Editor’s Note: This article was originally published by Myk Pono on The Startup, a Medium publication. The below is an excerpt from the post. You can read the full article here.
This article will walk you through the customer acquisition funnel for SaaS companies. The primary goal is to help you design, analyze, and optimize your customer acquisition process. The secondary goal is to present different perspectives on moving customers through the lifecycle stages and to show how marketing, sales, and customer success teams should collaborate and where each team’s responsibilities lay. Hopefully, everyone will find at least one useful idea to try or to test.
The effectiveness of your customer acquisition funnel can be tracked by metrics that measure leakages when moving prospects from one stage to the other. The process of handing over prospects from the marketing to sales team and from the sales to customer success team presents higher than average risks of losing prospects, missing data, or miscommunication between teams about responsibilities, definitions, and success metrics.
Content strategy is one of the most effective ways for companies to increase the velocity with which prospects move from one stage to the other. As we go through each step in the funnel it will become clear why it is crucial to analyze content strategy from a customer lifecycle perspective. In favor of simplicity, the customer acquisition diagram is missing the reference to target customer profiles, product positioning, and value messaging. These three topics require a separate discussion.
Other pieces that are missing in this diagram are Customer Acquisition Cost (CAC) and Customer Lifetime Value (LTV). Again, this information was omitted for the purpose of clarity.
The customer acquisition funnel is a process of tracking and monitoring how effective the company is in attracting, engaging, converting, and retaining its customers.
Before we dive into the detailed discussion, let me answer a couple of questions.
1. Will this customer acquisition framework fit my SaaS company?
The Customer Acquisition Framework presented below is just ONE of the ways for a SaaS company to track customer acquisition effectiveness. Obviously, Slack’s customer acquisition strategy will be different from the one Salesforce uses. Companies with similar business models, product prices, and average deal size will have similar customer acquisition funnels. Please adjust and adapt this approach to fit your specific needs.
2. Why create another Customer Acquisition Funnel?
Many experienced investors, founders, and marketers have already written about customer acquisition funnels, SaaS sales cycles, SaaS metrics, and content strategy. Why do we need yet another customer acquisition funnel?
The customer acquisition framework for SaaS companies presented here has some key differentiations that are missing from other writings on this topic (based on my findings). It also highlights how content impacts customer acquisition and why Customer Lifecycle is important to track and consider when making decisions on how to grow your SaaS product faster. Here are some of the best resources for learning more about how SaaS companies design and track Customer Acquisition Funnels:
David Skok
Customer Acquisition: Maximizing your Funnel
SaaS Metrics 2.0 — A Guide to Measuring and Improving what Matters
Tom Tunguz
Sales Funnel Optimization For SaaS Startups
The Number One Objection In The Sales Funnel
Jason Lemkin
The Right Sales Metrics For Your SaaS Startup
Hire the Right Type of VP Marketing
Jacco vanderKooij
How to Scale ARR to $50M
3. Why is this framework missing X?
The goal for this framework is to provide comprehensive information that is easy to digest. My hope is that people working in SaaS businesses will look at this diagram, see things in a different perspective, and then take these ideas and optimize their customer acquisition process.
For example, the content strategy part of the diagram assumes that your company has clear messaging and positioning for your product. In other words, you have in-depth target customer profiles that your team uses to understand each of the different players in the buying process and the customer value they get from your product. Read more on how to create target customer profiles and effective value messaging.
Part 1 : Customer Acquisition Framework
1.1. Customer Lifecycle vs. Sales Funnel
Customer Lifecycle helps companies understand how customers are experiencing your product and what actions they are taking.
Sales Funnel shows internal processes that companies need to follow in order to move prospects down the funnel effectively and efficiently.
The diagram shows that the sales funnel is shorter than the customer lifecycle. For companies that track both, the sales funnel is just one part of the overall customer lifecycle journey.
Sales-centric approach vs. Customer-centric approach
If we only discuss the Sales Funnel part of the Customer Acquisition Framework, it’s easy to forget that customers look at your product differently and there are multiple paths to conversion.
