startup secrets - an insiders guide to unfair competitive advantage. michael skok at business of...

Harvard innovation lab Michael J SkokStartup Secrets Business of Software

@innovationlab @mjskok #startupsecrets startupsecrets.com

STARTUP SECRETS

MICHAEL J SKOK

An insider’s guide to unfair competitive advantage

Hi Harvard innovation lab

startupsecrets.com

Business of Software

@mjskok

#startupsecretsTweet questions to:(Q&A at end)

Why are we here?

• A story…

– Zero to a couple of billion dollars… – but NOT back again!

If you want to build a billion dollar business…

Start with a MULTI billion dollar problem

eCommerce…

Market: eCommerce:

• $4.7 trillion• ~7% penetrated• Growing in mid

Problem:“Under siege”, Disruptions

• Offline -> Online• Physical -> Digital• Mobile -> Omni

Channel

And if you want to build a business around it…

… you’ve got to make it RSVP

• Repeatable, • Sustainable, • Valuable, • Predictable

Tasters…

• Value prop - fundamentals• Business model - basics• Product – friction free, “slippery”

products• Metrics – that matter• Cloud – the second front

Value Proposition

… customer view

Customer view = Gain/Pain• Revenue • Cost savings• Time• People• Competitive advantage• Reputation• Etc..

• Inertia• Switching costs?• Default = do

nothing• Alternatives?• Good enough =

good enough!• RISK on a startup

• Find (See)• Try• Buy• Implement• Deploy• Own – eg.TCO

Inertia,RISKGain

Customer view = Gain/Pain• Revenue • Cost savings• Time• People• Competitive advantage• Reputation• Etc.

• Inertia• Switching costs?• Default = do

nothing• Alternatives?• Good enough =

good enough!• RISK on a startup

• Find (See)• Try• Buy• Implement• Deploy• Own – eg TCO

Inertia,RISK

“An order of magnitude”

Demandware

• Commerce, NOT infrastructure

Business Model

… your view

Basic Startup Model• Lifetime Value of Customer (LTV)• Cost of Acquiring Customer (CAC)

LTV ~3x > CAC

A typical product lifecycle

See, Try, Buy, Fly, Die…

See Try Buy Fly Die

A typical product lifecycle

• How do we avoid:– Pain, time and cost of adoption?– Premature decline?

See Try Buy Fly Die

Long, costly (CAC), slow payback, EXTENDED lifetime value (LTV)

Adding Retention and Upsell

See Try Buy Fly Die

Re-TrialUp-sellExtendedLifecycle

Retention

Upsell

14 x leverage!

The Model Refined – Enabling Retention & Upsell

• Cost of Acquiring & Retaining Customer (CARC)• Lifecycle Value of Customer (LCV) = incl.

Repurchase, Upsell

Re-TrialUp-sell

Retention Costs

• Must be included in CARC as you drive down Churn– Examples:

• Support• Customer Service • Professional Services

• Also include any Re-engagement costs associated with any Upsell as you drive up ARPU– Sales, Marketing etc

Value Prop & Business ModelTOGETHER

customer view & your viewTOGETHER!

Value Prop & Business Model• They are two views of the same

principle:– Customer view = Gain/Pain– Vendor view = LCV/CARC

Re-TrialUp-sell

Vendor View

Customer View

Web / Mobile

Self service

On demand

SaaSSubscription

Open source

An extended & valuable lifecycle:“Land & Expand”

See Try Buy Fly Die

Re-TrialUp-sellExtendedLifecycle Re-Trial

Up-sellExtendedLifecycle

short, low cost (CARC), quick payback, extended lifecycle value (LCV)

Web / Mobile

Self service

On demand

SaaSSubscription

Open source

An extended & valuable lifecycle:“Land & Expand” without friction

See Try Buy Fly Die

Re-TrialUp-sellExtendedLifecycle Re-Trial

Up-sellExtendedLifecycle

short, low cost (CARC), quick payback, extended lifecycle value (LCV)

Frictionless, SLIPPERY

Demandware

• Software is free, it’s a shared success model

How do you take away the pain, and reduce friction?

… make it SLIPPERY

Friction Free, SLIPPERY products

(Reduce the Pain in the Gain/Pain Ratio)

Friction Free, SLIPPERY products• Simple

• Low to no initial cost

• Installs and integrates

• Proves value quickly

• Package for progress

• Experience is compelling

• ROI is obvious

• Your customers can’t live without it – it’s stickY

Simple

Which is better?

Microsoft Sony

Neither! = Less is More!

Microsoft, Sony Apple

Simple ≠ Easy to do

• Simple ≠ Easy !

• Simple often means complex technology that makes your product “magic”

• Simplification Innovation(search algorithms in the cloud)

Example

Knowledge Management vs. Capture

EvernoteLotus Notes

Less is More…

features are the enemy of function

functionality can overwhelm users

applicability is all that ultimately matters

Demandware

• Retail practice group – best practice for merchants

Why are we here?

