Acquiring customers is the biggest challenge any B2B software company has. Unless you are lucky enough to have an award-winning solution that sells itself like the mythical product-led growth companies (Slack, Dropbox, and Expensify), you have to grind it out like everyone else. Display advertising, landing pages, webinars, sales development reps, content marketing, marketing automation, sales automation, and CRM systems are the basic table stakes in today’s B2B software sales game. The ugly truth of B2B SaaS customer acquisition cost is that you need to fill the top of your sales funnel with hundreds of thousands of suspects to get a reasonable number of closed sales.
Selling B2B SaaS solutions has changed dramatically. Gartner Group describes the “new normal” for B2B software sales like this:
Customer buying groups are only spending 17% of their time meeting with potential suppliers:
B2B software vendors have to adjust their tactics to win in this environment. The costs to acquire customers in this new reality are daunting.
The unfortunate reality is that conversion rates for B2B software sales are low. You have to feed a lot of suspects into the top of the funnel to get a reasonable number to come out at the bottom.FirstPageSage, a B2B SEO agency, published an excellent report in 2021 on B2B SaaS Funnel Conversion Benchmarks. Here is an excerpt:
If you work for a B2B SaaS company that wanted to grow a product’s revenues by $20 million in a year, you could estimate how many suspects/contacts you would need to feed into the top of the sales funnel to achieve your revenue target:
Different Demand Generation techniques yield different results. In FirstPageSage’s analysis:
- SEO represents website visitors that come to your site as a result of organic (non-paid) content marketing
- PPC represents visitors responding to Pay Per Click ads, like Google Ads
- LinkedIn represents visitors from LinkedIn Ads
- Email represents visitors from email campaigns
- Webinar represents conversions from webinar attendees
Most companies use a combination of approaches. The sad reality is that even with a combination of tactics, most companies will experience; less than a tenth of one percent final conversion rate.
Given the reality of conversion math, SaaS companies need to pay attention to their Customer Acquisition Costs (CAC). CAC is how much a company spends to acquire a new paying customer. The basic formula is pretty simple:
For a company with a single product operating in startup mode where almost all customers are new customers and all marketing and sales activities are geared toward new customers, this formula works.
For companies that have been in business for a few years with multiple product/service lines, it gets significantly more complicated. How do you consistently determine the allocation of marketing spend to new customers versus maintaining revenue from existing customers? The same holds true for sales expenses. Another complicating factor is that over time, the percentage of total revenue new customers contribute tends to decline while revenues from existing customers tend to increase as a percentage of total revenues.
At its heart, this metric is about efficiency – how much do you have to spend to acquire a dollar of revenue?
Unfortunately, most B2B SaaS vendors do not have great data about customer acquisition costs. Here are two examples. You can use data from public software companies to get some ballpark ideas. Zoom is an early-stage company in an existing market. Oracle is a more traditional late-stage company that was founded over 40 years ago. Let’s look at their numbers:
From Zoom’s recent 10-K
In the most recent fiscal year, Zoom spent $0.26 for every $1 of revenue
From Oracle’s most recent 10-K:
Oracle serves more mature markets and the relative amount of money they spend on sales and marketing is less than a very high-growth company like Zoom. If you need to brush up on how to find this type of data check out Why Product Managers Need to be Able to Read 10-K Filings
There are a number of tactics product managers can use to combat the ugly reality of B2B customer acquisition costs:
The first step is to try and understand what are the true costs of your existing demand generation programs. Most product managers have a hard time finding out about customer acquisition costs. You should make an effort to gather what information you can. You may be able to leverage your relationship with your company’s finance team. Check out Why Product Managers Should Become Best Friends with Finance Team.
You should look at each type of demand generation program your company executes and gather what cost information you can. For example:
SEO and content marketing is one of the most frequently cited tactics:
- 70% of marketers are actively investing in content marketing. Roughly 60% of marketers stated that content marketing is ‘very important’ or ‘extremely important’ to their overall strategy. (HubSpot, 2020)
- 44% of marketers say their content marketing budgets will increase in 2021. (Criteo, 2021)
- 79% of B2B marketers share that they have a content marketing strategy. (CMI, 2020)
- 85% of B2B marketers saw promising results on their content marketing campaigns. (CMI, 2020)
- B2B marketers believe that the value the content provides is more important than search rankings. (CMI, 2020)
Getting highly ranked on Google produces great results:
Many people believe that content marketing drives great organic search results and it does. There are significant costs associated with content marketing. The time for experts (writers, editors, graphic artists, and SEO experts) adds up. These firms can charge anywhere from $100 to $250 an hour. One blog post can take 40 to 80 hours to produce. Many firms retain an agency on a monthly basis. Mid-sized agencies charge anywhere from $2,500 to $10,000 a month
Getting top-ranked Google organic search results is tough. Many companies short-circuit the process by using Pay Per Click ads. Unfortunately, getting a top ad placement can be very expensive for competitive keywords:
LinkedIn is a popular new tactic for demand generation. Results are generally very good:
- Message ad / Inmail CTR: 3.6%
- Message ad / Inmail Open rates: 38%
- Linkedin’s Conversation Ad CTR: 12%
- Linkedin’s Conversation Ad Open Rate: 50%
LinkedIn is expensive. On average, the cost of LinkedIn ads is $5.26 per click, $6.59 per 1000 impressions, and $0.80 per send.
According to WebFX “On average, a mid-size business can expect to spend $9 – $1,000 per month on email marketing if they self-manage their campaigns (depending on the platform and number of subscribers) or $300 – $500 per month if they work with an agency.”
While email campaigns are the lowest cost among all types of demand generation tactics, it also yields the second-lowest results – just a 0.08% conversion from initial email blast to closed sales transaction.
Webinars are an inexpensive tactic for demand generation. MaestroConference estimates that it costs about $1,385 to deliver a webinar for 250 participants. This would not include costs for presentation development or paid speakers.
The next step is to take a cold hard look at your customer acquisition performance. It is tempting to fall for vanity metrics like click-thru rates, email open percentages, number of webinar attendees, etc. You need to drive your analysis all the way through the funnel to closed sales transactions. Sales force automation solutions like Salesforce.com can help.
It will probably be hard to find definitive information about full life cycle customer acquisition performance. Another tacit to consider is conducting qualitative Win-Loss interviews. Win-Loss Analysis is a market research technique companies can use to discover key learnings from customers and prospects. These learnings can drive improvements in marketing and sales, resulting in more revenue and profits. Check out Win-Loss Analysis: Process & Lessons Learned.
Once you have documented performance, it is time to take action.
Double down on your most effective customer acquisition tactic, double your investment in it. Cut your lowest-performing tactic and reinvest in the top-performing one. The owners of these programs will protest, but you can present your fact-based performance data to back up your recommendations.
Start a regular program of experiments. Your products, your market, and your ability to execute are unique. Don’t fall into the trap of chasing the latest trend. Conduct fact-based experiments to learn what works and doesn’t work. Liz Cain from OpenView Partners wrote an excellent article on demand generation experiments. Check out How to design and stick with your lead gen experiments
Customer acquisition for B2B SaaS companies is ugly. Even with a portfolio of demand generation programs, most companies only achieve a 0.010% conversion rate from the top of the funnel to closed deals. The process of B2B sales has fundamentally changed. The pandemic has accelerated these changes, but they really began over 20 years ago. The cost of customer acquisition has skyrocketed. Well-funded companies are paying more than $50 a click to be on top of Google search results. Product managers need to honestly examine customer acquisition program costs and performance. They should double down on the most effective programs, cut the underperformers, and conduct fact-based experiments to discover new techniques.
Also published on Medium.