.

2 Comments »Tags: cost per acquisition, hubspot, inbound marketing, rackspace

As we’ve been doing our Twitter survey, we noticed that most of what was going on was conversations and mindless babble… When we started, the homepage said “Twitter is a service for friends, family, and co–workers to communicate and stay connected through the exchange of quick, frequent answers to one simple question: What are you doing?“

We guess Twitter also noticed there was a lot of boring babble going and was hoping to make it more useful for people, especially all those people who say they just don’t get the point of Twitter. If it’s just status updates, can’t we just use Facebook? So after the Twitter revolution of it being hailed a useful news source during the Iran election protests and talk of a Nobel Prize for Twitter, they have changed the homepage to say “Share and discover what’s happening right now, anywhere in the world”

Is Twitter hoping to become more useful than CNN? Are they hoping that more people will use it to promote their business or personal victories? If companies latch on to Twitter and use it as a broadcasting medium for their new products, will Twitter still be useful? Will they start charging for commercial accounts? Will anyone actually follow an advertiser? Several companies have already shown a major drop in followers after sending out product messages. On the other hand, Twitter can be a useful tool for instant updates. The Australian government used Twitter to send out a Tsunami warning following an earthquake in New Zealand.

I guess Twitter is something different for everyone. How you use it depends largely on who you follow. Some people use it for news updates. Others use it as a messaging tool. Others promote their business with it. For others it just a time waster at work. It does seem to be either an all or nothing phenomenon. Many people just don’t see the point of it. They may try it once or twice and then give up. Those that do use Twitter are fairly constant in their use. Statistics show that it’s actually about 5% of Twitterers who do about 75% of the tweets. Some people obviously either have too much time or their hands or too much self importance. Personally, I think if you have that much time to Tweet every 5 minutes, you’re probably not getting anything else done and probably aren’t that important. How much time do people have anyway. (Yes, I’m talking to you Ashton Kutcher!) Personally, I don’t care who Perez Hilton hates today. Or what Shaq is doing right now. I’m also not that interested in the daily goings on of someone on the other side of the world tweeting they just had a ham sandwich for lunch. But, I do follow people like CNN and some fellow expats that always have interesting news from both sides of the globe. I’ve also unfollowed a couple of people because I just didn’t find their tweets to be interesting. Especially those that post too too much.

Stay Tuned. Next week we’ll post the results of our Twitter Analysis. 

2 Comments »Tags: twitter

That’s right – you can’t measure everything online that you might think.  Analyzing click traffic on websites has become much more difficult to get anything close to accurate.

One of the most difficult problems to solve is the issue with giving proper credit to the “original source” of the lead or sale.  Some of the PPC systems refer to this as the “assist” and they pass special tracking cookies to the user that will help indicate in the click stream data future visits from this user.  This typically helps credit PPC campaigns and reduces the cost per acquisition (CPA) for that channel.

This is great, but it is flawed.  This generally assumes that the visitor used one computer, and few of us use one computer.  We usually have an office computer, a home computer (we have 2), plus mobile devices.

Consider this situation (which is probably quite typical):

1.  Husband is searching for vacation spots for his family during his lunch at work.  He does several searches, including hitting a few paid ads.
2.  He runs out of time and has to get back to work, so he emails himself the links to the pages of the sites he liked to his home email account so he can show his wife later that evening.
3.  He gets on email at home and pulls up the pages on his home computer to show his wife and kids what he found.
4.  They continue to do more research and even bookmark a few sites/pages and will revisit in a couple of weeks so they can think about it.
5.  They revisit the site a few weeks later by hitting the saved bookmark and from there, decide to purchase.

Now in this case, it’s going to be virtually impossible for the marketer to track this sale all the way back to the paid search ad because he lost him as soon as he switched computers (if he is even using cookie and campaign tracking in the analytics software).  And if this happens often enough, he will think his paid search campaign is ineffective because it is not driving any sales.

Newsflash: most people don’t buy anything on the first visit!

There is likely going to be multiple interactions, extensive research, bookmarking, etc. before any purchase is made over a several-week (depending on the product) sales cycle.

