digital marketing, revenue agency, sales strategy

Posted on by Louis Gudema

AtomFor decades physicists have searched for a unified field theory, because sub-atomic particles act so differently than the objects that we see in everyday life. It is a puzzlement.

We have a similar challenge in marketing because it can be so different for startups, SMBs and enterprises.

Of course they all start with understanding the customer, and the market, and creating offerings that they want. But once you get past product-market fit and enter the world of promotion and demand generation, it’s all different. Continue reading →

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Posted on by Louis Gudema
18
Sep

Note: in February, 2019, about 17 months after it was published, I heard from the CEO and COO of HubSpot that my analysis of their rising CAC after 2014 was incorrect. This is my update to this piece. 

This is the original piece:

In just a few years the customer acquisition cost (CAC) for HubSpot has more than doubled.

Could your company afford to spend more than twice as much to acquire each new customer?

In this post I review this and what it means for the efficacy of inbound marketing.

The HubSpot Customer Acquisition Cost

The Customer Acquisition Cost (CAC) is the average cost for each new customer. It is one of the most important metrics for a company and a marketing organization.  You need to keep your CAC below the lifetime profits from a customer — their lifetime value (LTV) — or you’re losing money on each customer. And you won’t make it up on volume.

Companies usually aim for a customer LTV that’s at least three times the CAC.

HubSpot wrote in its annual report for 2014, “We believe that customer acquisition cost, or CAC, is an indicator of the efficiency of our sales and marketing programs in acquiring new customers.”

And in just six years the HubSpot CAC increased over 130 percent.

Basically, the CAC is easy to calculate: it’s a company’s total marketing and sales costs divided by the number of new customers acquired in that period. So if a company spent $10,000 on sales and marketing and acquired 10 new customers, its CAC would be $1,000.

When HubSpot went public in 2014, and in its first annual report after going public, it reported this information:

Right off the bat we can see that in just four years, with little notice, the HubSpot CAC almost doubled – it was up 79.8%.

WTF? The goal is to lower the CAC as you learn more about your customers, target more effectively, build up SEO domain authority and organic search traffic (as HubSpot has).

What has happened since 2014?

Well, in 2015 and 2016 HubSpot stopped reporting their CAC in their annual reports at all. I reached out to their investor relations group and requested the 2015 and 2016 CACs and they refused to provide them.

So I calculated it. (To keep our focus for now on the bigger issues, I put at the end of this post more detail on how I calculated the HubSpot CAC for those two years.)

Here are the numbers that HubSpot published and my calculated CACs for 2015 and 2016:

No doubt my calculated CACs are not accurate to the dollar. But I’m confident that they’re close enough for this discussion.

And they show a 133% increase in the HubSpot CAC in just six years. The trend line is pretty steady.

Why is HubSpot so shy about publishing their CAC now? They report a lot of other company metrics such as those on slide 34 of this annual report. But they won’t give out their CAC anymore. Given how open they have been about so much data throughout their history that suggests that it’s not good. As my calculations show.

HubSpot CAC 2011-2016

What does this mean for inbound marketing?

Why should you care about the CAC of this one company?

HubSpot is a very important company to marketers because not only does it provide a marketing automation program (MAP) and CRM used by over 20,000 mostly small- and mid-sized companies (SMBs), but it created and evangelized the inbound marketing approach. It is so identified with inbound that it calls its annual customer conference, which will be held next week, Inbound. They describe inbound as a movement, “the inbound movement”.

As a result of the successful evangelizing by HubSpot Inbound marketing is one of the most popular marketing approaches today. (For those unfamiliar with it, HubSpot describes inbound as “an approach focused on attracting customers through content and interactions that are relevant and helpful — not interruptive. With inbound marketing, potential customers find you through channels like blogs, search engines, and social media.”)

HubSpot also claims, “Since 2006, inbound marketing has been the most effective marketing method for doing business online.”

Maybe it’s been effective, but the numbers from their own business argues that increasingly it isn’t cost-effective.