The sales funnel is used by organizations to analyze how effectively they move prospects through the sales pipeline. Sales funnel stages represent a prospect’s current stage as the company sees it. As a prospect moves down the funnel, the probability of closing the deal increases.
For example, a company may know they have a 30% probability (based on past sales) of closing a prospect once they reach the opportunity stage. They use this probability when doing sales planning and modeling. If they currently have $500,000 in opportunities, then they have a potential for $150K in closed business.
NOTE: If you are doing sales planning, you need to take into account the average time it takes to move a prospect from the opportunity stage to the closed stage. Using the example above, if it takes an average of 60 days to close an account after it becomes an opportunity, the company can forecast a revenue of $50K net 30 and the remaining $100K net 60.
Customer lifecycle is a framework that puts the customer at the center of the process and looks at how they move along the buying process. It provides insights on customer’s actions that identify an increased probability of buying your product.
For companies that have a freemium business model, the customer lifecycle funnel is more important than the sales funnel. A great example of this is Slack, which offers their basic service for free, but converts free customers into paid customers by offering additional features. Obviously, a sales funnel with MQLs and SQLs isn’t tracked at Slack since their bottom-up approach to customer acquisition eliminates this need.
Finally, it’s important to remember that the higher the product price, the more emphasis companies should place on monitoring sales cycle. For example, Salesforce’s free trial isn’t as useful as Slack’s since their product is too complicated and needs significant resources to be integrated. Therefore, following the internal sales funnel makes more sense.
1.2. Customer Lifecycle Funnel
The Customer Lifecycle is often drawn as a circle, but in this case we use a vertical representation to make it easier to visualize the relationship between the customer lifecycle and sales funnel. There are six stages the customer has to go through in order to “complete the circle”. Each transition between stages corresponds with a direct action that customer has to do or achieve. Think of this process as different levels in a video game.
To become a visitor, somebody needs to visit your company’s website. When they submit a form or sign up for a free trial, they become a prospect. Prospects then become activated users when value is delivered or a certain level of usage is reached.
Let’s quickly go over each stage.
Visitor
Visitor is a very broad category that includes everyone who lands on your website. In theory, every visitor is a potential customer (not really). When a visitor signs up for a free trial or downloads something (e.g., case study, ebook, etc.), they become a prospect.
Action required to move to the next stage: Conversion
Prospect
A visitor becomes a prospect once they convert on a website. A prospect is a potential customer who has expressed interest in the pains, solutions, products, or materials related to your company. The contacts on a list that your marketing team might buy from a third party are not prospects since they haven’t actively expressed interest by sharing their information nor have they been qualified by your sales development team.
Metric: Conversion Rate
The conversion rate, in a sense, tracks the effectiveness of your website and content. Overall, the conversion rate for your website is a more generic metric (and can be ignored), but the conversion rate for free trial and product signups pages are more explicit and actionable.
Action required to move to the next stage: 1st value delivered
Activated User
Not tracking user activation during the initial signup or a free trial is one of the most common mistakes SaaS companies make. They are focused vastly on getting customers into the product that first interaction with the product becomes an afterthought. Tremendous resources are spent to get prospects in and even more resources should be allocated to designing the first experience and getting prospects to the aha-moment when first value is delivered.
The primary goal after getting a prospect inside your product is to activate them by delivering the core value unit for the first time. You entice the prospect to reach your pre-defined activation level.
As discussed in The Cost of Poor User Onboarding, Slack user activation happens when a team chat reaches 2000 messages.
Other examples of user activation goals:
Subscription billing: connecting your payment options or bank account can be used to activate a user.
Platform connecting farmers, distributors and chefs: activation can be tracked when a first order is placed.
Airbnb: an activated user could be a new visitor that saves their first listing.
Lyft (yes, I’m rooting for the underdog!): an activated user could be one who connects a credit card to the app.
You get the point.
