How to Create a $50M ARR Inbound Revenue Machine with Justyn Howard and Mike Volpe

Last February, former Hubspot CMO Mike Volpe sat down with Sprout Social Founder and CEO at the SaaStr Annual to talk product pricing, delivering individualized value, and creating a $50M ARR inbound revenue machine. Check out the full session video and transcript below!

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Transcript:

Announcer:  Please welcome Mike Volpe, CMO at Cybereason. And Justyn Howard, Founder and CEO of Sprout Social.

Justyn Howard: Do you have a preferred side? We’re gonna do a little rearranging here.

Mike Volpe: Awesome. Cool. Wow. Clearly the bar must be closed.

Justyn: Yeah.

Mike: I actually stole that joke from Justyn. You literally just told me that two minutes ago. And I was like that’s a good joke. I’m gonna steal it.

Justyn: That’s right. We share jokes. But, yeah. This is a lot of people for 5 p.m.

Mike: It is. It’s great. We’re pumped to be here. We’re gonna talk about building a 50 million dollar, or a 100 million dollar, actually should be 100 million, I think.

Justyn: Yeah. I mean, the numbers are a little outdated. Although, not all of that is inbound. So, there’s some fudge room there.

Mike: Yeah. It’s fine. But this is marketing. So, you exaggerate it a little bit, right? So, building a 50 or 100 million dollar inbound revenue business. I’m Mike Volpe. I’ve done marketing for a long time. Probably for this particular presentation, the relevant thing, I was part of the founding team at HubSpot. Which obviously had an almost complete inbound model. Grew that to 150 million through IPO. And Justyn, I want you to introduce yourself.

Justyn: Yeah. So, I’m Justyn Howard. I am the CEO, and one of the founders at Sprout Social. We’re a Chicago based SaaS company, and we’ve been at this for, I think it’s coming up on eight years now.

Mike: Yeah. Cool. Awesome. And represent non-Silicon Valley SaaS companies. Boston, Chicago.

Justyn: Actually, there’s a few of us. Right?

Mike: Shout out. There’s like two people in the back going yeah. Right? There we go. So, you guys are with us. Awesome. Cool. It’s a 5 p.m. show, so we’re gonna have some fun with this. All right, so talk a little bit about just, like, Sprout Social. What do you guys sell? And then, I want to branch into a whole conversation around who do you sell to? ‘Cause then it gets interesting.

Justyn: Yeah. So, Sprout … We’ve got a couple of products. Kind of the flagship, or the core product, social media management software. We work with about 21,000 brands around the world who use it to more effectively manage their social, create stronger relationships with their customers. We also have an employee advocacy and engagement product. Also in the social space. And recently made an acquisition in the social analytics and listening. So, we’ve got a few products. The flagship of which is this social media management at Sprout Social.

Mike: Got it. So, 21,000 customers. You sell to small businesses?

Justyn: So, yes.

Mike: You sell to big businesses?

Justyn: We do.

Mike: You sell to enterprise?

Justyn: Yes.

Mike: You sell to Fortune 100?

Justyn: We do.

Mike: What the hell, man?

Justyn: Yeah. So, yeah.

Mike: Like, that’s against all the traditional advice about SaaS. It’s like pick this core target market. And go out, like what’s …

Justyn: Yeah.

Mike: Where’s that coming from?

Justyn: So, not something that we intentionally set out to do, I don’t think. The idea, early on, was let’s build really great software. And myself and a couple of other folks on the early team, we came out of the enterprise space. We knew some things that we didn’t necessarily like about that. We felt that we could build great products, find efficiencies in how we sell and market, and it worked. And over time, we started to realize that, “Hey. You know what? Our customer base is really diverse.”

We’ve got large enterprise. We’ve got SMB. We’ve got agencies. We’ve got mid-market. And everything in between. And again, not intentional, but when you come to that realization, then you’ve got a choice to make. Where do we want to focus, right? ‘Cause everyone suggests you’ve gotta pick a niche, you’ve gotta pick your focus. Is it SMB? Or are you enterprise?

And we resisted that idea, and said, “You know what? These segments are all really interesting to us for different reasons. And if we can add value to all of them, and do it profitably as a company, then lets take on that challenge.” And so, all of those parts of our business are growing, thriving, and very important to us.