Secondly, consumers are not going to be as compulsive in a down economy and are going to be looking around for deals, so we can’t possibly expect them to purchase on the first visit from a Google ad.

So what can we do about this?

Well, not too much, unfortunately.  However, if you have an e-commerce site selling any sort of products, you can reduce this phnomenon by simply having a “Favorites” or “Wish List” area of the site where a user can quickly and easily open a free account and save what they like straight on your site. This would eliminate the need to bookmark and email and cookie track everything.  You would have all of the data on your site, and now you could even do session tracking by username and get other interesting information (beware that session tracking has additional privacy issues that you will want to look at closely).

Many of the large sites like Amazon, eBay and others have this feature, but even for small or medium sized business, most of the 3rd party off-the-shelf e-commerce applications (like X-Cart, Magento) have Wish List capabilities.

Happy tracking!

No Comments »Tags: cost per acquisition, Google AdWords, PPC, Web Analytics

A guest blog by Steve Patti, a marketing strategy expert at Polarity, Inc. – part of The Permission Network

Most of you that have read our blog posts know that we’ve been trumpeting a wake up call to all marketers that the days of dumping millions of dollars into non-measurable, interruption marketing are over.  While our target audience has been largely management and executives, we’re pleased to see the latest Ad Age article that raises the stakes and calls out the CMO as holding ultimate accountability for marketing performance and budget ROI — and we couldn’t agree more.

In today’s economic meltdown, marketers needs to be “manning the war room” where tactics are mapped, performance is measured, and funding decisions for tactics are made each week/month based on what is working and what is not.  Not only are we talking about measuring acquisition performance of the various sales funnels, but focusing on the lifetime value of the customers produced in each sales funnel (see our other blog posts on this topic).

It doesn’t matter if you’re embarrassed to say you are a marketer not getting it right when it comes to performance metrics — because few are.  However, the sooner you start the more quickly you can distance yourself from your competitors who may be sitting around their agency conference room asking how much “reach & frequency” they should be buying — instead of how they should be engaging prospective customers via permission marketing.

Feel free to share your thoughts.

No Comments »Tags: lifetime value, permission marketing, ROI

Amidst the worst financial crisis since the Great Depression, companies are slashing jobs, slowing growth and cutting costs. One of the first costs to get cut are usually in marketing and advertising.

Marketing in a down economy requires you to measure the performance of each campaign.

The problem is the direct correlation between marketing and advertising efforts, and your sales needle. Companies are pressured to cut costs, yet maintain or grow sales, even in down economies. They are going to be forced to do more with less, and be more efficient with spending.  Well, the reality is that you should be doing that anyway and your agency should be helping you achieve better marketing performance.

Are you measuring the results of your marketing and advertising efforts? What if you end up cutting something from the budget that is working? The concern is that companies are widely slashing efforts with high acquisition cost, cutting loyalty and reward programs – all of the things that could be producing the best results.

We recently wrote a post on measuring the lifetime value of the customer, and here is another example of how we can use this kind of data to make these crucial decisions.

In the simplified example above, we look at four different types of marketing channels.  Each has a varying cost per acquisition (or the cost to get a new customer), and we assume that each new customer channel contributes the same net margin per month over varying tenures  (a.k.a. lifetime value of the customer).

If you are not measuring cost per acquisition and lifetime value (LTV), you may be quick to decide to slash the efforts with the highest costs – in this case everything except direct mail.  This is precisely why we like to compare each of these using the Effectiveness Ratio, which is defined as:

Effectiveness Ratio: Value / Acquisition Cost

where Value equals Net Contribution Margin/Mo. times Tenure.

We can quickly see that eliminating paid search would be a detriment to long-term sales.  If we had to cut costs, perhaps we should cut public relations and direct mail in this example.  Also, I am not discounting the sheer number of customers that each channel produces either, hence this is a simple demonstration to point out the importance of marketing measurement, and the types of measurement you should be making.

I’m Not Measuring This Way – How Do We Get Started?

There are some basic data capturing mechanisms you can use to get started on the path to better marketing performance.

