Higher Growth And Lower CAC - Optimise Your Conversion Funnel!

Simple math
Photo by Annie Spratt

How to accelerate growth? How to improve the growth rate? How to acquire more customers? How to get more traction? If you are a founder looking for answers to these questions, do not directly jump to analyzing options to increase the number of website visitors and prospects that can be converted into customers. Do not immediately consider spending more on marketing and sales or finding other ways to fill the top of the conversion funnel. You should rather ask yourself: How to analyze our conversion funnel? How to improve our conversion funnel? How to increase our conversion rate? Simple math can nicely explain why you should optimize your conversion funnel first.

 

Optimising the conversion funnel will not only lead to more customers, but also to lower customer acquisition costs, shorter payback periods, better CLV/CAC-ratios and ultimately higher growth. After you have optimised your conversion funnel, you may fuel your growth engine and fill the top of your conversion funnel.

 

This article uses a software-as-a-service business to illustrate the impact an optimized conversion funnel can have. But the insights can be applied and adapted to all businesses: B2B, B2C, platform, marketplace and SaaS businesses. 

 

The first part of this article focuses on the simple math that demonstrates the significant positive impact an improved conversion funnel can have on your business: the number of new paying customers, customer acquisition costs (CAC), payback period, unit economics and ultimately growth. The second part deals with topics you may look at in order to get from this simple math to tangible business improvements.

 

Part I: It’s only simple math, but I like it, like it, yes, I do

More Paying Customers

Let’s assume a software-as-a-service (SaaS) company spends $100,000 per month on marketing and sales and generates 10,000 monthly website visitors. Let’s further assume that 2% of these website visitors can be converted into 200 leads. Applying a conversion rate of 30% from lead to marketing qualified lead (MQL), from MQL to sales qualified lead (SQL) and from SQL to customer, the 200 leads can be converted into 5 new paying customers. 

 

The conversion funnel in this original example - starting at the lead stage - looks as follows:

 

Conversion Funnel

 

Here the math:

10,000 website visitors * 2% = 200 Leads

200 Leads * 30% = 60 Marketing Qualified Leads (MQL)

60 MQL * 30% = 18 Sales Qualified Leads (SQL)

18 SQL * 30% = 5 Customers

 

If the same company improved the conversion rate at each stage of the conversion funnel by 10% only (from 2% to 2.2% and from 30% to 33%) it could increase the number of new customers from 5 to 8. 

 

The conversion funnel - starting at the lead stage - looks as follows:

 

Improved Conversion Funnel

 

Here the math (rounded figures):

10,000 website visitors * 2.2% = 220 Leads

220 Leads * 33% = 73 MQL

73 MQL * 33% = 24 SQL

24 SQL * 33% = 8 Customers

 

If the company found ways to improve the conversion rate at each stage of the conversion funnel by 20% (from 2% to 2.4% and from 30% to 36%) it could more than double the number of new customers from 5 to 11. 

 

The conversion funnel - starting at the lead stage - looks as follows:

 

Improved Conversion Funnel

 

Here the math again (rounded figures):  

10,000 website visitors * 2.40% = 240 Leads

240 Leads * 36% = 86 MQL

86 MQL * 36% = 31 SQL

31 SQL * 36% = 11 Customers

 

Yes, this is only math, but this math shows nicely how a company can increase the number of customers significantly by optimizing the conversion funnel only slightly.

 

Lower Customer Acquisition Costs (CAC)

At the same time, the optimized conversion funnel leads to significantly lower customer acquisition costs (CAC). $100,000 spent on marketing and sales will lead to CAC of $20,000 in the original example ($100,000 / 5 new paying customers), $12,500 in the example with a conversion rate improved by 10% ($100,000 / 8 new paying customers) and $9,091 in the example with a conversion rate improved by 20% ($100,000 / 11 new paying customers).

 

CAC and new paying customers

Higher Growth

Since a better conversion rate leads to more paying customers, it also leads to more growth. Assuming an average monthly recurring revenue of $1,000 per paying customer, the new monthly recurring revenues amount to $5,000 in the original example (5 new customers * $1,000 new MRR), $8,000 in the example with a conversion rate improved by 10% (8 new customers * $1,000 new MRR) and $11,000 in the example with a conversion rate improved by 20% (11 new customers * $1,000 new MRR). Correspondingly, the new annual recurring revenues (MRR * 12) amount to $60,000, $96,000 and $132,000 respectively.

 

New ARR

Shorter Payback Period

If a company improves its conversion funnel and spends less on acquiring a customer, the payback period gets shorter. In the original example, it takes 20 months to pay back the customer acquisition costs (CAC of $20,000 / $1,000 new MRR).* In the example in which the conversion rate is improved by 10%, the payback period is reduced to 12.5 months (CAC of $12,500 / $1,000 new MRR). In the example in which the company found ways to improve the conversion rate by 20%, the payback period is reduced to 9.1 only (CAC of $9,091 / $1,000 new MRR).

