Written by Dave Parker, Venture Partner, originally published at DKParker.com
A lot of startup founders work hard on getting their product ready to launch before understanding the economics of marketing. Specifically, how to acquire customers at reasonable economics. Sometimes that topic is met with a genuine head tilt and quizzical look. Sometimes it’s met with a “handwavy” response – usually by those who believe if they build a better mousetrap and promote it on Crunchbase then people will beat a path to their door.
Let’s move you from hypothesis to actual data. You can do it and in 90 days you’ll likely have a meaningful set of data that you can use to do fundraising or in 90 days you could also learn that you don’t have a viable idea or you will be making changes in your go-to-market assumptions. Either way, you can learn a lot in 90 days. Don’t wait, let’s get started now.
Your marketing funnel is how you’re going to track the results of your marketing and PR efforts. I’ve tried to break up the sections and walk you through this in a step by step mechanic so you don’t lump all of these components into the “marketing” cloud of hope.
Startup Marketing Channels
Above your marketing funnel is an example of marketing channels that you can be tracked on a monthly basis. Here’s a non-exhaustive list:
- Search Engine Optimization – SEO or Organic Search are the FREE way your prospects find you on Google and other Search Engines
- Search Engine Marketing – SEM or Paid Search is your effort using Google Key Word tool and ads. These ads are shown to people that have displayed “intent” based on the words they are typing into the search field
- Display Advertising – Facebook ads are a great example of display advertising. These ads are presented to a group of people that fit specific demographic, which may include:
- Age – if you’re doing consumer marketing and your target customer is a specific age range
- Gender – is an easy check box if you have a hypothesis of your customer leaning to a specific gender
- Title – on LinkedIn, you can target people based on their job title. This can be a great way to connect with “Marketing Manager” or “IT Director”
- Group interest – some advertisers allow you to pick a special interest group, e.g. people who are interested in “sports cars”
- Word of Mouth and Virality (K-Factor) are different mechanics – Word of mouth is the typical referral mechanic for Business to Business (B2B) products based on prospects or customers recommending your product to others. K-Factor is generally applied to the way of calculating viral customer growth – e.g. for every new customer you bring onto your site/product they generate referrals or create a network effect, think What’s App, where the product works better when you have a bigger network.
- Public Relations – or PR is another channel, how do you get media for your idea?
- Email marketing – most startups don’t have a list, that’s why you need to start building your list as you do Customer Development Interviews
- Sales Calls – if you have a list source, e.g. an association list or any other target list of prospects, outbound sales calls is a possible channel
- Cold email – I list this one with hesitancy. If you email a group of people who haven’t given you permission, it’s SPAM. If you decide to pursue this option, beware. Sending one-off emails or “Inmails” via LinkedIn to Prospects may be effective, but make sure you nail your value proposition first
- Tradeshows – can be a very good source of leads if you’re able to get above the noise associated with a lot of tradeshow experiences
- Finally, my favorite channel is Miracles! That means you have no plan for marketing – Get a plan, start today
It’s about the Leads+Revenue!
You have Suspects, Prospects, Qualified Prospects, and Customers. A Suspect is the profile of the person you think will be your customers. A Prospect could include a person who is currently using a competitive product or offering. A Qualified Prospect is someone who has actually shown interest. To be qualified, they need to be contacted and have confirmed a level of interest. Without this step, you’re falling back into the “Miracle” category. Customers pay you for the use of your product. You may also have Users as well, just remember your goal is to get paid. Users would be “Qualified Prospects” in my vernacular.
Marketing Qualified Leads – MQL
Ultimately, your final definition of MQL’s could be nuanced to your business. Let’s start with the basics. As leads come from different sources you can place qualification attributes on the leads. At the simplest level, it’s the prospect showing some level of interest and beginning the qualification process. I’ve shown MQLs as a single step in the funnel, but it may be multiple steps.
- Email subscription – you can use a “mouse-out” to capture email address
- White papers – offer someone more education if they provide their email in exchange for some level of value
- Timing to purchase – if they are in or out of cycle to engage with your product. This may have more to do with seasonality vs budget. Keep in mind, no prospect is going to tell you, “Yes, I have unplanned budget dollars to give you, where have you been!”
