New research from TrialPay shows stark contrast between marketing costs for small and large software vendors, provides industry spending benchmarks and best practices for customer acquisition
We’ve just released key findings from a quantitative and qualitative survey of software vendors across consumer and small business sectors. The survey queried software companies on their most effective customer acquisition strategies and marketing programs as well as their predicted marketing spend. Full details of the survey are now available in our 2011 Report on Software Customer Acquisition Methods.
Among other key findings, the research reveals a large divide between what small and large software vendors must spend to acquire customers. Smaller vendors spend upwards of 50 percent or more of their revenues on marketing, three times more than their larger counterparts. The research also tells a striking story about the impact of pricing on customer acquisition costs: software companies with product prices in the $19-$39 range face the highest relative customer acquisition costs versus any other price point. Raising one’s price to $50 could cut relative costs by a third, and lowering the price to under $15 could cut relative fees in half.
Key conclusions from the survey include:
(1) Customer acquisition is a costly proposition for smaller software vendors.
Customer acquisition is usually the largest variable cost in software companies’ budgets, but this survey shows wide variation between spending as a percentage of revenue depending on company size. While companies with more than $100K in annual revenue only spend about 15 percent of revenues on customer acquisition, smaller vendors with under $100K in annual revenues are spending more than half (54%) of their revenues to acquire customers.
(2) Product pricing decisions can impact customer acquisition costs.
Most companies think pricing decisions only impact revenue. This study reveals that selecting one price point over another can double one’s customer acquisition costs. While companies with an average product price of less than $15 only spend 26 percent of revenues on customer acquisition, that number almost doubles for companies with an average product price between $19-$30. Those companies spend more than half their revenues on customer acquisition (54 percent of revenues). Once the price point hits about $40, the percentage expenditure begins to drop again. TrialPay also found that companies with a price point between $19-$30 spend about $13.60 to acquire each customer, while companies with price points between $34-$50 spend just little bit more (about $15.50 for each new customer), giving them a significant advantage on margins. Companies who are spending a large percentage of their revenues on customer acquisition may want to look at their pricing. Healthy competition in the $19-$39 range appears to have bid up customer acquisition costs.
(3) SEO and SEM are still king for customer acquisition.
According to the study, software vendors find Search Engine Optimization (SEO) to be the most effective online method for acquiring customers, with 29 percent saying SEO delivers the most customers. Followed closely behind is Search Engine Marketing (SEM), cited by 21 percent of respondents as the most effective customer acquisition method. E-mail marketing is in a distant third place at 14 percent. A surprisingly high number of companies (9.6 percent) say that display advertising is their primary means of customer acquisition, despite claims by many that consumers don’t click on banner ads.
(4) Spending on all customer acquisition methods is expected to rise in 2011.
The study shows that the majority of software vendors plan to increase spending on all forms of customer acquisition in the next few years. Some 61 percent of software companies plan to increase spending on SEO and SEM, with 45 percent planning to increase e-mail marketing expenditures and 43 percent planning to spend more on PR. SEO, SEM and email marketing are expected to see the greatest growth over the next year as software vendors plow more of their marketing dollars into these customer acquisition methods.
(5) Vendors are increasingly looking for alternative channels for their products.
While the vast majority of software vendors currently sell directly from their own website (87 percent), this number is expected to drop slightly to 80 percent in 2011, with many vendors looking to find alternative channels for their products. For example, while 50 percent of vendors sell via online retailers today, 61 percent plan will do so in 2011. Use of vendor cross-sell is also expected to dramatically increase in 2011, from 27 percent today to nearly 37 percent in 2011.
“Whether you’re selling downloadable software or Software-as-a-Service, customer acquisition is one of the most important determinants of software business profitability,” says Daniel Greenberg, TrialPay’s Chief Marketing Officer. ” With rising marketing costs and heightened competition at popular price points in the $25 range, smart marketers would be well served to copy some of the creative, low-cost tactics offered in the 2011 Customer Acquisition Report.”