 

Payback Period

For the business, a reduced payback period means that the money invested to acquire a customer can be reinvested earlier again in order to acquire further customers. Shorter payback periods enable stronger growth!

 

Better Unit Economics

Assuming an average customer lifetime of 48 months and the same monthly recurring revenue of $1,000 per paying customer, the customer lifetime value is $48,000 ($1,000 new MRR * 48 months).* 

 

In the original example, the CLV/CAC-ratio is 2.4 ($48,000 CLV / $20,000 CAC). In the example in which the conversion rate is improved by 10%, the CLV/CAC-ratio improves to 3.84 ($48,000 CLV / $12,500 CAC). In the example in which the company found ways to improve the conversion rate by 20%, the CLV/CAC-ratio is improved to 5.28 ($48,000 CLV / $9,091 CAC).

 

CLV CAC CLV/CAC-ratio

When analyzing SaaS businesses, investors look for CLV/CAC-ratios >3 (as a rule of thumb). Hence, without looking at additional options to fill the top of the funnel, founders can improve the unit economics and the attractiveness of their businesses by only optimizing the conversion funnel!

 

Part II: From simple math to tangible improvements

Now indeed, so far this has only been applied simple math. And whether or not a company can in fact improve the conversion rate and at which stage of the funnel is something that needs to be analyzed on a case-by-case basis. However, below are some topics you may look at in order to get from this simple math to tangible business improvements.

 

Ensure Your Website Visitors Match Your Target Customers

Analyze your website visitors and assess whether you actually attract your target audience. Only if you attract website visitors that can turn into successful customers characterized by a great customer experience and a strong return on the customer’s investment, your marketing and sales teams can nurture high-quality leads that convert into successful customers with a higher probability.

 

Remove Unqualified Leads Early

Correspondingly, if you attract no- or low-fit customers, remove them early on. Removing unqualified leads will improve conversion rate since your marketing and sales teams can focus only on qualified leads. More time for preparation, more time to follow-up and hence higher conversion rate.

 

Provide Relevant Content That Stands Out

For a successful Go-to-market strategy and especially for both Search Engine Advertising (SEA) and Search Engine Optimization (SEO), it is of paramount importance that your marketing team creates outstanding content that is relevant for your target audience at each and every touchpoint of the customer journey. Remarkable content is what drives your marketing success across channels. Through creating relevant content that stands out, you build a strong brand that potential buyers trust, differentiate yourself from your competition, become SEO-relevant and lay the foundation for attracting your target audience to your website. 

 

Create Customised Landing Pages

Your landing pages are where your potential customers land after they have searched for relevant information and clicked on the links to your website. Your landing pages therefore create a first impression of your company, your products and services. Your landing pages need to be just great from both a relevant content perspective and a customer experience perspective. Loading times need to be extremely short and the content your potential customers find on your landing pages need to be absolutely relevant for them. If you have several target customers or customer segments you do not only have to have landing pages tailored to each and every target audience, but also in the respective language. Sounds obvious, but if you have a business already active in several geographies and targeting different customer segments, your landing pages need to be in the right language with relevant content for the respective segment. And “in the right language” does not mean that you translate content from one language into the other. Take into account that people with different backgrounds living in different cultures and coming from different countries usually have significantly different expectations. 

 

Further, your landing pages should be mobile-friendly and absolutely clear about the call-to-action. Are the website visitors supposed to sign-up for your e-mail newsletters, download content or any other next step you want them to do. 

 

Understand The Buyer Journey

Before becoming customers, buyers normally go through three phases on their buyer journey, the awareness phase, the consideration phase and the decision phase. Each phase requires your marketing and sales teams to communicate with your leads in a way that shows them that you know where they are on their journey and what they need to get or understand in order to move on to the next phase. It is therefore important that you understand the typical buyer journey of your buyer personas and have relevant content tailored to each specific point in time on the buyer journey.

 

Understand And Constantly Adjust Your Lead Scoring

Lead scoring is the process of assessing the quality of the leads that have gone into the conversion funnel. This process helps sales and marketing teams prioritize leads, so they can work on the most promising leads first, interact with them correspondingly, and improve the overall lead to customer conversion rate. While the lead scoring methodologies (slightly) differ from company to company, many companies work with numerical points that get assigned to leads depending often on demographic and geographic fit, company information like size, type or industry (segment) and how the buyer interacted with the company on- and offline. For example, a lead may get a higher score or more points if such lead has visited a certain page or downloaded content that indicates a higher likelihood that such lead usually becomes a customer. As a founder, you should ensure that your marketing team scores the leads in a sophisticated manner based on attributes of leads that have become customers, on attributes of leads that have not become customers, feedback from your sales teams and feedback from your customers.Your marketing team should build a model around the attributes that increase the likelihood of a lead becoming a customer and constantly check whether the lead scoring methodology needs to be adjusted based on new information available, new winning trends identified or new marketing channels available.

