It is tempting to fully embrace data-driven decision making and demand all marketing efforts are backed with data and ROI. While this sounds reasonable initially, marketing is both an art and science, and great marketers should also spend time honing their customer intuition to be successful in their craft.
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Inquiring minds want to know… What is the average free to paid conversion rate from a free trial or freemium? What is a “good” conversion rate from free trial to paid?
Just about every startup has to cross this bridge at some point: making their first marketing hire. I often get asked about this topic and after several conversations, I was inspired to put together a guide on how to scope, evaluate and hire a strong first marketer for your team.
One of the areas I often advise startups on are questions around how to structure a marketing organization or make their initial marketing hires. I noticed there isn’t a lot of information out there about the different types of marketers, so I wanted to share some of the key functions that make up a marketing organization and thoughts on how to build and structure your team.
Brand is a hot topic for tech companies lately. It’s unsurprising, because tech companies are currently dominating the top brand charts. In the 2016 Interbrand survey, technology companies occupy fully half of the top 24 global brands with Apple and Google 1st and 2nd, and Facebook and Amazon the top growing brands in their report.
Product and marketing are key players in ensuring the success of a product. However, often these two functions struggle to work effectively together.
The role of product marketing in technology companies is a fascinating topic in part because it is so poorly defined and inconsistent. I’ve managed product marketing now at LinkedIn, SurveyMonkey and various early-stage startups and in each case the expectations for the role were different from team to team and company to company. It’s a chameleon role that is often defined by circumstance, such as the first hire of a marketer to support the product development teams. Often, this first hire creates a precedent on product marketing’s role and contribution within the organization which results in wildly different roles from company to company. What then do product marketers do?
The role of the product marketer is to accelerate product growth by championing the customer, communicating product value, and driving distribution. It may even be just one of many hats, like what it is today in my role as founder at Notejoy. Regardless, effective product marketers are focused on ensuring the product connects with its ideal customer. The “work” of product marketing may look very different due to the variety of products out there, but generally they share these common pillars.
Championing the Customer
Product marketers work closely with their product teams to define the target customer and champion them throughout the product development process. During initial product design, product marketers are often focused on researching and defining the ideal target customer. This often takes the form of customer development interviews, market research surveys, and competitive analyses. Key insights such as a customer’s purchasing process or industry information during this phase can influence product teams to make radically different decisions. For instance knowing the primary complaint about your competitor’s feature might inspire a team to double down in that area.
After a product is launched, product marketers often play the role of data aggregators, sifting through customer data to provide actionable recommendations for development teams. While many product teams are on top of product metrics, other sources of data may be overlooked. What are the top trending issues from the customer support teams that are receiving feedback from customers? What is the reception from early sales conversations with prospects? What can we learn from the traits of the most engaged or profitable customers? What is the general sentiment of about product & brand on social media? While product and engineering teams are deeply focused on the work of product design and execution, product marketers play a key role in enabling them to easily leverage customer insights from other sources. Often, product marketers have a seat at the table as a proxy for the customer’s voice. At Mochi Media, when we had debates over which feature to prioritize next for our game developers, I’d message key customers for quick feedback to drive an informed decision. At LinkedIn, we monitored our product’s Net Promoter Score and verbatim feedback, and analyzed the results to provide roadmap recommendations.
Examples of a product marketer’s role in championing the customer
- Coordinate and execute customer research for validating key product hypotheses, such as product-market fit, definition of target customer, pricing strategy
- Create competitive overview of industry and products with deliverables such as internal digest of competitor news, competitive training, or collateral communicating product differentiation
- Train R&D and sales teams on who the customer is and how the product helps them
- Develop buyer persona and customer segmentation as a resource for product development and marketing programs
- Collate and deliver regular stream of customer product feedback such as NPS, support issues, sales team feedback, and other channels
Communicating Product Value
Successful product growth and engagement is fundamentally linked to whether customers understand and realize the value it offers. While all product teams aspire to create an elegant user experience and functionality that enables customers to intuitively “get it” after they try it, product marketers are focused on conveying the product’s value to the customer to engage, convert and retain them. Product marketers play a key role in driving awareness and trial as well as packaging the product to appeal to customers. They accomplish this by packaging a product’s features and functionality into messaging and positioning, pricing, and collateral.