Mike: So, tell us about the inbound side of it. So, you’ve got …You sell to businesses of almost any size. Obviously, you’ve got the set of use cases around the product for that. But where do the leads come from? Is it different in the enterprise? Do you actually have an SDR team doing outbound for the Fortune 100?

Justyn: Yeah.

Mike: Where does all this come from?

Justyn: Yeah. So, it’s evolved a bit over time. I’ll say, on the whole, probably the first six years of our life, the vast majority, if not all of our revenue, was inbound. And when we say inbound, in our world, that means through our free trial funnel. We have a 30-day free trial of our product. And, to a lesser degree, people who are requesting more information. Requesting a demo. That sort of thing.

We do a lot of content marketing as well. All with the end destination of one of those two entry points into the funnel. And we … The free trial, obviously, slightly different from a qualification perspective. So, we handle those a little bit differently than we do the others. And so, that’s been kind of our whole lives. That’s been the focus.

Now, over the last 18 months, we’ve put a lot more energy into the outbound side of things. We’ve also grown the SDR and BDR teams. Both the ones doing the outbound prospecting. As well as the ones who are qualifying some of the stuff that we get from the less qualified channels, from an inbound perspective. And once those are qualified, they go to the sales organization. The sales organizations work with those folks, and ideally, turn them into customers.

Mike: So, I wanna stick to the inbound stuff. ‘Cause that got you guys to 50, 80, whatever million ARR. Like a huge number. So, you said some interesting stuff in there. So, I heard free trial? Give us a sense of the volume of free trials on a monthly basis.

Justyn: Yeah. So, we do I’d say about nine to ten thousand businesses are trying our software on a monthly basis.

Mike: Okay. And then.. that’s a lot. Sounds pretty cool.

Justyn: Yeah. It’s fun.

Mike: But then, you also mentioned sales reps. I feel like the typical free trial is like, oh, people try it and then they kind of humanlessly upgrade.

Justyn: Yeah. Yeah.

Mike: So, but I heard sales reps. So, what are you telling me? What’s going on with that?

Justyn: And that’s actually a really interesting, and I think, critical point in this. So, from the beginning we assign sales reps to that free trial process. And certainly, we have buyers who avoid the emails. Avoid the phone calls. Put their credit at the end, and buy. That’s shifted over time. We’ve gotten more effective getting engaged with the prospects during that trial. But throughout that trial, we’ve got live sales reps working on those accounts. Making sure that the customer’s questions are being answered. That they understand the positioning, the value, and things like that. So, the vast majority of those trials get a sales rep, including the SMB segment. And so, we’re working with them through that, to make sure they get everything that they need out of the trial.

Mike: And give us a sense, from the SMB through to the enterprise, what’s the variation in ACV?

Justyn: Yeah. So, I’d say that ACV … Taking out the outliers, is like a 3 to 4X from the SMB, in aggregate. We have customers who are paying us less than $100 a month. We have customers that are paying us tens of thousands. But on the whole, with a couple thousand enterprises, I think it’s about 3 or 4X.

Mike: Got it. Okay. And then, it sounds like the reps are actually talking to almost all of the trialers.

Justyn: They are.

Mike: It sounds like there’s a few humanless that come through. But really, it’s a free trial to all inside sales rep, basically?

Justyn: Yep.

Mike: Okay. Free trial to inside sales rep model. That’s interesting. So are the reps product experts? ‘Cause I think what’s interesting, so at HubSpot, 90% of the deals we closed were through the inside sales team and sourced from marketing leads. But 85% of our leads were inbound, but based on content, not free trials. Right? This is through IPO. So, it would seem to me like the stuff that we had to do to get the reps … You know, someone downloads an ebook about XYZ topic … To get from that to buying a software product is one motion but it feels like you’ve got them at the point that they at least signed up for a free trial. Maybe they didn’t click around at all in it. But at least they signed up for a free trial. And then you’re sending it to a rep.

Justyn: Yeah.

Mike: So, what’s the rep onboarding like? What are the reps like? What’s the special sauce there?

Justyn: So, it varies a little bit by segment. But I think the primary job of the reps during that process is to demonstrate the value of the product. So, to your question, are they product experts? Absolutely. And we have this interesting situation where, because that’s our primary source of leads, that we point everyone to sign up for this free trial.

