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Best Practices CAC conversion conversion rate customer acquisition cost customer lifetime value metric TLV trial conversion trial usage

SaaS Best Practices: Measuring Trial Conversion Rates – Part 1

Defining an active user and setting a baseline

 

Over the next few weeks, Totango will be posting a blog series on best practices for measuring conversion rates of trial usage for Software-as-a-Service (SaaS). Trial conversion is arguably the single most important business metric for SaaS companies since the model is based on two key parameters: customer acquisition cost and customer lifetime value. The trial conversion moves customers from the acquisition phase to the lifetime value phase and as more potential customers become paying customers, the customer acquisition cost goes down and the customer lifetime value goes up. Simply put, the ratio between customer lifetime value and customer acquisition cost is the entire profit of a SaaS company.

It is important to make sure that the measurement of trial conversion addresses three basic concepts:

  1. Simple to measure;
  2. Simple to understand;
  3. Be actionable.

Unfortunately, trial conversion is not that simple to measure correctly (most organizations do it, but haphazardly) because there is no “single source of truth” per se. That is, trial conversion comes from multiple business processes (marketing and lead generation, in-house sales, and the product itself), which muddies the ability to measure it definitively. As a result, to get an accurate trial conversion number, organizations need to make sure that all the data collected is aligned among the business processes mentioned above.

Conversion Rate GraphThe second challenge is “noise,” or trials that are “dead on arrival.” These users may have signedup for a trial, but have no intention of buying. They are just playing with the software because they can; it could be for educational reasons, it could be for other reasons. Taking these “dead on arrival” trails into account creates a very blurry picture, which is difficult to take action on.

Considering the challenges of measuring trail conversions (and the need for simplicity), the first step is to define the active, or effective trials (trials who came with the intention to buy and now are evaluating the service) and weed out the “dead on arrival” trials. There are different ways to do this of course, but one example could be measuring active trials based on a second day of usage or perhaps based on what the user is actually doing. Once the SaaS organization defines an active user, a baseline can be established. A baseline is taking the current number of trial conversions (and perhaps taking into account historical information as well, if available), and setting metrics around that.

With a baseline set that weeds out “dead on arrival” trials, organizations can tweak the service they sell or the various parts of their sales and marketing processes to improve trial conversions. Perhaps the organization needs to focus on marketing to get better leads because the current leads aren’t good enough. It could be that the sales process is not effective and it needs to be improved. Or it could be that the service itself needs improvement. Ultimately, the SaaS organization needs to measure continuously in order to put a finger on the right problem.

Imagine an organization that had, for the duration of July, 1,000 new signups for trial. Out of those accounts, 10 ended up “converting”. On the face of it, the conversion rate is 1%.

Signed up Purchased Conversion Rate
1,000 10 1%

However, dig a bit deeper and in many cases, you see that many, if not most, of those 1,000 trials never had a “buying potential at all”, evident by the fact that they never did a serious evaluation of the service

Signed up Actually Evaluating Purchased Conversion Rate
1,000 100 10 10%

(note: it would be nice if numbers in real life would be so round and simple to calculate in ones head!)

Why is this important? First off, because it gives a more real indication to what is going on within the sales team’s pipeline (they are succeeding in selling to 1 out of every 10 prospects not out of every 100), and it is easier to motivate people to improve a metric they intuitively feel is true.

But that is not it, in our next post, we’ll explore what the trial conversion metrics mean and how SaaS companies can best act on the data that is collected to increase conversion rates.

View our Trial Conversion Webinar!

 

To learn more about Trial conversion,
view our 40 minute webinar: “Best Practices on Trial Conversion

 

 

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Categories
Company updates totango

Totango: We’re Launching!

Today we’re announcing our $3.8 million Series A financing as well as opening our service to the public with a free beta offering.

I wanted to give a bit of a personal perspective to what is being announced today and put it in context.

