Optimizing Customer Acquisition for Startups

Intro:

Welcome to Startup Success, the podcast for startup founders and investors. Here, you’ll find stories of success from others in the trenches as they work to scale some of the fastest growing startups in the world, stories that will help you in your own journey. Startup Success starts now.

Kate Adams:

Welcome to Startup Success. Today we have in studio, who is the founder and CEO of scaleMatters. Welcome Scott.

Scott Stouffer:

Thanks, Kate. Appreciate being here with you.

Kate Adams:

Thank you for being here. I’m looking forward to our conversation. To get started, I would love an overview of scaleMatters and how it came about, if you could set the stage for us.

Scott Stouffer:

Sure. So the previous company that I was running, this is about a $15 million company. We made a marketing automation platform and a CRM specifically for nonprofit organizations. And while there’s a feel good aspect of serving nonprofits, they can be a tough customer to build a good business model around. One of the things we had to do was get really, really efficient at acquiring those customers because they tend to be low pay, high touch. So from the perspective of a traditional like SaaS metric, LTV, Lifetime Value, etc., they’re a little challenging. So you had to get very good at and very efficient at acquiring these companies as your customers. And so we went through a process of effectively deconstructing our whole process that we went to market with, modeling it out in great detail and then configuring our sales and marketing technology stack so that we could measure it at a kind of extraordinary level of precision. And once we started doing that, it surfaced a bunch of data that showed us where we had friction and inefficiencies in our whole go-to-market approach. And we started knocking those things off and lo and behold, in about a year’s time, we improved our overall customer acquisition efficiency by about 70%, which was transformative for that company. When we sold that company in 2018, a few of us said, look, you know, what we just did was it really was transformative and it could be so powerful for early-stage companies. And the reason for that is capital is precious. I mean, obviously you talk all the time to startup founders and investors. Capital is so precious and so much of the early-stage capital, I mean, it’s certainly beyond seed by the time you get to Series A. So much of that early-stage capital is consumed on trying to acquire customers – basically spent on sales and marketing. And the vast majority of early-stage and even growth-stage companies are not particularly effective and efficient with that money. They spend it on sales and marketing. So our whole thought was to the extent that we can use data to make them be much more efficient by identifying kind of where the inefficiencies are or where the friction is, then we would help them progress their company further on less capital being consumed. So there was a little bit of a mission behind the genesis of scaleMatters, which was basically to improve the probability of success for early and growth stage companies.

Kate Adams:

I love it because what you’re saying is, I’m sure resonating with so much of our audience, right? That’s the challenge that they’re facing every day, especially right now in this market where they’re being told to really conserve their cash runway and be so cautious, but yet they also have to grow, they have to scale. So it’s a very difficult balance. Can you give us an example of how you’ve helped a company with some specifics? We don’t have to name the name, but just so we can get a little more detail.

Scott Stouffer:

Sure. So if you think about the points of inefficiency or friction that companies might face in their whole customer acquisition process, it could be, well, first of all, let’s assume they have some reasonable product market fit so that what they’re building, somebody actually would find value.

Kate Adams:

I think that’s a good assumption.

Scott Stouffer:

So put that behind us. So then the first place we find people struggle is messaging. So even if they’ve got something great, they often aren’t particularly stellar at communicating it in a way. that their prospective customers immediately gravitate to. And so there was one example I can think of off the top of my head where one of our customers was, they were using Software Advice. It’s like G2 Crowd. It’s one of these kinds of listing referral review services as a lead source. And they were noticing that their win rate on leads that were surfaced through that particular venue was substantially worse than through organic, through paid search and other things that they were doing. And so they basically sitting there saying, well, maybe we just shouldn’t invest in it, or can we figure out why it’s not as successful as these other channels? And we, using our platform, we were able to surface data that effectively showed them that they were bringing in non-ICP prospect, non-Ideal Customer Profile people. So they were bringing in a disproportionate number of what I’ll call buyers who were less sophisticated buyers that they needed. through that particular channel, which was the reason their win rate was so low. And we helped them understand that by surfacing data that we actually extracted out of sales call recordings in that particular case. And so you can learn a lot about prospect priorities, prospect challenges, start to really dial in your ICP, your Ideal Customer Profile by basically having a better understanding of who these prospects are. And that’s one of the things that we did with these customers. So that’s an example. There’s hundreds of examples, right? So there’s messaging examples where companies are sort of not dialed in and optimized. Could be channels or strategy examples. So maybe they’re over-investing in LinkedIn advertising, and it’s just not as effective as paid search for this particular company. And if they don’t necessarily have the data to show overall end-to-end effectiveness of these various venues they’re investing in, they don’t know how to properly allocate their resources in a way that’s going to generate the biggest return. There’s also process friction. We have this part of our platform as a process analyzer, but basically it’ll demonstrate wherever in the entire, from the point somebody hits your website to the point they actually become a customer, maybe you’ve got 20 different steps. Think of each as sort of a conversion step. We tend to be pretty good at isolating where in that overall process things seem to be getting bogged down so that then people can sort of run experiments to try to improve that, et cetera. So I mean, you can think of it as… You know, when you go to the doctor and you have your physical and they say, go do your blood work, right? A week before, think of it as we’re given all this data, right? That then when armed with a professional that knows how to interpret it, it tends to become pretty obvious what’s wrong with you and what treatment you ought to have applied to you.