• A story…

Welcome Scott Dussault

former CFO

Metrics that Matter

• Annualized Revenue per Customer (“ARPU”)

• Renewal Rate/Churn

• Revenue per Employee• Cost of Acquiring and Retaining a

Customer (“CARC”)

VOCS 0.0x

BCOV BVIL

SQITNGO

CVT ECOMULTI CNQR

MKTG JIVERP

R² = 0.6577

10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

Source: FactSet, Stifel estimates

Now MKTO

Estimated CY14 Organic Growth Rate

Total Revenue

Live Customers

Live Sites

Subscription Gross Margins

Dec. 31, 2008

Dec. 31, 2013

$515,000

$103.7M

100% Cloud

$250,000*

*Excluding Neckermann GmbH

• Higher ARPU indicates value delivered– “SLIPPERY” products will drive sequential and

year over year ARPU growth

• Increasing ARPU driven by upsell– Chance to demonstrate how well your

customers re-engage (which is demonstrably better than re-sell)

• Investors view ARPU as THE driver of CLV and, most importantly, revenue growth…

Renewal Rate/Churn

• Renewal rate/churn is unique for every business– Need is to demonstrate stickiness– Dollar value renewals, churn count, long-term

contracts

• Rule of thumb is “needs to be better than 90%”– So figure out a metric that magically results in 90%

or better…(MJS: but don’t lie to yourself!)

• Investors view renewal rate/churn as THE metric for visibility and long-term revenue growth

Revenue per Employee

• Cloud software is a technology delivery model that provides significant operating leverage– Most if not all have subscription revenue models

that enable predictable revenue streams

• Subscription revenue models on their own may not provide significant operating leverage

• Legacy software models are inherently profitable, but not predictable

• Revenue per employee greater than $250,000 is a benchmark for inherently profitable models

• Cost of acquiring a customer– Unique metric for each business – what is the

sales model? How does marketing play in?

• Cost of re-engaging a customer– What are the costs for operating a customer?

How do customers renew?

• High gross margin businesses with less touch on re-engagement will have the best CARC metrics

Frictionless Land and Expand, Drives ALL of these Metrics

Q1 Q2 Q3 Q4

Year 2

Q1 Q2 Q3 Q4

Year 3

Q1 Q2 Q3 Q4

Year 1

Cohort analysis includes a family of third-party solution partner customers who share a minimum level of subscription revenue and 56 customers all of which have been operating on Demandware’s platform for a minimum of three years through December 31, 2013. Analysis excludes two customers operating on the platform for three years – one invoiced through a third party and Neckermann GmbH.

BaseSubscription

Customer Expansion

$20,000

$40,000

$60,000

$80,000

$100,000

$120,000

$140,000

$160,000

$180,000

$200,000

Frictionless, SLIPPERY+ Land & Expand = ?

Frictionless, SLIPPERY+ Land & Expand = fastest growing software companies

“Addiction before Adoption & Expansion”

ADDICTION(Free, Open Source)

Delight,ADOPTION

UpsellEXPANSION

$50$100$150$200$250$300$350$400

“Addiction before Adoption & Expansion”

Why are we here?

• A story…

THE FUTURE OF

4TH ANNUAL SURVEY 2014

NORTH BRIDGE FUTURE OF CLOUD COMPUTING SURVEY IN PARTNERSHIP WITH GIGAOM RESEARCH

@North_Bridge @mjskok

@futureofcloud#futureofcloud

CLOUD COMPUTING

http://bit.ly/2014FutureCloud

THE FIRSTCLOUD FRONT

@futureofclo

#futureofclo

TRANSITIONING

LEGACY APPLICATIONS:

ecommerceERPCRM

@futureofclo

#futureofclo

@SALESFORCE @WORKDAY @DEMANDWARE

THE SECOND CLOUD FRONT

@futureofclo

#futureofclo

GROWTH IN WEB APIs SINCE 2005

Jun-05 Mar-06 Oct-06 May-07 Dec-07 Jul-08 Feb-09 Sep-09 Apr-10 Nov-10 Jun-11 Jan-12 Aug-12 Mar-13 Oct-13 Jun-14

1 186 299 438 593865

12631546

20262418

11,493

Source Programmable Web

@futureofclo

#futureofclo

REIMAGINING APPLICATIONSIN THE CLOUD

@futureofclo

#futureofclo

THE SECOND CLOUD FRONT:

MANY CLOUD SERVICES =>RE-IMAGINED APP

@futureofclo

#futureofclo

AMAZING BECAUSE

@futureofclo

#futureofclo

IMPOSSIBLE WITHOUT

@futureofclo

#futureofclo

@innovationlab@mjskok #startupsecrets startupsecrets.com

Why are we here?

• A story…

@innovationlab@mjskok #startupsecrets startupsecrets.com

Tasters…

• Value prop - fundamentals• Business model - basics• Product – friction free, “slippery”

products• Metrics – that matter• Cloud – the second front

Redefining the (Business of) Software

• Installed by IT

• Customized

• Infrequent upgrades

• Proprietary

• License

1990+ Now +

On demand, SaaS, Cloud

Web / Mobile / Self Service Restful APIs, Extensibility

Open Source, Open Data Subscription, Recurring

Self service

On demandSaaS

Subscription

Open source

Up-sell

Extended

Lifecycle

Up-sell

Extended

Lifecycle

short, low cost (CAC), quick payback, EXTENDED lifetime value (LTV)

Re-Trial

… fundamentally more Repeatable, Sustainable, Valuable & Predictable… RSVP = YES!

STARTUP SECRETS

MICHAEL J SKOK

Hi Harvard innovation lab

startupsecrets.com

Thank You BoS!Slides at

mjskok.com/bos2014

@mjskok

#startupsecrets

startup secrets - an insiders guide to unfair competitive advantage. michael skok at business of...

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