Why Real Businesses Don’t Charge $5/month: Part 2

In my earlier blog post on pricing, I talked about how there are two ways to increase profits as a B2B company: increase LTV (which I covered) or decrease CAC (cost of acquiring a customer). Let’s take a look at increasing profits by decreasing your CAC.

Your access to (and the efficiency of) distribution channels has a larger impact on your CAC than just about anything else. The more it costs you to acquire a customer, and the longer it takes to receive a return on that CAC investment, the slower your company will grow if you’re plowing profits back into growth. CAC relative to LTV is the single most important determinant of a successful company in a B2B setting, as it directly determines how fast you can grow. (Note: this is why in competitive, new markets like payments, a well-funded startup has a large advantage. PayPal raised nearly $200m, and paid a $10 referral for every new user. If they had to wait a year to make a profit from that new customer, there’s no way they would have grown as rapidly. To companies like that, CAC is almost irrelevant).

This is a hard lesson I learned with the first iteration of Roommatefit. When I started the company, the idea was to sell a personality-based matching solution to colleges and universities. After looking at the data behind roommate conflicts and student retention (basically, if you have a crappy roommate you’re far more likely to drop out or transfer), I thought there was enough of an opportunity to create matching software and sell it to colleges and universities. I went through the customer development process, got some great feedback, built a product, sold it to a few early customers and raised a small round of funding.

Only one problem – I was totally ignorant of my CAC.

The biggest problem was that there was no way to reach these university decision-makers at a scale that worked. Really, my potential customer base was about 3000 people. This group is extremely small, highly targeted, and not very active online: all of which made it near impossible to reach a sizable portion of them via Adwords, SEO or other traditional online ads. After unsuccessfully testing partnerships, trade shows, email marketing, content, and magazine advertising strategies, the last viable marketing channel was field sales.

Field sales didn’t make sense either… which I figured out after a year doing them. Given the university market’s incredibly long sales cycles, our mid-four-figure pricing, and the cost of making a sale (multiple phone calls, emails, whitepapers and demos), the cost of our time was thousands more than what we’d bring in for every marginal sale. And, as much as I tried, I couldn’t see that changing in the future.

People much smarter than me – people like David Sacks – get this concept. In fact, one of the main reasons David started Yammer was because of the distribution opportunity he saw in applying viral marketing to an enterprise channel. He realized that no other companies (at the time) were applying viral mechanics – which have a near-zero CAC – to reach enterprise adoption at scale. Successfully executing on this distribution channel allowed them to get acquired within 4 years for $1.2 billion dollars. All because Yammer was able to acquire customers basically for free.

The two major ways B2B businesses are drastically decreasing their CAC are through content and email marketing. This growing popularity is largely due to the rising cost of other channels. Now that other platforms are mature, it’s much harder to buy a customer via Adwords or Facebook ads at very low cost. The channels are just too crowded and competitive.

This is why it’s important to test other traction channels: if you start using one early enough, before it inevitably becomes crowded, you can benefit from a low CAC and little competition.