If the CAC for the company most expert in inbound marketing keeps going up so rapidly, then that suggests that the inbound channel can be exhausted. They’ve picked the low hanging fruit, or too many competitors are now replicating the tactic, and it’s going to keep getting more and more expensive for them to acquire future customers.

It is not uncommon for a marketing channel to become exhausted, or at least a lot more expensive. Marketers can spot it by seeing a declining efficiency in their programs and an increasing cost per lead. For example, the cost for search ads in some highly competitive industries has been bid up to several hundred dollars per click.  Your social media messages can get crowded out by those of competitors; the typical post by a brand now is only seen by 2-3 percent of its followers. More content makes it harder to get high organic search rankings; SEO software firm Ahrefs found that only about 5% of new content even gets a page 1 ranking in the first year, let alone a ranking in the top 3 or 4 positions that can actually drive significant traffic. And – as Mark Schaefer predicted in his Content Shock blog post — competition will make content marketing unsustainably expensive for some companies.

HubSpot has written about the amount of content it takes to really move the needle; it’s a level that few SMBs achieve. While saying things like, “If you have more money than brains you should focus on outbound; if you have more brains than money you should focus on inbound”, HubSpot itself has spent millions of dollars creating and amplifying content to feed the beast.

This is why I put inbound marketing in the third, outer ring of my Bullseye Marketing Framework, which is designed for use by SMBs (who are HubSpot’s main customers, too). In a competitive industry it can take a couple years, or longer, and a lot of money to move the needle with inbound. The center of the Bullseye activities, which involve taking better advantage of existing company marketing assets, are far more effective for the first year or so, followed by search marketing and other programs informed by intent data.

Bullseye with three rings

All of the money and effort that HubSpot has put into content development and inbound marketing has not been wasted. SEMrush and SpyFu both report that HubSpot is getting about $5 million of organic search clicks each month — $60 million a year. That’s an evergreen asset that will keep delivering search traffic to HubSpot for a long time.

But that traffic is not an efficient lead generation source. For HubSpot itself, according to its 2013 data when it was generating 60,000 leads a month, it took over 150 new inbound leads to produce one new customer. That’s actually better than for some companies using inbound.

When Jim Williams was Vice President of Marketing at Influitive he reported that only .25% of their new contacts became customers – just one in 400. He said, “These stats are actually quite common for high volume inbound funnels.”

Indeed they are. When I mentioned them to an analyst at a leading sales and marketing advisory firm he responded, “If not worse.”

To properly qualify and respond that kind of lead-to-deal ratio takes a lot of BDRs, software and money.

In a few cases, inbound can be much more efficient. If you have the rare situation of being in a nascent industry where (1) many people are searching for content with narrow search terms, and (2) you don’t have many competitors creating content, you can get high rankings and significant numbers of qualified inbound leads quickly. But that situation is rare.

Can HubSpot afford inbound? Can you?

So now let’s consider the original question in the title of this post: Can HubSpot afford to do inbound marketing anymore? And more importantly, can you?

HubSpot has access to the capital markets. It raised $100 million from VCs in six rounds over seven years to fuel its product development, marketing and sales. Then in 2014 it raised another $125 million with its IPO. It can afford to lose money as it builds its business. And it has. In over a decade it has never had a profitable quarter.

The more important question is: Can your company afford inbound marketing?

If you’re one of the 99% of startups who don’t receive venture funding, or have founders with very deep pockets, than you need to grow organically and — pretty quickly – profitably. Inbound isn’t usually going to produce results quickly and inexpensively enough.

The same is true for more mature SMBs, which is why I usually prescribe starting in the center of my Bullseye Marketing Framework instead.

Inbound really is for established companies that are generating profits and can wait a year or two or three for a significant impact.

And it depends on your competitive situation. If you’re in a market with lots of competitors who are pouring out tons of content, then the answer is: Probably not.

If you’re in an unusual industry like I described before, with many people searching for your offering and not much content competition, then inbound may be a good, long-term strategy for you.