We get some people who are in there to actually test out the software. We get other people that are in there because we told them that that’s where they needed to go. But, in reality, they want someone to show them around and answer questions, etc. So they’re not actually there to try the software. They’re there to be shown the software.

Mike: They want someone to do the trial for them.

Justyn: Yeah.

Mike: All right.

Justyn: And so, and it took us a while to figure that out. And adjust the sales process. But their job there is to … And there’s a bit of a disadvantage to that, too. So, we have the advantage of they’re highly qualified by the time we them. They’ve expressed interest enough to give us their information. Connect their Twitter and Facebook accounts, etc. And so that’s great. But it’s also challenging now, too, we have to back them off of that. Let’s not just talk about the product. Let’s talk about what you’re trying to accomplish. Let’s talk about the typical discovery type discussions that you’d have. Because they’ve already..

Mike: How long would it take to cover that? Okay. ‘Cause you’re in feature functionality land because it’s a trial based conversation. You’re not necessarily in business value land because they’ve started clicking around on a bunch of buttons. They said, “Oh. Why is this in this part of the menu?” Or whatever.

Justyn: Exactly.

Mike: That’s interesting. So, how do you branch back to that business value? ‘Cause I feel like … So, with HubSpot, when someone downloaded a piece of content about generating more leads through social media, you could have a business conversation with them. And then, the bridge we needed to build was, “Okay. Here’s some software that helps you do that better.” Right?

Justyn: Yeah.

Mike: You’re saying, “Well, I have the software. But let’s bridge back to the higher level business value, se we could establish a use case here.” Yeah. How do you do that?

Justyn: Yeah. So, I would say for a good chunk of our prospects, there’s some pain with an existing tool. Whether it’s through the native platforms, a competitor of ours, etc. And that’s usually where it starts. Right? This product doesn’t do X, and I need to do X. Well, why do you need to do X? What is it that you’re trying to accomplish? At the lower end of the market, certainly, there’s more folks who are just dipping in their toes, and figuring out … And that’s where we have to do the education, and talk about well, are you trying to get more customers? Keep more customers? Etc.

So, we can use what they focus on in the product to figure out. And then, ask questions backwards to get to the business value.

Mike: Okay. Now, it seems like, so the product generates all these free trials. You’ve got the sales team bridging back to business value. Then you’ve got people through that process signing up and becoming customers. In all of our getting to know each other over the past while, one of the things that we talked about once, that I was fascinated by, was the conversion tribe.

Justyn: Yeah.

Mike: How do I join such a tribe? It sounds fascinating. What do they do?

Justyn: Yeah. So, our product and engineering organizations. We’re set up in a hybrid, spotified model. Which is squads, and then squads put together under tribes. The conversion tribe is one of the newest product and engineering organizations that we put together. That’s focused entirely around funnel conversion, first use, and onboarding customers.

Mike: The funnel conversion. Okay, so visitor to the site to signing up. Okay, to signing up for the trial. First use meaning they’ve signed up for the trial, and now doing something in the trial?

Justyn: Yep.

Mike: Okay. And then, what was the other part?

Justyn: And then, just onboarding. Making sure that they’ve seen value across the product, wherever they might need to see that value.

Mike: Okay. I see. Okay.

Justyn: That value. And so, prior to that, we had each of the teams that was working on a different part of the product was asked to be thinking about that. Right? Think about the first use of this feature, or whatever it might be. And we did an okay job with that. But when we started putting a team that was responsible for nothing but that, and making sure that that onboarding and first use was incredible. That’s when we started seeing really good results.

Mike: And, who’s in that tribe? ‘Cause I think that that model is typically, it’s like only product manager and some developers kind of a thing. But when we were talking about it, it seemed like … I don’t know if they were formally in there, or heavily aligned with them. But you had marketing and some other people in there, as well.

Justyn: Yeah. So, the growth tribe’s interesting because it really straddles marketing and product. And we’ve got people on the team from both disciplines. And also stakeholders from both disciplines. So, that really is an interesting … and something that the executive team is involved with, too. So, they have this hybrid mission that is, obviously, for a company like ours, when it’s driven on free trials, and that early exposure to the application, it’s critical. And took us probably a lot longer than it should have to put that function into place.