Prior to launch, product marketers spend time helping the team gain an understanding of the customer. During this process, the team reaches a clear understanding of who the ideal target customer is, their motivations, and what pain points are driving them to purchase. In a crowded landscape with limited budgets and many options, competition is fierce, and product marketers are responsible for developing product messaging and positioning that explains how the product provides unique and differentiated value that resolves pain for the customer. Without someone owning this critical component, many brilliant products are reduced to a long-winded list of features lacking clarity on how they are better or different. In addition to this, the product marketer ensures that the product’s value connects with the customer on the basis of it’s price and overall package. During and after the product launch, product marketers own the expression of the product’s messaging throughout the website and marketing materials. When the product package is well-defined, everyone who interacts with the customer from product development and design to sales and customer support should have a clearer view of how to effectively and consistently explain what the product is.
Examples of a product marketer’s role in communicating product value
- Develop product messaging and positioning framework leveraged internally for content, support and sales to ensure a consistent outbound message
- Develop and internally coordinate launch plans including outbound go-to-market channels and internal team coordination (e.g., paid marketing, PR, support, legal, sales) to ensure consistent messaging
- Define product pricing by working with product and finance teams taking into account pricing strategy and competitive dynamics
- Create and distribute content and collateral communicating product value such as website content, sales collateral, videos
Driving Product Distribution
Successful product marketing teams adopt shared goals with the extended team to drive the adoption and engagement of their product areas. While product development teams are focused on shipping brilliant products, product marketers play a key role in making sure these products reach their intended customers. Rather than applying a standard marketing playbook, strong product marketers develop and execute plans based on their unique insights about their product and target audience.
Many teams approach product launch by creating a comprehensive list of many potential channels and beginning to execute on them, often on the basis of interest or difficulty. The challenge is that budget, time and resources are scarce to launch and optimize distribution channels. Product marketers are critical to ensuring that they are spent wisely. The key role that product marketers provide in this arena is prioritizing these initiatives and driving their execution with the broader team. Based on their customer insights, they have a perspective on where customers spend their time and assess the feasibility of a channel. For instance, at Mochi Media we knew that our target audience of game developers was practically unreachable through PR and paid advertising, so we focused our resources on web forums and business development at developer conferences ultimately launching our own flagship conference. While building my contact management startup Connected, we were able to leverage SEO and app integrations, but quickly abandoned paid marketing because the cost-per-click for CRM-related terms against our LTV were too high. Often this is a rapidly changing environment with new data or market shifts happening on a day-to-day basis, and product marketers provide significant value in bridging this gap for product development teams.
Examples of a product marketer’s role in driving product distribution
- Investigate and prioritize potential distribution channels (e.g., work with online marketing to assess media buying, business development to assess partnerships, product for in-product virality)
- Provide ownership and accountability for overall performance of product distribution efforts, such as budget management, team/agency coordination and performance metrics
- Ongoing testing, analysis and optimization of distribution channels to drive higher performance, such as landing page tests or assessing feedback from PR and social strategy
- Execute marketing programs such as webinars, offline events, media buying, social campaigns, often in collaboration with other teams
While the day-to-day work of product marketing is varied and diverse, the focus is often the same. Ultimately, product marketers accelerate product growth by championing the customer, communicating product value, and driving product distribution.
Ada Chen Rekhi is co-founder & COO of Notejoy, a collaborative notes app for individuals and teams. She’s also an executive coach who works with founders and executives looking to scale themselves as they scale their teams. If you enjoyed this essay, subscribe to her newsletter or follow her on @adachen.
A quick repost of my guest post for Andrew Chen’s blog yesterday.
After recently moving on from adventures building a consumer gaming portal at Mochi Media (acquired last year for $80 MM), I’m now working on a new startup called Connected, which is a SaaS contact management solution for professionals. I decided to blog some of my thoughts based on my experience thus far with deciding on the right user acquisition channels to focus on.
When does ad buying work for SaaS businesses?
It’s a convenient belief that after you decide to build your software as a service (SaaS), Google AdWords and other networks will enable you to outsource all of your marketing efforts and focus less about user acquisition. This is not always true. Here’s a “napkin math” model to quantitatively decide whether or not ad buying is right for your startup based on reality, not guesswork.
A model for user acquisition
Paid user acquisition works for you when the following proves true
- LTV > CAC
The lifetime value (LTV) of your users should exceed the cost of acquisition (CAC) to get them in the door. As a reminder
- LTV = Expected Life x Average Revenue Per User (ARPU) x Gross Margin
In addition, for SaaS, you care quite a bit about costs and conversion rate for your funnel to trial, and from trial to paid. In specific, these look like
- CPC — cost per click to get traffic
- % trial conversion rate — users who convert to a trial of your product
- % paid conversion rate — users who convert to paid account
To estimate your cost of acquisition, you can base it off of estimates for your trial and paid conversion rates.