What’s your competitive landscape look like? How much can your company afford to invest? How long can you wait for results?

What is your customer lifetime value relative to your customer acquisition cost? Is it profitable and sustainable?

No marketing strategy should be called a “movement”. Movements are for universal values. The Civil Right Movement was for equal rights for all people. The Women’s Movement was for all women having legal, economic and social parity with men.

But marketers should be guided by their particular situation, and the data, not by ideology. When inbound works, use it. When social media marketing works, use it. When account based marketing works, use it. When my Bullseye Marketing Framework works, use it.

And when they don’t, don’t. And switch to the strategies that will.

Update: A week after posting this, I received this tweet from a former VP of Sales at HubSpot:

This confirms my earlier point that if a company’s LTV is high enough — typically more than 3X its CAC for a SaaS company — then it can afford a high CAC. Few companies will be able to grow their LTV fast enough to support such a rapidly rising CAC, though.

Also note that HubSpot is using a strategy that is at the heart of my Bullseye Marketing Framework — upselling current customers — to drive that LTV increase. Selling more to current customers will always be faster and cheaper than acquiring new accounts.

 

Footnote: About calculating the HubSpot CAC for 2015 and 2016

Here’s how I went about calculating HubSpot’s CAC for those two years.

If you look at the numbers for 2011-2014 and divide the marketing and sales spend by the increase in total customers each year, you don’t get their CAC. That’s because there’s a third factor: the churn rate.

Remember: to calculate the CAC you’re dividing by the total number of new customers. Every company loses some customers during the year, and the rate of that is called the churn rate. So in addition to the difference between total customers from year to year you need to add in the replacement customers to calculate the total number of new customers.

And – this part is important for the calculations in the next few paragraphs — with a certain marketing and sales spend, the higher the churn rate, the lower the CAC will be because a high churn rates requires a higher number of replacement customers. That’s just how the math works.

Think of it this way:

Let’s say a company in year 1 has 1,000 customers and in year 2 has 1,200 customers. If it lost no customers in year 1 – a churn rate of 0% — then the number of new customers would be 200. But if it lost 25% of its customers during year 1 — 250 customers — the number of new customers that marketing and sales produced is 450. That will have a big impact when calculating that company’s CAC.

If you have these three numbers for multiple years you can calculate the churn rate:

  • Total customers
  • Marketing and Sales expense
  • Customer Acquisition Cost

Given the numbers that HubSpot provided in its reports I calculated these approximate churn rates:

Is this accurate? More to the point: Is it likely that HubSpot was able to significantly improve their churn rate in just a couple years? Reducing churn was a key focus at HubSpot at that time. In 2015 their then Chief Revenue Officer described how they had gone about reducing their churn rate. But they never publicly said what their churn rate was before or after; I calculated it.

I could be wrong about these. These are very high churn rates; average SaaS churn rates are below 10 percent. But average is kind of meaningless since SaaS offerings range from a few dollars a month for Hootsuite or MailChimp to thousands a month for enterprise software. Even at HubSpot prices range from $200/mo at the low end to $2,400/mo and up at the enterprise level. Their churn rates probably vary considerably by segment.

For 2015 and 2016 we only have two of the three numbers we need to calculate the CAC, so I based my calculations on the assumption that they continued with that 2014 churn rate of 23% for the next two years.  The calculated CACs for 2015 and 2016 are approximations, but I believe that they’re close enough to support the general points that I am making, especially given the known CACs for the previous four years.

But what if their churn rate is actually 20%? Or 15%? Or below 10%? Then their calculated CAC for 2015 and 2016 would be even higher. (The given sales and marketing spend would be divided by fewer new customers.) So, if anything, those are conservative.

It is worth mentioning that not all demand generation and leads at HubSpot are inbound. They have quietly mixed in outbound programs like Google AdWords and telesales all along.

But they have always touted inbound as the single most important strategy for them — and that it should be for their customers, too.