Mike: Yeah. Interesting. Okay. Cool. So now i wanna jump ahead a little bit. So, if we were to graph your ACV across the whole business, from year one, two, whatever, kind of post-product market fit through today, approaching 100 million ARR. What are the … Tell me, when do I stop? Like what’s it …

Justyn: So, year one and two was like this.

Mike: Yeah. Okay. So, it’s kind of flat.

Justyn: And then, ever since then, it’s

Mike: It’s … okay.

Justyn: Yeah. It’s …

Mike: And how much of a change overall? Like from a couple thousand dollar ACV to $5,000? Or ten, twenty?

Justyn: No. I mean, the … So, when we first started out, we were in a category where our competitors were free products. And..

Mike: Free, and then had a few dollar a month plan. Was like, I feel like the typical kind of the company that shall remain nameless.

Justyn: Yeah. So, people were just getting used to Twitter, just getting used to Facebook. There were free tools out there, like TweetDeck and Seesmic, and HootSuite, and these. And so, when we came out, we started pricing really low. So, I would say our ACV back then was probably … Maybe like 200 bucks. So,

Mike: $200 a year?

Justyn: Yeah.

Mike: Right. Ten, twenty bucks a month.

Justyn: We priced it incredibly low.

Mike: Wow.

Justyn: Which haunts us still.

Mike: How does it haunt you still?

Justyn: So..

Mike: Don’t you get a lot of customers if you have low prices?

Justyn: Yeah. It’s interesting. Because at some point, your product’s gonna outpace your pricing. In virtually every scenario. I’ve never talked to a founder who said, “We priced too high.” Right? It’s always that we started too low. As the product gets more mature. And also, the market, they said, “You know what? Social is a critical part of our business. It’s mission critical across the organization. We’re gonna take this seriously. We need world-class tools.”

And so, we were anchoring the market, that this was not a really valuable tool, initially. And in the reality, it was. And so, over time, we’ve gradually stepped that up. We’ve cut off the bottom of our price interiors and fixed that. But we still find our …

Mike: So, you’ve cut off the bottom, actually? So, it’s not just, you’ve gone, like, raised prices and added functionality. And grown up. But you’ve also chopped off the bottom.

Justyn: We have. Yeah.

Mike: That’s fascinating.

Justyn: Yeah. And so, now we haven’t imposed that on any existing customers. We’ve never forced an increase. But you can’t sign up for those lower level plans anymore.

Mike: I can no longer get it for nine bucks a month?

Justyn: You can’t.

Mike: Okay.

Justyn: You might be able to.

Mike: Well, me, right. Got it. I know. I’m special. But fine. Okay. So, that’s interesting. And the point you made about people equating price to value is fascinating. It’s like when you go into a wine store, and you buy a bottle of wine, you’re like, “Ahh, going to see my buddy Justyn. And he’s really cool. I gotta buy a $30 bottle of wine.” Right? I would never buy you a $9 bottle of wine.

Justyn: Thank you.

Mike: When in reality, if you tasted those, there may not be a difference. Or maybe the $9 one is actually even better. Right.

Justyn: Yep.

Mike: But, it’s like that equating price to value. We saw that in … during the product market fit phase at HubSpot. I remember pitching my other head of marketing friends. And you’d go through this whole pitch, and why it was awesome, and all the things that were great. Great product. Here’s why you should use it. The vision of inbound. And all these things. And then they’d be like, “Okay. How much is it?” And we’d be like, “It’s $250 a month.”

And they would look, and be like, “Well, what’s wrong with it?”

Justyn: Yeah.

Mike: Right? ‘Cause they were expecting a thousand, two thousand, three thousand a month. They were expecting these really, really big high prices. And it’s funny because if you talked to a really small business that wasn’t a venture backed, didn’t have a VP of Marketing. And they were like, “Oh. $250 a month.” Like, “Oh geez. I don’t know. Its so expensive. What are we gonna do?”

Justyn: Yeah.

Mike: It’s just that mindset of those different buyers. Like a ten person company versus a 30 person company. There can be vastly different price elasticity. And it sound like you guys found the same thing. And you’ve just been chomping at the bottom, adding at the top to drive that ACV up over time.

