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Clever Ways to Reduce Your Customer Acquisition Costs

April 05, 2017 - Article
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Ryan Walsh**Editor's Note: Distributor Report is a recurring column featuring thought leadership from IT and cloud distributors. We're looking for insights into evolving business models in this new era of distribution, product and technical service offerings, education and training, marketing/branding, credit and a myriad of other services.**

By Ryan Walsh

Are you spending too much to acquire new customers? It’s a daunting question that keeps many new and expanding cloud service providers (CSPs) up at night.

With IDC predicting public cloud spending to top $200 billion worldwide by 2020 – which is almost seven times the rate of overall IT spending growth – it’s clear there’s money to be made as a CSP.

That being said, there are a number of profit-poor CSPs out there. Why is that? While there are many reasons – poor distribution deals, too much competition, wrong vendor mix – this post will focus on customer-acquisition costs.

As a managed service provider (MSP), you focus on building recurring revenue. Your cloud offering should also aim to generate a monthly recurring-revenue stream because it’s far more valuable over time than a one-off deal. Here’s where it gets tricky. Would you pay $24 for $1 of recurring revenue?

Sounds alarming, right? But let’s take a closer look.

A customer-acquisition cost (CAC) of $24 for $1 per month in recurring gross margin for several years could be worthwhile. It’s not uncommon for a business to stay with the same MSP for five or more years. So, if a customer stays with you for five years, you’ll end up making $36 (or 150 percent of your original investment) in the long run.  

According to Bessemer Venture Partners, it is best practice to spend $24 or less for every $1 in recurring revenue you earn. That $24 includes all the sales costs, marketing, headcount, advertising spend, etc. required to successfully win a new customer. The more efficient your sales and marketing efforts, the lower your CAC will be. If you are fortunate enough to have a payback period of less than 12 months, then keep spending because you will be a money-making machine.

Be sure to consider the lifetime value of a customer when setting customer-acquisition budgets. Time and time again, I see new MSPs fail to make the investments necessary to acquire ideal clients with a triple-digit lifetime value, which stunts the MSPs growth and long-term success. Don’t be afraid to invest in winning worthwhile clients.

This investment might come in the form of hiring a dedicated marketing specialist, investing in a marketing-automation tool with lead-scoring capabilities, or following up on certain types of leads faster. Consider your business, and identify those sweet spots that can help you win better business more quickly.

Set Standards and Identify Your Ideal Customer

Not every prospect interested in cloud services is going to be right for your business. Some simply aren’t going to be worth the trouble. You know the kind — they only buy on price, seem to have unrealistic expectations of what you’ll do as their MSP, and they aren’t willing to accept their role in a successful partnership with their MSPs. In this instance, don’t invest — run.

Having a clear picture of what your ideal customer looks like, and working with customers (and vendors/distributors) who have proactively invested in becoming cloud-ready can help you win profitable contracts faster.

3 Marketing Basics to Reduce Your Customer Acquisition Costs

Be Easy to Find — If your website is hidden seven pages deep in search-engine results for key phrases your hottest prospects will be looking for (e.g. Denver Cloud Service Provider or Denver Office 365 Provider), you’re going to have to work harder – and most likely spend more advertising/marketing dollars – to capture their attention.

Understand Your Sales Funnel — What actions does a customer typically take before buying from you? This is the buyer’s journey. By providing content – in the form of website verbiage, eBooks, infographics, emails, blog posts, etc. – that addresses key questions or concerns at each stage of the buyer’ journey, you’ll help them make a decision without constant hand-holding from your sales team. With helpful content, your prospects will enter and move through your sales funnel with the greater ease, at a faster pace, and they will be more qualified. 

Leverage Free Marketing Resources — Top vendors and distributors offer free marketing resources you can brand as your own and use with your customers. If you’re strapped for time and don’t have a dedicated marketing team, shortcut the process by using these free resources to bridge messaging gaps in your sales funnel.

Lowering your customer-acquisition cost is easier when you have support. When evaluating vendors and distributors to partner with, review their sales and marketing programs, automated marketing campaigns, and upsell opportunities. If they’re not proactively producing materials to help you sell their solutions, consider seeking out more supportive partners that will take an active role in reducing your customer acquisition cost.

Ryan Walsh is co-founder and senior vice president of partner solutions at Pax8, a leading value-added born-in-the-cloud distributor. Walsh oversees the selection of cloud products in the Pax8 online marketplace and drives the market requirements, innovation, and development of the Pax8 Command Console, a cloud marketplace platform designed for channel partners. He is also responsible for managing strategic vendor relationships and representing the voice of Pax8 partners and customers.

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