- CAC = CPC / (% trial x % paid)
An example of cost of acquisition
Let’s pick an example and work backwards. Let’s say you have a
- $20/monthly subscription
- 5% paid conversion rate — from trial to paid
- 10% trial conversion rate — from visits to trial
Then let’s pick a two different points for cost per click
- $0.50 CPC
- $2.50 CPC
In order to get a user at these CPC points
- CAC = CPC / (% trial x % paid)
- CAC = $0.50 / (10% x 5%) = $100
- CAC = $2.50 / (10% x 5%) = $500
In this example, it costs anywhere from $100 to $500 to get a single paying user at $20 per month. If you were trying to acquire 100 users ($2000/month), at $0.50 CPC that’s $10k ad spend, and at $2.50 it’s $50k. Drew Houston from Dropbox brought up very similar issues from his Dropbox Startup Lessons Learned presentation, where their initial search marketing test had a whopping $233–388 cost per acquisition for a $99 product!
Compare this against lifetime value
Compare this against the lifetime value of your user, or the total amount of profit you expect to receive over the user’s use of your product. This value should factor in the churn that you’re seeing from users canceling their subscription over time as well as what the payback period and working capital which you expect. Even though you might expect a user to be retained over a period of years, most startups don’t have the capital necessary to tie up their money for that long.
Let’s go back to the example above. We have the two users who cost
Assuming zero churn and zero operating costs on their $20/month subscription, you would recoup your cost on these user over a fixed period of time
- $100 / $20 = 5 months
- $500 / $20 = 25 months
In the case of second user, it would take over two years to recoup the initial $500 you spent to acquire them. You can offset this issue of working capital by setting the value at the amount of revenue you receive over a fixed period of time, or by being more aggressive with pushing them to prepay for longer periods of subscription cost upfront.
For example, what if you could get these users to pre-purchase their $20/mon subscription for $149/year? You’d be able to recoup the first user’s cost instantaneously, and get back a significant percentage of the second user’s acquisition cost.
Making the model work
The path to achieving profitability looks like making the model of having your cost of acquisition beneath your lifetime value work. You can quickly get a back of the envelope idea of whether paid acquisition is for you based on the examples and model above.
Doing this will help you determine whether or not you can profitably use ad buying as a source for getting users. You can also fine-tune your model to incorporate even more granularity such as
- traffic source
- working capital
Trying paid acquisition on for size
Now that we have the framework down, the question is whether or not paid acquisition works for you.
If this works for you, then congratulations- you are on the path to scalable riches! 😉 If it doesn’t work, then you should think about how far off it is. Getting ad arbitrage to work out profitably is extremely sensitive to changes in the steps of your conversion funnel, as well as the source of the traffic. So if you’re not many factors off, it may make sense to spend a few months refining your funnel and trying to optimize the channel the traffic is coming from. Here’s a few things to consider-
Does the math work?
Once you launch your product and get a sense of what the conversion rates are in each step along the funnel and the churn rate, it may be that the math doesn’t work out. If you’re not too far off, then it may be worth spending time trying to make the metrics work out through landing page optimization, increasing conversion along the steps of your funnel and trying to optimize your traffic sources. However, if you’re several factors off (this is common in highly competitive markets) paid acquisition may not make sense as a strategy for you.
Is your product in an existing market or a new market?
Intent-based paid acquisition channels like search advertising work best in an environment where users are aware of the problem and actively searching for solutions which your product meets. You can look up potential search terms and volumes through Google AdWords Traffic Estimator, including estimated average cost-per-click and monthly search volumes. If not, you can also experiment with targeting sites that reach the demographics of your users.
How much working capital do you have?
While theoretically you might be willing to pay up to the full LTV of the user, you may want to limit the amount you’re willing to pay based on a fixed time period, for example the expected value from the user over 6 months. This may be because at some point you run into working capital issues paying for users who may take years to break even.
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One of the key early decisions to game design or creating a virtual currency platform is designing the price and exchange rate of virtual currency. Unfortunately after it’s been released, it’s also one of the most difficult to change, because the change impacts the userbase and economy of the system as a whole. So if you’re starting out, how do you decide how to price your virtual currency?
Three Types of Virtual Currency
To answer this question, I started by looking across a broad swath of popular social games, social networks, and some MMOs and virtual worlds. Currency is typically used in three different forms across these games:
Attention Currency — currency earned by taking actions on the website and rewarding engagement. For example, Gaia Online’s Gold Pieces are earned by posting in forums and playing in games. This is roughly analogous to currency earned as a function of time.