- If the timing is off, it’s better to put these prospects into a drip campaign. Don’t forward unqualified leads to sales. That creates a vanity metric that won’t result in revenue.
- Demographic profile – this can range from simple information like age, geography or language to a very complex method of Lead Scoring services. Start simple.
- Lead Attribution in the early days is likely differentiated landing pages. You’ll get more systematic as the business matures. You’ll need to track attribution to calculate your Customer Acquisition Cost (CAC)
Marketing is “handing off” these leads to sales at this point. Are the leads ready to be in the sales process? Don’t setup an “us vs them” dilemma and finger pointing of “Marketing needs to provide us with better leads” and “Sales just needs to close the deals we send them.” In startup land, you’re likely doing both as you start. I love the Selling CEO, but for the business to scale into a high-growth business, you need to scale past yourself in both sales and marketing.
Sales Qualified Leads
Like MQLs, you can get more complex over time. Let’s start with a very standard Qualifications model. You’ll need to define the terms so that everyone who touches the sales pipeline shares the same definitions. Some people use the acronym BANT, though I think the order is a little wrong. I also don’t think prospects ever have “budget” for a solution they’ve never seen. In any case, it’s a solid qualification set.
- Budget – does the prospect have the budget for your product? This is partially a pricing question as well. As I mentioned above, new prospects never have “approved budget,” and as a friend of mine who is a VP Marketing reminded me, I never confirm I have the budget.
- Authority – does the person you are talking to have the actual authority to make the purchase decision? This can be budget authority and price point, but if it’s a technical solution that requires IT to buy into the offering, they may not have the authority to get all the way through implementation
- Need – in your conversation with the prospect, have they confirmed that they have a need/problem your product solves?
- Timing – your desire to implement your solution may be at odds with current projects and internal resources. For one company I’ve worked with, the sales cycle isn’t the long part, the legal approval process is what slows down the sale and implementation.
Are you in an educational or transactional sales cycle? If the prospect is replacing an existing solution for your faster/cheaper solution, you’re likely in a transactional sale.
A customer is a customer when they pay you for the product or service that you offer. Don’t confuse a “prospect” with a “customer.” When I talk to a customer and they casually say things like “we have 10 customers”- what they really mean is that they have 10 SQLs -then they lose credibility.
For early startups, you shouldn’t exceed 12 months of Life Time Value calculation. When you have real data you can extend your LTV calculation. For a more thorough breakdown of CAC/LTV calculation, see Tomasz Tonguz’s post on “The False Confidence Of The LTV/CAC Ratio For Early Stage SaaS Startups.”
How long you keep the customer is your retention metrics, with the inverse represented as Churn. The big question early on is customer engagement. This can be measured as time on site or time on the app. It can also be measured as frequency and recency of site visit depending on the service.
Time to Close
The trend you are hoping to see is that your time to close continues to make improvements and move to shorter timeframes. The sub-components to track are important as well, for example, time to close by channel/lead type. Or time to close by customer type. If prospects are getting stuck at different steps in the funnel, you need to address why they are getting stuck. This is a cause and corrective action topic. Marketing improvement should increase the “top of funnel” but don’t stop there, keep optimizing within the funnel as well.
Startup Waterfall and Conversion Ratios
I’m in the process of adding these input fields into the financial models on Venture Ready Models. You’ll need to be able to track your monthly conversion ratios as well as time. Are they decreasing or increasing, what is the cause and corrective action? These inputs should be part of the waterfall into your conversion of customer data and revenue.
You can’t improve your performance if you’re not actively tracking the data and making an improvement. Without the monthly tracking, you are only guessing about your performance. Your monthly P&L and Cash Flow Statements won’t help you change the performance of your business. Monthly data is like looking backward at the wake of the boat but never looking ahead to see where you are going. As you change your marketing levers on a daily basis you should see the impact on performance and results. Throwing money at Adwords is only good for Google.
Love Startup Math!
As you start to dial into these factors, in combination with product pricing, you’ll begin to see a compounding effect on your financials. Look for opportunities to make step function improvements on your ratios. As your pitch gets better and your target customer gets more precise, you should see the sales cycle come down. As the product matures, you should see pricing increase as features increase.