Metric: Activation Rate
The activation rate is a ratio to track how effective the company is in delivering first value and designing the first experience with the product. Activation rate simple shows the percentage of prospects who actually activate their free trial and received a first value unit.
Action required to move to the next stage: Customer Paid
NOTE: It can be extremely challenging for a SaaS company to use a third party onboarding solution. User-onboarding is such a critical step that it’s almost impossible for someone outside of your company to design a product that perfectly meets the needs of your customers. Your product team needs to own it.
Customer
A user or prospects becomes a customer as soon as he/she pays. Your team’s next goal is make this customer an active one. Two questions you want to ask your team:
Do all of our customers use our product regularly?
Are they happy with how much value your solution delivers?
Metric: Daily / Weekly Active User Rate
Action required to move to the next stage: regularly use product
Active Customer
Your customers can pay for the product but not use it very often or at all. An active customer is one that regularly uses your product and therefore receives value and installs habits of using your solution on a regular basis. SaaS companies need to identify what usage correlates with high Lifetime Customer Value and a higher renewal rate.
Metric: Renewal Rate / Churn
Action required to move to the next stage: Renew / Upsell
Loyal Customer
When a customer renews or signs up for additional features (e.g., extra seats or API access), they become a loyal customer.
Metric: Net Promoter Score / Referrals
The customer lifecycle helps you understand how customers experience your product and company. It’s a customer-centric approach in which customer action drives the funnel.
Takeaways:
Each stage that a customer goes through is preceded by a specific action.
Effectiveness of each stage needs to be tracked and optimized with conversion metrics.
For products that have free trials, it’s crucial to track ‘Activated Users’. This metric is an important checkpoint for measuring intermediate steps between the ‘prospect’ and ‘customer’ stages.
Companies need to know how often customers use their product/solution and how much value they derive from it.
NOTES:
Buying decisions for larger companies are rarely done by one person. Because of this, the “Customer Lifecycle” refers to everyone (i.e., whole account) involved in the purchase and use of the product, not just one manager or one end user.
A company can request case studies and referrals from a customer as soon as it make sense. Make sure that the customer receives consistent value before asking for a case study or referrals. The customer should be at least an active customer.
1.3. Sales Funnel
Whereas the customer lifecycle is driven by customer actions and tracks how they experience the product and company, the ultimate goal of the sales funnel is following specific actions, processes, and workflows to track and optimize the sales process effectiveness.
Questions that your sales funnel has to answer:
How does your team prioritize leads?
How does your team nurture prospects?
What prospect actions correlate higher with closed deals?
How long does it take for your SDR team to reach out to leads that reach a qualifying lead score?
How long is your sales cycle?
What metric best represents efficiency of moving prospects from one stage to the next?
When and how do your teams handoff prospects in the funnel?
Do you have an onboarding plan?
Let’s take a closer look at the sales funnel.
Leads
Leads can enter the sales funnel from outbound and inbound channels.
Outbound leads are leads created by Sales Development Reps (SDRs) by carefully targeting accounts that may have never heard about the company. Outbound email outreach is still one of the most effective tactics for generating outbound leads. Cold calls, direct mail, sending messaging on social media are all part of the outbound channel.
LEARN MORE: get everything you need to know to start outbound sales for your startup with Steli Efti’s ebook — “The Ultimate Startup Guide to Outbound Sales”.
Inbound leads are leads created when prospects submit information in exchange for an asset (whitepaper, case study, etc.) or signs up for a free trial.
NOTE: In account-based selling approach where SDRs pre-qualify accounts before initiating an outreach prospects that showed interest can be assigned to Sales Qualified Lead (SQL).
Action required to move to the next stage: filtering bad data, enriching inbound leads
Two things usually happen after lead data is entered in a company’s database whether it’s marketing automation or CRM: 1) filtering bad data; 2) enriching incoming leads with more information using 3rd party solutions. (insert your ad here — just kidding <img src="https://s.w.org/images/core/emoji/72x72/1f642.png" alt="