In early 2009 I was looking for the next opportunity. Cloud computing in general and Software-as-a-Service specifically were continuing to rapidly gain ground and it was clear that almost every aspect of the software was undergoing massive change: how software is delivered and consumed, bought and sold; everything was changing.

It was clear that while SaaS presents enormous opportunities for vendors, it also introduces new challenges. Much of the focus in the industry has been on the technical aspects of these challenges: how to build scalable, high-performing, reliable multi-tenant services. But while these technical challenges are interesting and important, we felt that not enough attention was being given to the business side. In SaaS, the customer engagement model is fundamentally different.

The SaaS Customer Engagement Challenge

Most SaaS companies put their services in front of potential customers on the web and allow for a self-paced evaluation process. The sales process is no longer controlled by the companies’ sales people. However, sales teams do need to keep up with the high volume of evaluating prospects and make sure the users find what they need to make a favorable buying decision.

Most SaaS pricing models are based on subscription or usage, which allows customers to stop using — and stop paying for — the service at any time. That, plus low switching costs, mandates that SaaS companies constantly monitor customer satisfaction and improve the value that is being delivered.

In addition, the engagement between customers and the business is indirect. There are almost no customer visits, minimum sales calls, and most of the interaction between clients and the business is usage of the service. This no-touch and low-touch engagement model creates a wide gap in how companies understand their customers.

But there is one huge advantage SaaS companies have over their traditional counterparts — they can measure the actual way in which prospects and customers use their products. That is, if they have the tools to properly track and analyze such activities.

Helping SaaS Companies Understand Their Customers

So we set out to help SaaS companies understand their customers through their actual interactions on the service. It also quickly became clear for us that [1] customer facing staff — sales, customer success and others –  are looking for practical and actionable solutions [2] based on this information, and not YAD (or yet another dashboard, as it is often referred to).

Before we wrote a single line of code, we talked to more than 50 SaaS companies, trying to validate our initial assumptions. It was clear from these conversations, and especially from the fact that many companies have developed homegrown tools that crudely attempted to address this need, that we were on to something.

Those homegrown solutions were developed, well frankly, half-ass, without a long term strategy. As a result, there was constant friction between the business users who need the information and the engineering team, which was already barely keeping up with its core product development responsibilities.

The Totango Solution

We created the initial version of Totango, and worked for almost a year with a number of SaaS companies of all sizes and industries in a private beta. From this we learned (and are still learning) how SaaS companies would like to analyze and act on customer usage information.

Today we are publicly releasing the first solution we developed through this process. It is a set of tools that help sales teams increase their effectiveness by improving the conversion rate of evaluating users into paying customers. We’ve built this by spending many days at the offices of our initial clients to learn their daily routines and practices so that we could provide the missing tools they’ve been looking for. The initial results with these private beta customers were amazing, and we feel very confidently that it is time to share our solution with a wider audience.

For now, the product is free. And although we will announce pricing in the coming months, we are planning to always offer a free tier.

When it comes down to it, we’re a SaaS company ourselves and we know first hand how important it is to get people up and running in minutes, so we’ve made sure Totango is as simple as can be to get going.
You can read our official press release here.

We’re ready Totango, please join us.
— Guy

 

 

About TOTANGO:
TOTANGO analyzes in real time customer engagement and intention within SaaS applications to help you grow your business

 

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Categories
Best Practices box.net enterprise RC-SaaS Best Practices software techcrunch

Building Enterprise Software Products That Don’t Suck

Aaron Levie, CEO and Founder of Box.net posted this excellent article on TechCrunch. I encourage you all to read it before reading onwards.

Levie describes a major shift in enterprise software towards ‘value to users’ vs. the old ‘perceived value to the CIOs’.