Kate Adams:

That’s interesting. And I like how you shared examples around messaging and channel and process, because through this show, those are three areas that we kind of touch on a lot, because all three are so important, but are so different. I mean, just in your experience, which one right now, you know, are most of your clients struggling with? Is it process or channel? I’m just curious, kind of on a macro level.

Scott Stouffer:

I would say on a macro level, my conclusion is the biggest friction or point of inefficiency that the vast majority of these companies deal with. is that they are attracting the wrong prospects.

Kate Adams:

Oh, interesting.

Scott Stouffer:

And therefore, so these are prospects that aren’t really their ideal customer. And as a result, they’ve spent money to bring them in the door. Then they spend money on the salespeople’s time trying to fruitlessly sell to them or furtively sell to them because they’ll never sell them. And so it’s just a complete waste of energy, right? And so companies are not generally narrow enough in defining what their ideal customer profile is. This is my opinion based on what we’ve seen. And therefore they don’t put enough energy at perfecting their messaging in a way that attracts those people and only those people. And so there’s just a lot of waste, right? A lot of waste to bring in the wrong people, a lot of waste to try to sell to the wrong people.

Kate Adams:

That’s fascinating because that’s impacting capital, obviously, but also their process, right? Because they’re trying to push people through a funnel or a process that aren’t the right fit. They’ve got salespeople out there. It’s a big investment. So do you then help them with solutions around messaging? Or is that kind of where scaleMatters ends? Like, you’ve presented the data. You’ve shown them. Or, yeah.

Scott Stouffer:

We will help them, we will present data that helps them to understand more precisely who is their ICP, who is the Ideal Customer Profile. We will also present data that shows them sort of what’s important, right? What do prospects talk about as important to themselves or what their challenges are? Which to me then is an awesome foundation to start to build your messaging around, right? I mean, this is part of the problem in this digital age we live in, is unfortunately the people who are predominantly responsible for messaging, which is marketing, have become more and more removed from the customers. So they try to figure everything out through these clandestine methods of A/B testing website or running different ads and different campaigns and seeing which get different click rates, etc. Then so many marketing people, their marketing organization stop at, well, geez, we’ve got more leads, so this is better messaging, but that doesn’t mean that those leads are actually converting into revenue. So what we try to do with some of our data, the data that’s very prospect profile and messaging oriented, is allow the marketers to have a much more intimate understanding of who these people are that they’re actually engaging with than they otherwise would. We’re not Procter and Gamble or anyone that can run these $100,000 focus groups all the time. But the techniques most companies currently use, which is trying to infer stuff. through A.B. testing stuff on your website or ads, etc. It’s just not as effective as extracting information out of the sales calls that are actually being had.

Kate Adams:

I think you’ve hit on something so important as somebody who has a background in marketing. There’s been this shift, right, because of digital, where we’re now focused more, like you said, on channel performance, right, and click through rates and conversion and testing, because we can do that now, where I remember when I started my career, it was much more around building the perfect buyer persona, having focus groups, listening to those calls, and working with product to meet those needs. And now it’s much more based on analyzing performance. And when I spend a day listening to sales calls, it has more of an impact than so much. So I think you’ve hit on something.

