A $13M SaaS telecom provider optimized marketing, tested new channels, and leveraged radio to triple acquisitions, doubling revenue before selling for $170M.
A $13M SaaS Telecom provider had experienced slowing growth over the past few years. The company was self-funded so all marketing funds needed to be generated from operations. Our goal was to consistently and profitably grow the company with at least a 20% CAGR.
Every SaaS business has a natural plateau of customer count based on its churn rate and new customer acquisition rate. Simply put, once the company is losing about as many customer as it is gaining, the growth will slow and eventually stop. In this case, the company had about 35,000 customers with a churn rate of about 3% so it lost about 12,600 customer per year. This just about matched the new customer acquisition rate of about 15,000 customers per year so the company would not be able to grow beyond about 41,000 customer unless one of these values changed significantly. The chart below shows this visually.
In order to grow beyond the plateau, a company can either increase customer acquisition rate or decrease churn. Decreasing churn is extremely difficult in an operating SaaS business and was almost impossible in this case because the company sold to micro-businesses (SMB). These business come and go out of existence at a rate of about 30% per year (2.5% per month) and most of this company's churn was caused by its customers no longer being in business. So, in order to grow significantly, we chose to add to customer acquisition volume.
In order to grow this businesses we knew that we would need to acquire more customers from existing channels and/or identify new channels. In either case we were going to need to test things that had not been done before and this would require a testing budget. In the beginning, the company did not have a dedicated testing budget and we needed to find this budget in existing operations. To do this we looked at the existing marketing spend and compared the marginal CPAs of each channel to the customer lifetime value (CLTV).
The company was using the following channels. The relative cost and customer volume for each is shown in the chart below.
Paid Search had the highest cost per customer and when we dug deeper we found that within paid search the performance was highly skewed. Much of the paid search volume was driven by brand-related spending and the highest cost keywords delivered very little volume, but made up a very high percentage of the cost. And, the marginal cost on these keywords was a very high percentage of our CLTV. We cut the highest cost keywords from the budget and saved about $200K per year which we used for a testing budget.
Now that we had a testing budget, we worked with the entire company to come up with ideas to test. Over time we adopted a vigorous testing mindset.
Our tests came from everywhere in the organization and although most failed, these failures were celebrated instead of demonized. In each quarterly company meeting we would review the test that failed and remind the team that it would only take 2 or 3 tests to have a material impact and we could be wrong most of the time. By being wrong we were learning what did not work.
There were a few tests that showed promise, specifically dropping an activation fee that customers paid when they set up their account and expanding the our phone number inventory. Each of these increased conversion by about 20%.
Next, we hired a Search Engine Optimization (SEO) expert and got out of his way. We told him 'Your goal is to make SEO customers 25% of our paid customer signups. We're going to grow the rest of the channels so you need to keep up. Just don't violate our brand standards'.
When combined, these improvements led to annual growth of about 20% but we knew that we were approaching another plateau. Given that we had increased our acquisition volume by about 40% we could now grow to about 58,000 customers and that would only allow us to grow by 20% for a year or two before the growth slowed. We needed to find more channels.
We had been using Sirius Radio for several years and it had been generating a steady flow of customers. Terrestrial radio is 20X the size of Sirius, so learning how to use this as an additional channel became the key to growth.
We talked to a radio agency about running a test of radio to see if we could generate customers at a reasonable cost relative to our customer lifetime value. With this partner we put together a $1M test that ran over 9 months in 4 cities. This was a significant increase over our original testing budget of $200K but by this time we had grown revenue to about $18M and we had not significantly increased our costs so we had more money to invest in growth.
We ran radio locally in these 4 test cities and compared the results to the rest of the US. At the end of the test, there was a spike in every metric (traffic, signups, support calls) in the target cities. We were able to calculate an expected CPA and new customer acquisition volume with national radio based on the relative costs (CPMs) of local and national radio and the number of impressions we expected with a national campaign. This led to the big bet: a $12M non-refundable national radio test. Once the test began the $12M needed to be payed out regardless of performance, so the pressure was on.
The national radio rollout began in mid January and on the first day, traffic to the site doubled but the number of signups and new customers did not move. Over the first 4 weeks, signups increased and the conversion rate approached normal levels for the new traffic level. This was a highly seasonal business, so the ads were only run during the busy periods and radio eventually tripled our acquisition volume and put us on a new growth trajectory.
However, one of the most beneficial aspects of the radio campaign was that our acquisition volume doubled during the slow times even when the ads were not being run. This showed us the benefit of the increased awareness.
By the end of the first year, new customer acquisition volume had more than tripled, revenue was on track to double and the company was sold to a strategic acquirer for more than $170M.
We succeeded in this case study by using a disciplined approach to analysis and testing. We understood what metrics drove our business and we ran countless tests to identify ways to change our trajectory. We also made the entire company part of the process. In summary, we:
Mike Morris is the founder of Kettle Hole Partners. When he is not trying to figure out mathematical models for marketing and customer acquisition he is probably riding his bike.
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