One of the key arguments in his article, that grabbed my attention is:

By focusing on building enterprise software that the users love, driving demand up to the CIO. Vendors like Workday, Jive, Yammer, or Rypple are responding by investing more in design, usability, openness, and the total user experience. They’re measuring success by user adoption, rather than feature checklists

I couldn’t agree more! Consumer products, such as the iPhone, iPad, Facebook and many others are changing the way people evaluate products, including enterprise software products.

Value to users is key decision criteria. Software vendors who fail to constantly improve and increase value to users will end up with shrinking user bases, resulting in replacement from others who will deliver the right value.

When thinking about the emerging customer facing business models of subscription (SaaS) and pay-per-use, switching costs and vendor lock-ins can not be a reason for enterprises to stick with overly complex products who fail to deliver ‘right’ value to users. We at Totango certainly appreciate vendors that do it differently, and create an ongoing dialog about value with their customers.

It is crucial for software vendors, to constantly monitor the current value their users are getting from their online software. It is the challenge and at the same time the big opportunity for the SaaS delivery model.

Luckily, measuring value is simple. Vendors can learn about the value their customers are getting by measuring how much the software is being used and how. By providing Totango Analytics service to some of the vendors Levie mentions in his article we’ve learned that  investing a small effort in determining the right information to collect, companies gain great visibility of value their clients are getting (or not).

The need to constantly increase value to customers is inherit in the SaaS model and results in alignment of customer success and the vendor’s own business success.  Successful SaaS companies realize this and constantly strive to get immediate feedback on value by monitoring increases or drops is usage. Combined with fast paced releases and methodical A/B testing, software vendors can focus on building customer-centric, value-first enterprise software products.

It’s great to share this vision with others. Enterprise customers should expect this level of value from their software vendors.

 

Get your FREE copy of our latest RESEARCH:

The 2012 SaaS Free Trial, Freemium and Pricing Benchmark

get-your-free-copy


About Totango:

Totango analyzes in real time customer engagement and intention within SaaS applications to help you grow your business

 

Increase your sales revenue!
Try Totango free for 30 days
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Categories
Business Insights cltv RC-SaaS Best Practices totango usage

SaaS on the House. A Dialog About Value

Who doesn’t like it when the bar tender pours an extra glass of fine wine ‘on the house’?
Every time it happens to me, my emotional attachment to the establishment grows, and it makes it that much more likely that I’ll visit again.

I tend to have the same feelings when I receive monthly emails from amazon AWS about new features and cost reductions, and a recent email I got from Beanstalk announcing a bunch of new services all included within the same package I’m already paying for. It’s a great way to create loyalty for subscription services.

Constant increment to value and service level improvement without additional costs is probably one of the biggest benefits for SaaS customers. It is inherent to the subscription/pay-as-you-go business models. The power is in the hands of the customers who can always decide to cancel their subscription. SaaS vendors must constantly innovate and create additional value to keep their customers happy.

SaaS vendors, frequently monitor a metric called Customer Life Time Value (CLTV). How much revenue does my average customer generates over it’s life-time. However, this metric can also be seen from the reverse perspective, how many months does my average customer continue to see value from my service such that they are willing to continue paying for the service.
It is also a key benefit for software vendors. Success comes from focus on the customer-lifetime value, which can only come when you truly understand customers and their changing needs. Anyone who developed software products knows how easier, more productive and more enjoyable it is when you have than organizational knowledge. With SaaS you have no choice but to develop it.

These type of customer/vendor relationships are healthier and thus last longer. As long as customers are getting real value they will pay for the services they are consuming. In the old, on-premise applications world, customers had to pay in advance for a service/product they didn’t really use yet. This up-front payment created a dynamic where application vendors where focused on the initial sales, and decision makers where focused on making the first initial buying decision. You can clearly understand why the new model is better for both sides. The new conversation between vendors and customers is about constant value creation, delivery and consumption.

Another great benefit which comes from both SaaS business models and the web based delivery model is a much faster value creation cycle. The motivation of the SaaS vendor to create value faster, combined with the opportunity to manage a single version of the service enables rapid cycle times. Customers are getting new features and functions which create value much faster.