1.  Track the source of the sale. Having your front desk attendant asking “how did you hear about us” may not be the most accurate way of measuring leads, so we use software applications to help track the lead all the way to a sale, such as Salesforce.com, or if you want to control the software on your server, you can download a free version of Sugar CRM.  Also, use things such as dedicated 800 numbers or unique website URL’s to segregate promotional offers on print or broadcast channels.  Online advertising continues to be the easiest to track and one of the most cost-efficient channels to producing sales.

2.  Track Spending Per Channel. Track your spend on each campaign effort separately.  Ask your agency to breakdown the costs of direct mail, paid search, and other things rather than sending invoices with general “agency fees”.  Agencies markup media buys, including online buys, so know what they are and how it affects your ROI.  Now that you have your campaign costs and leads broken down into each channel, you can now effectively track ROI and cost per acquisition.  This will factor directly into your net contribution margin and should be subtracted from the revenue earned from sales.

3.  Track Customer Spending – use your CRM system, or if you are a retail organization, your POS system to track customer spending.  Try to uniquely identify the spending by customer ID or email, rather than just by store location or geography.  This gets you to the additional granular detail to further segment your data later by usage and spend, and can do wonders in your lifetime value calculations.  We can also develop patterns to help re-tool marketing efforts by being more relevant and targeted.  From this data is where lifetime value calculations are born.

Are you ready to roll up your sleeves to track the right data and get lean and efficient in your marketing?

2 Comments »Tags: better marketing performance, cost per acquisition, lifetime value, LTV, marketing performance tracking

Many marketers are quick to prescribe to their clients a laundry list of tactics that may or may not be based on some sort of overall strategy.  The client usually comes back with “how much”, and the marketer usually responds with a la carte pricing as if you were buying a car.  Then the client chooses leather seats, moon roof, and keyless entry, but holds off on the special paint for now.  Sound familiar?

What’s largely missing from this exchange is what I would consider the most important question the marketer could ask their client: what is the lifetime value of your customer?

The lifetime what?

The lifetime value (LTV) of your customer is loosely defined as the net dollars a customer contributes over their life as a customer.  It is important because you will need to know this in order to properly assess what you will spend on all of the laundry listed items above.

Lifetime Value (LTV) = Total Customer Revenue – Total Customer Costs

Example: let’s assume that a customer generates $1,000 in LTV, or net contribution margin, during their lifetime.  Knowing this, you wouldn’t spend $1,000 to acquire a new customer, right?  Of course not.  You should earmark about 10%, or $100 towards acquisition cost.

My colleague Steve Patti found a really good LTV calculator, compliments of the Harvard Business School.  In there, there is an excellent graphic describing the impact of customer retention on profits, which basically illustrates the simple principal that the longer a customer stays with you, the more profit they generate.  For those of you who are finance geeks, a more complicated formula to calculate LTV would include things like net present value, or the discount rate, based on the company’s cost of capital, or things like churn rate (which vary across the lifetime of a customer).

Some examples of revenue are obviously new purchases, but also warranty upgrades, accessories, license renewals, etc.  Some examples of customer costs could be tech support, service and warranty claims.  This will easily get into a complex web of customer segmentation, which is OK, you need that and we will look at that here in a bit.  You could even break down your customer lifetime values by original marketing channel for additional insight (such as paid search, direct mail, broadcast, etc).

Not All Customers Are Created Equal

Another mistake marketers make is assuming that all of your customers are exactly the same in terms of revenue per customer, cost per aquisition and other metrics.  This is wrong.  Let me illustrate:

For many, the majority of their customers are going to fall in the middle of being fairly active and profitable customers, while about 20% are relativly inactive (or customers who use up a lot of support, rarely upgrade or buy peripheral products), and another 20% who are highly active.  The 20% of highly active customers are really your “brand evangelists”.  These are folks who refer a lot of new customers, upgrade frequently, and generally purchase on any cross-sell opportunity becasue they truly love your product or service.

What I want you to take away form this illustration is that each segment of customer has a different lifetime value (LTV) and cost per acquisition (CPA), and so how we market to them and how much to spend should be different.

