Since SP Home Run generates about 150 organic Inbound leads each month, and any given time a whole bunch of these prospects are ready for a conversation, we talk to a lot of B2B software companies every month. Interestingly enough, we learn just as much from our clients as we do from the software companies that we decide not to do business with.
In this post, I’d like to talk with you about the lifetime value (LTV) of your average client and why a modest LTV warrants a smarter, more considered approach to Inbound marketing. And in a follow-up post, Why B2B Software Companies Fail to Scale. And How You Can Fix It! (Part 2 of 2), you’ll learn how you can spend less time with each prospect and select the right Inbound marketing tools to drive profitable client acquisition.
Understanding Your Ideal Client’s Lifetime Value
Once you have a firm grasp on who your ideal client is – in other words what attributes you want to see appear on a completed landing page form to be considered marketing-qualified, it’s critical to get a handle on what your ideal client is worth to your software company over the lifetime of that relationship.
For example, I recently walked an accounting-related software company through our exploratory process and learned that their lite ERP offering had a $6,000 lifetime value over a three year period.
Another B2B software company, with a cloud-based medical SaaS app, has a $3,900 lifetime value over a two year period.
And a third software company that recently went through our Inbound marketing evaluation process makes a payment processing integration SaaS app with a $7,200 lifetime value over a three year period.
Navigating “No Man’s Land”
So while all three of these companies had a decent size LTV, relative to a shrink-wrapped software app that one might find in an office supply superstore or warehouse club, each of these software companies was kind of in “no man’s land” when it came to building a scalable Inbound marketing funnel. Why?
Their price point was too high to be an impulse buy for their target client size. As a result, considerable education was required to get prospects from awareness to a closed sale. In the case of all three of these software companies, the owner of the business was literally talking to and manually demonstrating the software to every prospect.
At two of these companies, there was a junior salesperson assisting, but again every pre-sales conversation required lots of time.
But the challenge however is that with LTVs ranging from $3,900 to $7,200, how much time could the owner or junior sales person really afford to invest in a prospect? Perhaps four hours at the most. But that clearly wasn’t the case.
Worse yet, even though the owner was the primary salesperson in all three of these B2B software companies, the owner wasn’t accounting for the true opportunity cost of their time.
Let’s say for the sake of argument that the junior inside sales person has a fully-loaded cost of $80 per hour.
And the owner of that company, with much more on their plate, backs into a fully-loaded cost of $400 per hour.
So with a 5% industry average close rate and spending an average of four hours of one-on-one time with each sales qualified lead, it takes 80 hours of work to close one new client, at an average hourly rate of $240 per hour, or $19,200.
Yikes! $19,200 in sales costs – before any kind of marketing – to close a sale with a client that’s worth anywhere from $3,900 to $7,200. With math like that, clearly something’s wrong.
Getting the Cost of Client Acquisition (COCA) Back Under Control
So how can this software company build a scalable demand generation system?
We need to fix this highly dysfunctional COCA scenario where the company is expending $19,200 in labor to acquire a client that’s worth about $5,500.
Assuming prices are as high as the market and software’s value allows, the primary levers we need to influence:
- Spending less one-on-one time with each prospect
- Boosting – dramatically – the lead to client close rate
In this post, you’ve been introduced to the importance of your ideal client’s lifetime value, why many software companies struggle in “no man’s land”, and what’s needed to get the math profitably back into balance.
Next time, we’ll look at how you can spend less time with each prospect and select the right Inbound marketing tools to help your sales staff work more efficiently and profitably, when confronted with a relatively modest client lifetime value.
What have you done to get a better handle on your client lifetime value and client acquisition costs? And what are you actively working on to lower your client acquisition costs over time? Let us know your thoughts in the Comments box below.
And to better conceptualize what needs to be done with your Inbound marketing, for more effective traffic generation, lead generation, and sales acceleration, be sure to download your free copy of the IT Channel Inbound Marketing Planning Guide.