Shorter customer commitments and business model flexibility presented by SaaS promotes healthy relationship between vendors and customers which revolves around value – simply win win!

Get your FREE copy of our latest RESEARCH:

The 2012 SaaS Free Trial, Freemium and Pricing Benchmark

get-your-free-copy


About Totango:

Totango analyzes in real time customer engagement and intention within SaaS applications to help you grow your business

 

Increase your SaaS revenue!
Try Totango free for 30 days
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Categories
Business Insights customer success Sa

3 Essential Tips for Sales in a SaaS Model

SaaS forever changes how software is developed and delivered to customers. This shift is well understood, frequently discussed and represents a major shift in the way software is built by vendors of all sizes.

Often less discussed is the impact the service model has on the way software is sold.

In our discussions with SaaS providers, big and small, we see a growing understanding of the need to define sales strategy and processes while taking into account the full life-cycle of a customer. It’s not about making a sale, it’s about making your customer successful.

It’s useful to compare SaaS and enterprise sales to appreciate this:

Enterprise software sales are a high-touch activity.  Opportunities are identified, tracked, and closed by a direct sales force or resellers. This cycle is what makes a good enterprise software company tick.  And it’s why successful enterprise software vendors like HP and IBM are so sales-driven.  Their culture must be very sales-oriented in order for them to succeed.

Selling SaaS is different.  SaaS solutions are fundamentally ‘self-service’, relying on a large quantity of (hopefully qualified) leads funneled to the web-service through inbound marketing activities. In an ideal world, these leads pick up the solution and turn into happy customers by themselves. But in practice, for all but the most simple and commodity software, cultivating customers and growing the business requires direct interactions with the customer.

We call this model medium-touch. It is a sales model that puts more onus on marketing and the product’s self-service to move large quantities of prospects through the sales funnel, but also assumes a level of direct engagement of a sales and support team. The trick is to identify the right touch points to make the system work.

Here are some tips we’ve learned from  SaaS vendors on how they build their sales process differently than traditional enterprise sales:

  • Successful customer onboarding is critical: in a SaaS model, because switching costs are low, “closing the sale” is not nearly as important as it used to. The vendor must ensure he’s doing everything possible to help customers adopt the solution rapidly and with ease. Otherwise, customers are likely to churn shortly after they subscribe, resulting in loss of revenue and reputation.
  • Don’t bother top-selling:  in SaaS product-usage and its sales are always intermixed. Customers first look at your site, then they try the software, then they decide to buy it. In enterprise sales, the same process may be reversed, and a sale can occur before even one user tried the product. That’s why “top-down” selling isn’t a useful strategy for SaaS and investment must be made in reducing usage-friction at every junction.
  • Focus on up-sell :  In traditional enterprise sales, customers often pre-budget and pay for what they (think) they will need in a few years. With SaaS, customers tend to buy what they need and buy more when they feel they need to. Therefore SaaS is as much about up-sell than the initial sale. For a SaaS salesperson, a large chunk of  energy need to go to cultivating existing customers and identifying up-sell opportunities.

The reality is that implementing these sorts of practices isn’t as straightforward as it looks. It often spans different organizations such as sales, customer-support, product development and operations — and it involves aligning goals and pulling in expertise from many disciplines. More than anything, it involves getting a very good understanding of what customers are doing so you can properly prioritize and streamline the process.

More and more SaaS providers are building “Customer Success” teams  that focus on just that: making the customer successful.  We’re building software to make it possible for them.

 

 

About TOTANGO:
TOTANGO analyzes in real time customer engagement and intention within SaaS applications to help you grow your business

 

Increase your sales revenue!
Try TOTANGO free for 30 days
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Categories
software

I Choose Cloud

This is a great video created by the innovative guys at Box.net with several other CEOs of companies creating very inspiring cloud services.