Now that you see this illustration, should you spend the same amount of money marketing to the right side of this curve, as you would to the left?  An example is your local cable or phone company.  You see all kinds of introductory offers (with high cost per acquisition) to lure in a new customer, but there is little for the customer who has been there 5 years.  I’ve yet to receive any kind of promo from my cable company as an 8+ year customer – not even a free movie, or a DVR box upgrade.  How much is that really gong to cost them?  Not nearly as much as it would to lure me in with a “6 months free cable” offer, which is why high utilization customers (right side of model) have a much lower cost per aquisition on additional products and/or services.  Let’s not even mention all the people I would tell through all the social networks about how well they treated me, potentially adding several more new customers.  Instead, I am tempted to take the competitors introductory offers.  This kind of marketing does not create longevity through value, but fickleness through price.

So the only loyalty and retention marketing that is done is when you call to cancel, and they send you over the “retention” department as a last resort to get you to stay.  Why does it have to come down to that?  Now I tell all my friends that all they have to do to lower their bill is to call and complain about it.  My colleague Alan Weinkrantz did that, and it got him a segment on Good Morning America, and now the whole country is doing it – at the same time.  So let me close this “rant” by saying this type of bad marketing, similar to end of the month price reductions, or end of the year clearance sales, only conditions the consumer to react to your brand when it’s convenient for them, not when it’s convenient for you (the marketer).

The Relationship Between Lifetime Value and Cost Per Acquisition

Back to the chart above, we see that as we move to the right, our lifetime value increases, as our cost per aquisition decreases.  This means that they are inversely proportional to one another.  The reason is that as a customer moves into a “high utilization” stage, you need to do little and spend little to get them to purchase, or to refer new customers.  This is where well-designed referral programs do very well.  For the most part, they require little resources and the rewards create high value to the customer, but are low cost to the company.  As marketers, we want to do everything possible to move customers from the low lifetime value, high cost per acquisition over to the high lifetime value, low cost per acquisition.

Some Examples of Lifetime Value

1. Diapers – as a father of 2 children now, I have purchased lots of diapers over the years.  You could assume the tenure of a customer (in this case a baby) would be about 2 to 2.5 years, and an average spend of $50-75 per month on the diapers and accompanying wipes, perhaps the direct lifetime value is around $1,500 – $2,000.  There is referent value as well, where I might tell other parents about how well Huggies is in stopping leaks, versus Pampers, etc.  This is called indirect lifetime value.  What could this be worth?

2. New Vehicles – it is estimated that a person will buy 7 cars over their lifetime.  If the average car sells for $30,000, with upgrades, interest on the note, and service, you could spend upwards of about $45,000 per vehicle.  This is why some dealerships go out of their way to service their customers because they want them to come back for another car in 4-7 years.  Just ask Carl Sewell, author of Customers For Life: How To Turn That One-Time Buyer Into a Lifetime Customer.  Personally, I am on my second Audi in 10 years.  My first one was great (I shouldn’t have gotten rid of it), but my second one has had two engine replacements so far.  In fact, it has had so many problems that I was considering moving to Lexus or BMW, and ditching the Audi brand.  The thing that is keeping me from doing that is the exceptional service I received from Cavender Audi in San Antonio.  As representatives of the brand, they stood by their product, and are now up to probably $20,000 in repairs on this one car of mine.  They want my business for the next 3 vehicles or more.

3. Cable Service - I mentioned that I had been a customer of the same cable company for 8 years now.  However, with increased competition, bundled packaging, price-lock guarantees and more, people are becoming more fickle and moving from service provider to service provider simply becasue of price.  The services offereings, packages, quality and reliability are all generally the same in the eyes of the consumer, so the common denominator becomes price and value.  I think these service providers could have customers for extended periods of time if they did more on loyaly and retention (the value part), versus focusing all efforts on defection from competitors and new acquisition (the price part).

Are you measuring lifetime value of the customer?