Scott Stouffer:

Oh yeah, and the problem is it’s just not scalable to listen to the calls, right? Right. And that’s what companies like us are doing, like scaleMatters, is making the process of extracting insights out of sales calls actually scalable for marketers.

Kate Adams:

I love it. Yeah, there’s a real need for that. So, I mean, you’ve really honed in on an issue. And when I first spoke, you mentioned that you yourself have been a part of, I think you said what, five startups?

Scott Stouffer:

Yeah, yeah.

Kate Adams:

So you’ve had this struggle. If you could kind of walk us through your trajectory, what you’ve learned being as part of five startups, how you’re applying it now to scaleMatters, I think that would be interesting.

Scott Stouffer:

And scaleMatters is fairly early stage. I mean, we’re only a four-year-old company ourselves. And I would say we have not perfected the identification of our ICP. I mean, we’re converging. We’re making good progress on it. But predominantly, we eat our own dog food. I mean, we record every single sales call. We have built trackers into our tool that we use. We use Gong, which we’re actually kind of a loose partner of. And we statistically look at all this data that surfaced out of the sales calls. And it’s not just ‘what are prospects saying are important to them, or what are their challenges, or who are they currently using, or what do they object to,’ and all that kind of. I mean, we are getting all that stuff, right? But then we correlate that information to how far along are they moving through the pipeline, right? Do we see patterns that the people moving all the way down have some unique patterns on, priorities, et cetera, than other people do? It’s all a little bit, in the last year and a half, it’s made a little bit more foggy. And that’s because if you think about who our target customers are, they are all VC and PE-backed growth stage companies. These are the very companies that are in a mode of laying people off, cutting costs, doing everything they can to extend runway right now. So we’re trying to discern between what’s kind of real macro or real customer-specific issues versus what’s macro conditions. But yeah, as I was saying, we eat our own dog food and extract most of the data that we can out of these customer calls and try to dial in our ICP that way. In the first company I started, which was a long time ago, back in the mid 90s, we sold to large telephone companies. In fact, we built a hundred plus million dollar company. off of four customers. And so there wasn’t really a challenge figuring out who our ICP was, right?

Kate Adams:

Right, you’re, right.

Scott Stouffer:

It was just a completely different set of challenges, which is you’re selling to AT&T and the predecessor of Verizon and all this stuff. And then the challenge there was more complex enterprise sales, right? How do you develop relationships and understand who all the people that must say yes, who all the people who can say no, et cetera.

Kate Adams:

Right, the decision makers, yes.

Scott Stouffer:

Yeah, and then there was no Zoom back then, so everything was face to face. There was a lot of relationship building, et cetera. So the challenges really sort of depend on what you’re selling and who you’re selling it to. I think when you talk about companies that are selling somewhat velocity motions, maybe a SaaS product for 10 to 50K a year, and they’re trying to nail 100 customers a month, then they’re gonna be less intimate with those prospects or customers by definition. And that’s where sort of using some of this data-driven approach to really develop as close to an intimate understanding as possible is really helpful.

Kate Adams:

then I think most of our audience is in that sweet spot that you just described, and it sounds like… from your work at your previous company that was acquired, when you had to work so hard on messaging and narrowing in on nonprofits, it prepared you in a sense for now selling to the group you are at scaleMatters, right? This venture backed high growth in a sense. Do you see where I’m going with that?

Scott Stouffer:

And it very much also taught us the importance of not trying to sell to the wrong people. I told you we were able to improve our overall acquisition efficiency by 70%. A large part of that. was by realizing all the bad fits that we were pulling into the process. Even bad fit people that we sold to because, then they end up not as nonprofits, but as unprofitable customers. So even though the sales guy or gal might get his or her commission off getting a deal done, if you can’t hold the customer for more than a year and they’re high touch and always complaining, I mean, it was a bad fit to begin with, right? And that’s just very costly for companies.

Kate Adams:

Right. So that happens a lot in our world of startups. How do you prevent against that? What do you do?

Scott Stouffer:

I don’t know. You know, there’s this natural tension, which is you need to raise money. And as a result, you need to paint as rosy a picture of the future as possible. You want to go right up to the point of believability and just pull back. And to do that, companies invariably exaggerate their TAM, their total available market, right, because the venture community generally wants to think, if it’s a huge market, then I only need to get a little slice and I can make a good return.