Justyn: We have. And even still, so I think even our lower end customers now, they convert more at the higher dollar plans. They’re seeing the value. And that’s something that we watch to give us indicators on how we’re priced. But even still, if you think about we’ve got small businesses. We’ve got large enterprise. There is a portion of our customers where we’re priced well. And there is a portion of our customer base where we’re still way underpriced.

Mike: Yeah. So, who are you way underpriced for?

Justyn: Way underpriced for … So, I’m gonna say enterprise generally. But the reality is it doesn’t have as much to do with the business size, as the sophistication of their needs.

Mike: Okay.

Justyn: So, there are companies that might fall into SMB or mid-market, depending on your … On the way that you categorize them. That have really sophisticated needs of our product. And we’re underpriced. And we would get into situations where we’ll go head to head in these bake offs, with solutions that are half a million bucks. We’d come out the other end winning. And then, they look at the pricing and say … The buyer would get spooked, or whatever would happen.

And so, we’ve made strides against that. It’s something that we’re still dealing with.

Mike: It’s also hard in those situations because the company that’s charging half a million bucks can afford to have a sales rep that’s taking the Chief whoever officer out to golf. And steaks at Morton’s, and all that stuff. Right? ‘Cause they’re gonna get $500,000 at the end of the deal. You’ve got an inside team that can send them a picture of a steak on Instagram, or something. It’s like there’s a different thing going on there. And it’s like matching your pricing to a buying process with some of those companies is fascinating. Yeah.

So, I’m at Cybereason now. Our average deal size is 25 times higher than HubSpot’s. We’ve got field sales reps, there’s steak dinners, there’s golf, there’s all that crazy stuff. But then, at the end, it spits out deals that are six to seven figures. And so, you could afford it. But it’s definitely like a totally different world. So, and then you’re right. It’s almost like, you’re like, “We won the bake off. We’re priced way less. What is the problem?” And some buyers just get spooked by it. Yeah. It’s fascinating.

Interesting. Okay, so with that rise in ACV, I feel like the other topic we should definitely dive into, and spend some time on, that is the big knock on anyone who goes into SMB, is churn. Right? And like, “Oh. The SMB. You’ll never make it work. The churn is too high. They all go out of business. They cancel. It’s like so hard.” But, you guys have crushed it there. So, what’s the secret? How do you conquer churn?

Justyn: So, when we think about churn, and this is true for any segment. But we’ll start with the SMB. And naturally, most of our churn comes from the SMB segment, as you would expect, for natural reasons.

Mike: Meaning the smaller companies have higher logo churn?

Justyn: Correct. And actually, in aggregate, they tend to have higher revenue churn, as well.

Mike: Okay.

Justyn: There’s just more of them that … And, in our case, a lot of times it’s they’re not committed to the problem. They’re trying some tools, but they’re not committed. Or you have the normal reasons. They go out of business, etc. Whatever it might be.

But the thing that we focus on related to churn. And this was really important in starting to get our CAC and LTV right. So that we knew what we can invest in these segments. Was not chasing the logo churn problem. But focusing on growing the existing accounts. And so that way you could net out that churn. You could have a healthy segment. And the idea behind that is assuming that you’ve got good customer service, if you cross that off the list, and then you’re still not a good fit for someone. Whether it’s their own reasons, or your reasons. That’s an incredibly expensive and distracting problem to solve.

I would rather spend that time and energy on the people who we’re a great fit for, and growing those accounts. And adding users, or upselling, or whatever it is. And so, when we think about churn internally, that’s our focus, is let’s focus on the people that we’re a great fit for. And not cry over the one’s that …

Mike: Yeah. This is fascinating. And we were talking about this. It was like twins separated at birth, or something. Because year probably five or so … Five, six into HubSpot we sort of … We just beating our head against the whole churn issue. Mostly tackling it as a logo churn issue. And I think, and it’s been 20 years since I took an economics class. But there was this thing, I believe, called the Laffer curve, and the idea was there was a natural rate of unemployment. And it’s hard to ever get unemployment below like 4%. And I think there’s also a natural rate of logo churn. And for SMB, it’s probably one and a half, one, one and a half percent per month. I don’t know what you would think, your opinion of that would be. In the enterprise, it’s less.