 

Make Sure Your Marketing Team Nurtures Leads Effectively

Make sure that your marketing team nurtures leads that are not yet ready to be passed to your sales team.The lead nurturing process is a series of interactions between your marketing team and your leads that increase the respective lead score and move the respective lead down the conversion funnel until the respective buyer is ready to be contacted by your sales team. Your lead nurturing process should be customized to what your buyers are interested in at each touchpoint and where they are on their buyer journey, in the awareness, consideration or decision phase. Not all of your leads can be guided down the conversion funnel by offering relevant content on your website. It is therefore important that your marketing team embrace all lead nurturing tactics that may work at your company given your target audience and the economics triggered by the tactics chosen. Typical additional lead nurturing tactics include retargeting ads, e-mail marketing and social media. 

 

Ensure That Leads Are Passed to Sales at The Right Time

As a founder, you need to understand whether leads are passed to the sales team at the right time. Why is this so important? Because your sales team is probably among the most expensive resources in your company and this team should only touch leads if and when the respective buyer is ready and open for a dialogue with your sales team. Put differently, if your sales team touches a lead too soon your lead conversion costs and ultimately the customer acquisition costs increase unnecessarily. At the same time, your marketing team should not hand over a lead so late that the lead cannot be converted anymore, e.g. since such lead has meanwhile become a customer of your competitor.

 

What is the right time then? Determining the right point in time at which a lead should be passed to sales is a task that needs to be accomplished jointly by your marketing and sales team taking into account, for instance, lead score, industry and segment, size of the potential customer in terms of revenues and buyer journey phase. For example, it may make sense to pass a lead to a high-volume enterprise customer to the sales team already in the awareness or consideration phase and irrespective of whether such lead has reached a certain lead score. You need to ensure that your teams cooperate not on the basis of pre-defined strict numbers but on the basis of what is best for your company. Usually, the respective point in time is agreed upon in a service level agreement between marketing and sales.

 

Conclude An Internal Service Level Agreement (SLA)

A service level agreement (SLA) between marketing and sales (and preferably customer success) puts down in writing how the teams want to collaborate in order to achieve a common goal, which should be a measurable goal in hard numbers like revenue growth, new ARR, net retention etc. The exact goals need to be determined on a company-by-company basis but usually have to do with growth (new revenues, less churn/higher retention, up- and cross-sell). Important is that these goals are common goals that the teams want to achieve working closely aligned. The common overarching goals are then broken down into team deliverables like monthly and weekly marketing qualified leads per segment and channel and sales qualified leads to be generated and converted. The SLA translates the common goals into clear plans per department, defines important terms unambiguously (e.g. lead, MQL and SQL) and describes how leads should be scored and nurtured by the marketing team. It states when leads are to be passed to sales and how the sales team should manage leads towards conversion. And it articulates how the customer success team is supposed to onboard and activate customers so that such customers have a great customer experience and a return on investment that delivers on the promises conveyed by the marketing and sales teams along the buyer journey.

 

A SLA breaks down silos and creates clarity, alignment and accountability among the teams. If the sales, marketing and customer success teams are on the same team, work aligned towards common goals and revise the SLA on a regular basis in order to reflect learnings, you are well on your way to high growth and predictable revenues. 

 

Key Founder Takeaways

  • Optimising the conversion funnel will not only lead to more customers, but also to lower customer acquisition costs, shorter payback periods, better CLV/CAC-ratios and ultimately higher growth.
  • Whether or not a company can in fact improve the conversion rate and at which stage of the funnel is something that needs to be analysed on a case-by-case basis. But there are some topics founders may look atin order to get from simple math to tangible business improvements.
    • Ensure your website visitors match your target customers
    • Remove unqualified leads early
    • Provide relevant content that stands out 
    • Create customised landing pages
    • Understand the buyer journey
    • Understand and constantly adjust your lead scoring
    • Make sure your marketing team nurtures leads effectively
    • Ensure that leads are passed to sales at the right time
    • Conclude ainternal service level agreement (SLA)
  • Service Level Agreements (SLA) break down silos and create clarity, alignment and accountability among teams. If the sales, marketing and customer success teams are on the same team, work aligned towards common goals and revise the SLA on a regular basis in order to reflect learnings, you are well on your way to high growth and predictable revenues.

*For simplicity reasons, the calculations in this article disregard the gross margin (or contribution margin) that needs to be applied to the new MRR figure in order to get to the real monthly contribution per customer. At SaaS businesses, CLV should be calculated as follows: Average monthly revenue per account (ARPA) * Gross Margin (GM) / monthly churn rate. Payback period is calculated as follows: CAC / the monthly contribution per client (ARPA*GM).

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