Gonna land that big enterprise deal any day now…
Let’s say that you are a start-up technology company with a great product searching for its first enterprise customers. The pressure is on to find the first few customers who will validate your business, right?
If you are trying to raise money from venture capitalists, you need the customers so the VCs can make reference calls. If you are bootstrapping the business, you need the cash that a first customer can bring.
You may have been working a long time to get the customer to sign on the bottom line, and you don’t want this time to be wasted. There is probably some customizations that will be necessary in order to launch your product or service, which isn’t so bad because an hourly consulting fee can help cover the costs of some of your engineers. So, if the deal is big enough, you can use it as a launching point for your entire business, right?
Seriously, run the other way!
Many start-up businesses feel the gravitational pull of these big enterprise deals at their most formative moments, and I’m going to tell you to run the opposite direction … if you dare.
What it all boils down to is customer acquisition cost, or CAC, for short. And, in this case, you don’t want a big CAC…
What is your CAC trying to tell you?
CAC is the incremental cost of sales, marketing and technical support that it takes to find a customer, win a customer and launch a customer in order to get money to start to flow from a customer. CAC does not include your other operational costs, such as your engineering and G&A expenses.
A long sales cycle that involves direct sales guys traveling all over the place to meet with customers is expensive.
It requires a marketing effort to keep the top of the pipeline full, and this usually involves inside sales people who cold call prospects and try to identify opportunities for the direct sales team.
Complex integration or customization efforts certainly add to your expenses, and these efforts might involve your best engineers (which has the compounding negative impact of slowing down your development roadmap).
All of this adds up to a high CAC.
If your revenue from the customer is less than your CAC, then this is unsustainable and you must price your product high enough, which can further slow down your sales process. If you have a recurring revenue model and it takes years for the revenue to pay for the CAC, then you are probably in trouble.
You can keep things going, but you probably don’t have a very good business.
Education & Content vs Sales Guys & Expense Reports
So, what’s the alternative? If you are staring at the possibility of building a high CAC business, think about what your sales guys and pre-sales engineers really do.
A huge part of what they do is to educate your customers about their problem, explaining why your product represents the best solution and proving the return on investment (ROI). What if you could educate the majority of your customers with content prepared in advance, which they can consume easily and anytime, instead of trying to interact with them in real-time?
If customers need to learn, give them content in the form of blogs, white papers, research and ROI calculators that will educate them about your product. Make the content useful and interesting (maybe even fun) and use your marketing dollars to make it as broadly available as possible.
In an ideal world, you can turn your inside sales guys into closers. I often say that this is at least a little bit analogous to waiters in restaurants. Marketing educates the customer and motivates them to come to the restaurant. When the customer sits down at the table, the waiter (salesperson) knows that the customer wants to eat. A good waiter then starts working on the basic sale, followed closely by the cross-sell and the upsell in order to maximize the revenue associated with that customer.
Easy Download vs Complex Integration
The best way to educate a customer about the value of your product is to let them try it out. If they can’t live without it, they will probably buy it.
The problem is that it is really expensive to provide a free trial if there is complex integration required in order to enable the trial. It is really, really tempting to try to preserve all of your options for possible integrations; however, your CAC will be lower if you can make the product super-easy to download and try out for free.
This means that you probably won’t be able to enable all of the possible integrations right away, but if you make the right choices on your product-market match (one of my previous posts), you can cover a lot of the market with a product that is easy to download and try.
Eliminating some features in favor of a simpler installation might require some very difficult decisions in the absence of perfect information about the market. This is why it is important to take an iterative approach. Eventually, you’ll get there. If your product is easy to download and try, then it is also going to be less expensive for your customers to download and install when it is time to buy. Lower CAC, baby, lower CAC.
Why it’s easier said than done
Another positive of a low CAC is that you can be very profitable with a lower average selling price (ASP). This helps because it is easier to get customers to sign off on smaller ticket items than huge deals.
However, the problem is that you need a lot of small deals in order to really pay the bills. For many entrepreneurs, this means a commitment to tightening the belt and living off very little for as long as it takes to get the business to the point where the cash flow from the business starts to exceed the engineering and operational expenses. (For entrepreneurs such as the founders of my current company, ZeroTurnaround, who have done this, I salute you.)
Not everyone can afford this approach, which leads us to look to VCs and other sources of funding for support. Historically, venture capitalists focused on enterprise information technology have looked for large, big-ticket customer wins to help validate their investment theses, but more and more (maybe most?) VCs now recognize the value of a low CAC business over the long term.
In fact, a low CAC business with a recurring business model has become elusive fantasy for many investors. My point is that you are in great shape if you can fund things yourself as you get started, but you will find a much more receptive audience of investors today than ever in the past. If you can resist the high CAC deals, and stay true to your low CAC approach, and you have a great product with a killer product-market match, then everyone associated with your business is going to win big in the end.