But there is a natural rate of logo churn, depending on who you’re selling to. And you can, literally, waste time trying to get below that natural rate. Like trying to get unemployment below 4% is a fool’s errand. Trying to …

Justyn: Even knocking of a tenth of a percent in that segment..

Mike: Super hard. So hard.

Justyn: Is incredibly expensive and incredibly hard.

Mike: And so, within the SMB seg … Like, your opinion on what is that natural rate of churn? ‘Cause I’m sure everyone’s about to write down don’t go past this number.

Justyn: Yeah. I think, now, it just depends on your growth, right? If all your existing customers are flat, I think you probably can’t go beyond maybe a point and a half. If you’ve got some decent growth within that segment for your existing customers. And you know that they’re gonna increase in value over time …

Mike: I just mean logo churn. So, not the net revenue churn. So just the logo churn. You’d say one and a half percent? I agree.

Justyn: Yeah. Well,

Mike: It could even be a little higher, if the businesses are smaller, I would argue.

Justyn: Yeah. And I think that they’re related, though. ‘Cause if my existing accounts aren’t growing, I don’t want my logo churn to go much over a point and a half. But I’ll take two and a half percent logo churn if my existing accounts are gonna grow at 40%. ‘Cause it’ll net out well. Does that make sense?

Mike: Yeah. Yeah. Yeah. Cool. Yeah. I mean, the goal is always to have the net revenue retention be 100% or higher. But your point is you can even allow …Yeah. Totally agree. And so, the interesting thing, so at HubSpot that led to us to make a bunch of changes in how the product was priced, as effectively. And add some add-ons, and things like that, over time. And it was all that up-selling that inside, that you just had of focusing on the customers that actually already liked you. And could you just get them to spend a little bit more?

Justyn: Yep.

Mike: And if you look leading up to IPO, it was like net revenue retention, if i can remember right, was like 78%, 86%, like 93%, and then post-IPO, if i recall it, I think it was like four to five quarters later, went over 100%. Right? And I feel like you guys have, without revealing your exact numbers in this stuff, have seen the same type of progression, as you figured out how to get the base to upgrade more. Like your happy customers to spend more with you.

Justyn: Yep. And it all came down to what we’re talking about. Which is stop focusing on the logo churn. Focus on your existing account growth. And then you’re [crosstalk 00:23:37]

Mike: Yeah. I think that’s a really big insight that I think a lot of people miss. It’s like there’s … Once you start to get to scale …Like product market fit and finding the scalable model. Those stages of the business are different. But, once you start to scale, don’t overemphasize the focus on lower logo churn. Yeah.

Justyn: Unless it’s really bad. Right? And then, probably fix it.

Mike: Well, then you’re just fu**ed, so.

Justyn: Yeah. Yeah.

Mike: Like you don’t have a business. So, that’s different. Okay. So, speaking of dropping F-bombs, we have a question that you said, “You should ask this.” So, what have you fu**ed up?

Justyn: Yeah. So, we’ve covered a couple of ’em already. The pricing early on, I think …

Mike: The quote here is, “pricing too low. We’ve increased pricing five to six times. And it’s now…”

Justyn: It’s still too low.

Mike: Too low.

Justyn: Yeah. And every scenario’s different. So maybe take that with a grain of salt. But in our space, anyway, it’s just been a reality. And we test and we test. And we find an interesting insight is … And the cool thing about 10,000 trials a month is you can test a whole bunch of stuff. And get just a ton of data. Which not everyone has that luxury. But the thing that we found is even the smallest businesses, the higher value plan that they signed up for, the more likely they were to spend more later. Which is kind of counter-intuitive. So, let’s say, I’ll just use fake numbers, but the person who signed up for the $100 plan, even a ten person business, was less likely to grow with us than if they signed up for $300 plan. They were more likely to increase that spend.

And so, just through a lot of learnings, we’ve tried to chip away at that problem. So, pricing is one. I think that when you’re working on inbound, and SaaS, in general, you’re focused on CAC to LTV. And I think early on we took a look at our numbers, and we said, “Yeah. Those are pretty good. Let’s just keep growing. Keep investing, etc.” Without taking the time to dig in and figure out what was actually in those numbers.