Kate Adams:

Yes, exactly. You’ve summed it up perfectly. Yes.

Scott Stouffer:

So there’s this natural propensity because of the need to raise money to get away from focus. Yes. But then to execute properly, You almost need to do just the opposite. And you need to narrow the aperture so much. that you know you can sort of build a repeatable process, a repeatable message, et cetera, that works. You know, and then once you kind of nail that within this small ICP, you can start to look at, all right, are there things we could do to expand that out, et cetera. But it just goes completely against the grain of what you’ve just told these investors that wrote you a check. right? And so most people don’t do that. They don’t narrow their aperture and they go after everybody. And that’s why they end up acquiring customer, first of all, wasting a lot of money on prospects that they never can turn into customers, but also then acquiring customers that they really shouldn’t have because they end up costing them more money down the road. A lot of venture and I mean, four of my five companies have been venture backed. It’s been great partnerships. So I have nothing but positives to say about the investment world, but a lot of the venture folks. would say, well, no, we want people to be legitimate about what their TAM is. We know you need to have a precise ICP, et cetera. But they’ve become so accustomed. to these exaggerated plans. that by definition they just sort of… They say, okay, well, you’re showing us you’re going to be a $40 million business in three years. We’re going to assume that means you’re going to be $5 million business. Right? So if somebody comes in legitimately, says we have this very narrow thing, but I think we can win at it, and we’re going to be a $10 million business in five years, they’re just so used to cutting everything from what the entrepreneur says that they’ll say, okay, maybe that’s a $1 or $2 million business. This is not fundable. There’s kind of this built-in need to deceive yourself, and I don’t think that works out very well.

Kate Adams:

That was so well said, and I hope all the founders listening really took note of that, because I think you described perfectly exactly what happens. So you go from your pitch deck where you need to get the money. So like you said, you show this huge market, but to actually be successful, you got to tailor your message, hone in on your perfect buyer and narrow. And I don’t think many people then do that. You’ve summed it up perfectly.

Scott Stouffer:

I’ve got scar tissue.

Kate Adams – 00:20:56:

I get it. Well, we always wrap up based on your scar tissue with just some general advice for founders. That’s always my closing question for those listening that are out there on that journey right now. You’ve been through it several times. I mean, parting words of wisdom for those.

Scott Stouffer:

And some of it’s just repeat from some stuff we’ve said, but certainly point number one is be vigilant in figuring out who your ICP really is. Because you just can’t afford to waste the precious capital, particularly in this day and age, right? I mean, it’s just so hard to get. It’s hard to get it at any decent value. I don’t know, maybe the valuations are fair and they were goofy before, but compared to before, they feel harsh, right? So be vigilant about knowing who your ICP is and focusing all of your energies on not just marketing and sales efforts, but also product features, et cetera, that are just going to speak to that ICP. So get successful at something, even if it’s a small pie first. That would be one bit of advice. Second bit of advice would be, and this is more given the current conditions we’re in, but just be very thoughtful about your expenses. There’s still a lot of uncertainty about what’s gonna happen in the financing world. I think we’re still at the beginning stages of a lot of nasty down rounds and potentially a lot of companies not even getting funded. And so, if you want to have some sense of controlling your destiny, you’ve got to have your burn as low as you possibly can. I mean, obviously you have to have burn unless you start your company as a services business or something where you’re generating some income and profit right away, but just be very cognizant of the current funding conditions. Take baby steps and prove some stuff out before you start cranking up the burn more.

Kate Adams:

Absolutely, really important tactical advice for these times. So if I’m listening and I wanna learn more about scaleMatters, where do I go? Where do I find more info?

Scott Stouffer:

You certainly go to our website, scalematters.com. You can email info at scalematters.com. You can email me, scott@scalematters.com. Be productive and efficient with the first line, because I actually do look at the first line of every email. But yeah, any of those. I mean, people will respond. We do respond.

Kate Adams:

Excellent. I like that. If people are emailing me, be productive too with that first line. Good advice. I really like what you’re doing. It was fun to talk to you today. Thank you for being here.

Scott Stouffer:

Kate, thanks for having me.

Kate Adams:

Thank you.

Outro:

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