Secondary Currency — paid currency in addition to attention currency which is tied to cash value. This is typically added as a way to control economic inflation. For example, in Playfish’s Restaurant City you earn both attention currency as coins as well have the ability to buy exclusive items through Playfish Cash.
Transaction Currency — currency tied purely to making transactions that can be used in multiple contexts and often transcends a single application or website. For example, this is Facebook’s Credits system.
Virtual Currency Pricing Today
With data from 57 applications and sites, I attempted to normalize the pricing structure of these games by taking the small cash purchase amount (usually $2-$5) and determining how many units of the virtual currency could be purchased with $1 USD, and then examining the distribution.
Looking across this dataset, it’s clear that attention currencies have a huge range of comparison relative to secondary and transaction currencies. I’d think through some questions first in determining how to price your currency.
- When and how are your users presented with the currency?
- What is the price range of goods which you expect to sell?
- How well should the user understand the value of the currency?
You should consider how to price your currency based on how the customer first sees it. For engagement-oriented attention currency, users are first presented with the currency when they’re earning it as payment for their actions. For secondary and transaction currencies, users first see the currency when they are making a purchase decision and seeing the price. Because of this, attention currencies should probably be on the high range and secondary and transaction currencies should be smaller numbers.
Also, you should make a decision about your currency based on your intended item price range because it sets the minimum and (loosely) maximum price ranges available in your economy.
An example of this was when Facebook adjusted the value of Facebook Credits in May 2009, changing the pricing from $1:100 to $1:10 credits:
We want to make sure that even the smallest amount of credits is meaningful. Now by accumulating as little as 10 credits, you can buy a gift to add more significance to a friend’s birthday, celebrate a special occasion or simply have fun.
At the time, Facebook was running tests on physical goods such as a $50 bouquet gift for a friend’s birthday. Rather than pricing it at 5,000 credits, 500 is much simpler pricing. The credits price also indicates the lowest bound of the smallest transaction you are willing to allow within your ecosystem. With a $1:10 ratio, the smallest transaction Facebook will process is $0.10 instead of $0.01.
Well what about secondary vs transaction currencies? Secondary currencies tend to be tied to virtual goods, which means they can be flexible in their pricing. The games using secondary currencies are largely closed economies without the ability to exchange currency or cash it out. Because of this, 89% of the secondary currencies had incentives to purchase larger currency amounts at a better exchange rate and obfuscating the true price you’re paying for the good.
In comparison, transaction currencies did not offer incentives. Their purpose is to ease payment friction in for small payments across multiple merchants. Since users are purely funding transactional currency to purchase items later across multiple contexts, this type of currency tends to be more straightforward in doing the math with fewer attempts to obfuscate the rates.
Ultimately, I think that you need to heavily consider the context in which a user first becomes aware of the currency, whether earning it or seeing it in the store. Dual currency systems are particularly valuable because items with two prices (free attention currency vs paid secondary currency) sets two contexts to the value the item. The user can either invest their time or money to get the item. You need to consider your long-term pricing structure on what items you plan to sell, and whether or not you allow money to be exchanged or used across multiple properties. And finally, you also need to consider all of this up-front because it can be costly and difficult to reset this after release!
Attention Currencies (24): Bowling Buddies, Sorority Life, YoVille Coins, Fishville Coins, Minigolf Party, Restaurant City, Farmville Farm Coins, Happy Aquarium Coins, Poker Rivals Poker Chips, Petville Coins, Happy Island Coins, Tiki Farm Shells, Gangster City Money, Tiki Resort Shells, Treasure Isle Coins, Wild Ones Coins, My Empire Coins, Hotel City Coins, Frontierville Frontier Coins, Pirates! AHOY Coins, Car Town Coins, It Girl, MyYearbook LunchMoney, Bejeweled Blitz (FB)
Secondary Currencies (27): Maplestory, YoVille YoCash, Pet Society, Fishville Sand Dollars, Farmville Farm Cash, Crazy Planets, Country Story, Happy Aquarium Pearls, Treasure Isle Island Cash, Frontierville Horseshoes, Gaia Online Gaia Cash, Car Town, Habbo Coins, gPotato, Dragon Wars, Fashion Wars, Street Racing, Vampire Wars, Friends for Sale, City of Wonder Gold, Social City, Market Street, Wild Ones Treats, Bola Melon Cash, Sorority Life Brownie Points, Millionaire City Gold Bars, Petville Cash
Transaction Currencies (6): hi5, Facebook, Xbox 360 Live, Spare Change, SocialGold, Playfish Cash