Mike: Yeah. This is the other thing we were talking about, too. How the averages of all these metrics across your whole business, they’re evil because they hide all the interesting information.

Justyn: Yeah. And it’s every time.

Mike: The average is not your friend, at all. So, talk more about that.

Justyn: Yeah. So, if you think about, like early on, we looked at, Okay, what’s our blended cost of acquisition? Or what is the LTV to CAC for this for this particular channel? Or something like that. And we focused on those hideable things. And we said, okay, you know, we’re kind of happy with those numbers. But without peeling back the onion a little bit further, you don’t find the opportunities to actually optimize that. When you dig in, and you say, okay, this channel, on the whole, is successful, but half of it’s completely wasted.

And then you click in a little bit further. And you find out, okay, in this region or to this landing page, etc. And just getting too cocky about the metrics that we had early on shielded these opportunities for growth. And every time we uncover one of those, and we still uncover them today, we kick ourselves because we’re saying, “We could have figured that out six years ago. Think about where we’d be.”

Because we weren’t being real with the data. And I think in some ways, it’s scary, right? If you’re saying, “Well, we’re getting two to one payback, or three to one payback. Let’s not punch the gift horse.” But the reality is, every opportunity to grow and get better, is in those next five, six, seven layers of data.

Mike: Yeah. That four to one LTV to CAC hides that part of your business is eight to one. And part of your business is one and a half to one. And like you really need to drill in to understand what those different segments are. And yeah. There can be so many insights there. At one point, we got to the point at HubSpot that we started to do that kind of analysis. And what we realized was that all of the, almost all of the companies with fewer than ten employees were actually pretty bad economics for us.

Justyn: Yeah.

Mike: And that leads you to, okay, well. There pricing changes we can make. There’s lead scoring changes, and allocation to sales reps, changes we can make. There’s pointing sales reps in the right direction. There’s changes in the pitch and the messaging. There’s changes to what type of lead generation you’re doing. There’s a million changes you can make throughout the entire business to shift it to where your payback ratios are much better.

Justyn: Yeah. And it’s … You know, you justify it to yourselves early on. And I think probably a lot of people have found themselves in this position by well, it’s market share. Like okay, this customer might not be profitable, this one is. Blended we look good. Let’s just get a bunch of logos. And the problem with that is that, again, you’re masking your opportunities. But you’re also building bad habits. You’re asking the sales team to work on leads and prospects that aren’t as valuable. Your churn numbers are artificial. And you’re just, you’re not dealing with the real business yet.

Mike: Yeah. Not dealing with the real business yet. Yep. The thing we don’t worry about. Cool. All right. So, any parting advice? Is there one … We had a bunch of things here we were gonna dive into. I think we’re close on time. What do you want to … What’s the one word of wisdom you would leave these folks with?

Justyn: One word in one minute. So, segmentation is … And I mean this in every sense, in understanding what the productivity at the rep level is per lead. What the … In your ad campaigns, figuring out which keywords are performing well. And click down five more times.

Mike: Yeah. Your point, earlier we were talking about how at a specific Adwords campaign, or a campaign group, or something like that, might look like it’s performing really well. But within there, there’s ten keywords, eight of which are great. And two that suck.

Justyn: Yeah. And I’ll just close with ..

Mike: And same thing for individual sales reps, like a sales team, like a sales manager might look great. But four of the reps are good. And one is really bad. Or within each segment of customers. Or each vertical industry. It’s like, keep clicking in and find those sweet spots. And the not so sweet spots of the business. And continue to morph it over time.

Justyn: Yep. And find those signals that are hidden in that good looking line. There’s some bad stuff in there. And just to close with an example. We had a period where we cut our ad spend by probably 60 or 70%. And the next month increased the yield from that by maybe 30%. Just because we got real and said, “Let’s put our energy elsewhere.” And so, segmentation, the awesome thing about SaaS is there’s plenty of art involved. But there’s math and science, can’t lie. And if you get really good about getting intimate with your data, all the answers are in there. So.

Mike: All right. Apparently, just gotta get intimate with the data. And that’s where we’re gonna leave you.

Justyn: Yeah. Really intimate with the data.

Mike: 5:30. Everyone, Justyn Howard. Founder and CEO of Sprout Social.

Published on August 8, 2018

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