5 Comments »Tags: cost per acquisition, lifetime value, LTV

Today we are going to discuss how to measure Cost per Acquisition, which is a fancy way of saying “Cost per Sale”.  If you are like most companies, you probably have several marketing promotions going on across multiple channels. Maybe what you have is some online pay-per-click (PPC), organic search engine optimization (SEO), direct mail and radio.  Good marketing requires that we know and understand what sales are costing us from each channel.

Well, how do you know how much you are going to spend in each marketing channel?

The fact is, most are guessing. In order to properly assess what you are going to spend in each marketing channel, it is necessary to understand what you are willing to spend to acquire a new customer (cost per acquisition), and ultimately, the lifetime value of the customer.

Wait, what is “lifetime value of the customer”?  That is the net dollars a customer is worth to you from the moment they become a customer to the moment they are no longer a customer.  We will talk about this in much more detail in a future blog.

But for now, let’s say that the lifetime net value of a customer is $1,000 so I can illustrate how to use this to back into your cost per acquisition thresh hold. Now, depending on the type of company, margins, and a few other factors, the general rule of thumb is to allocate on average, 15 percent of the customer lifetime value to acquisition cost. This means for this example, we are willing to spend $150 to acquire a new customer from any marketing channel.

How To Measure Cost Per Acquisition

Great! Now, that was the easy part. The hard part is setting up each campaign to be able to track leads and acquisitions by source because we want to make sure we are not exceeding our cost per acquisition thresh hold. This is where everyone falls apart, because it takes process, training, leadership, dedication and the proper tools to do this. We can express cost per acquisition in a fairly simple equation:

You can get as detailed as you want on what “total campaign cost” means to you in terms of labor, graphic design, ad expense, printing, mailing, etc., but the most important thing is that you break it down by individual campaign. Keep in mind that your cost per acquisition may be quite high in the beginning as you front-load all of your set-up fees. Those will get diluted as the campaign starts to generate leads and sales over time.

OK. We’ve determined what campaigns we’re going to run, how much (roughly) we should spend to acquire a new customer ($150) each. How much money should we allocate to each campaign? Honestly, it will be an educated guess until you are tracking leads and sales efficiently to really know the answer to this. But let’s look at a direct mail example.

Direct Mail Example
Many companies purchase mailing lists based on a set criteria for demographic, household income, and some level of intent to purchase. Most direct mail campaigns I’ve done usually yield a 1-5% response rate, and out of those, a 10-30% convert into a sale.  So let’s make some assumptions for illustration purposes:

• List size:  10,000 names
• Total Campaign Cost:  $20,000 (includes list, design, printing, and mailing)
• Response Rate:  3%
• Conversion Rate:  15%

So based on the above response and conversion rates, we would get 300 people to respond to the mailer, and 45 people to buy (this is our Total Acquisitions in the equation above).  Now we know that our cost per acquisition is $20,000/45, or $444.44, which of course is higher than our initial cost per acquisition threshold, so we need to decide if this channel is feasible moving forward.

Pay-Per-Click Example
Pay-per-click is an online ad buying method where you run some ads on search engines, affiliate networks, social sites and other, to drive traffic to a landing page where you hope to “convert” the potential customer.  Results on PPC will vary by industry and competitiveness, but for illustration purposes, let’s assume the following:

• Total Click-Throughs: 2,500
• Total Campaign Cost:  $20,000 (includes set-up, landing page design, ad expenditures, etc.)
• Conversion Rate:  8%

So based on the above response and conversion rates, out of the 2,500 who clicked on our ad to arrive at the landing page,  200 visitors converted to a “sale”.  Now we know that our cost per acquisition is $20,000/200, or $100, which is $50 less than our initial cost per acquisition threshold, so comparatively speaking, the PPC campaign is yielding much better results than our direct mail example with the same investment, so we could take the funds spent on direct mail and re-distribute them to our PPC campaign.

So there is a basic example of how to measure your cost per acquisition.  This gets to be much harder to measure on traditional broadcast channels, so try using unique URL’s or 800 numbers to capture and segregate leads from various channels.

What are you doing to measure cost per acquisition?  How many channels are you marketing across?

No Comments »Tags: better marketing performance, cost per acquisition