THE STARTUP CHAT

Steli Efit:

Hey, everyone, this is Steli Efti.

Hiten Shah:

And this is Hiten Shah, and today on The Startup Chat we’re going to talk  about affiliate marketing and referral marketing, and really dig into that topic in sort of  a rapid fire discussion about it. The main reason we’re talking about it is because  everybody that listens to this podcast, I shouldn’t say everybody, but many folks really love  it when we talk about customer acquisition. This is one of the key customer acquisition  strategies today is affiliate marketing, referral marketing, invite a friend, all this whole category. Really  what it’s all about is getting your existing customers, prospects, users to refer other people  to the product on a very sort of high level. There’s a lot of different  ways to do it. Between Steli and I we have sort of different experiences and  strategies there, so we wanted to rapid fire kind of talk about this.

Steli Efit:

I think that I’m going to have a bit more to share from a sales  referral point of view, especially when you have larger customers, how to get really big  referrals, really high value referrals. I was curious, have you set up for your SaaS  products, have you done a lot of experiments around setting affiliate marketing programs, like the stuff for people that purchase your product, very low touch. You’re not talking to these  people, you’re not calling these people necessarily, they’re just using your product every single month  and then you do something in some kind of an automated fashion to incentivize them  if they share your product with other people they know and these people buy, they  get something in return, either a month free or a discount or something like that.  Have you played with this? Have you seen success with this for any of your  products?

Hiten Shah:

Yeah. We tried this early on at Crazy Egg and we actually failed. The reason  is, and I can tell you the reasons. All these programs, especially when you’re making  users do it, or they’re incentivized to do it, you have to keep optimizing it  and make it work. When we initially did it many years ago, I kind of  want to say 10 years ago, it really didn’t work. What we did offshoot out  of that is we actually have a pretty strong partner program where if anyone signs  up, which is very related to this, but anyone signs up that’s a user of  another product, they get a special offer like a longer trial or some discount on  our product. We’ve been successfully doing that with Crazy Egg for many years. It is,  I’m not going to share exactly what percentage of revenue right now because I don’t know, but it is somewhere in the double digits in terms of a percentage of  signups or revenue that we get, which is this idea that, let’s say they use  another product that’s not competitive to us. We’re offering a partner program sort of deal  where that company’s promoting us, we’re promoting them, and there’s sort of an equal exchange there with our lists and stuff like that. That is one thing that’s very related  to this that we offshooted from having a referral program. More lately there’s a bunch  of companies I’ve worked with as well as we’ll be launching some of these things  in my companies as well over time on working on a referral program and how  to do that right. You would be surprised at how effective these things are today.  One reason I would say that is your Uber, and your Lyft, and Postmates and  all these sites and apps, they all have referral programs. They all have invite a  friend, make some money sort of deal. Consumers are getting used to it. B2B customers,  as a result, are also used to it because they are also consumers. I actually  would advise most SaaS companies at some stage, when they have enough of their own  users and customers, maybe after they have 1000 plus customers, or maybe even more depending  on scale, this all matters, could be different metrics. Once they’re in the hundreds to  thousands of customers, it is definitely one of the key channels that, if you’re willing  to invest in it to optimize it, change the messaging, look at the conversion rates  and all that, it can be one of your primary drivers of new users.

Steli Efit:

That’s interesting. I think one of the key messages there is that, the partner thing  is interesting, there could be a whole other episode on how to do sales partnerships.  On the referral side of things, it’s interesting that consumers have been more used to  it and more exposed to it because of some very successful products that a lot  of people are using frequently. Once you get to that kind of a consumer acceptance  and adoption of a certain type of …

Hiten Shah:

Behavior, I guess.

Steli Efit:

Behavior, it moves over to more and more other areas of how they use software,  and B2B’s one of them. That’s super interesting and makes a ton of sense. The  other thing that I would say is that the second part, which is, I think,  at the kernel part of a lot of the advice that we give, is that  if you do it just be committed to investing into this type of thing in  a period of time, iterating it, thinking about a version one but then realizing that  you’re going to have to have a version two and version three. It might be  your messaging, it might be the incentive you give might work right off the bat  or it might not, but it doesn’t mean that the referral program doesn’t work. It  just means that you might have to invest three to six months in tweaking and  working into it until you can really reasonably assume that you’ll figure it out. It’s  not just like a, all referral programs work the same, so you launch it and  it either works or it doesn’t. It might have to do a lot of tweaking,  which you have to do with almost everything in life, especially business, right?

Hiten Shah:

Pretty much, yeah.

Steli Efit:

The other thing, you know, interestingly enough I didn’t even realize this before we started  talking about it, but I just realized that recently we had a discussion internally. We’ve  always been doing referrals on the sales side of things, and I’ll talk a little  bit about my system there because it’s served me really well. We’ve never productized referral  marketing. We’ve done referral sales, but never referral marketing as part of the fore, especially  for the users that our sales team isn’t touching and isn’t spending time with, or  our success team. We just recently reopened that discussion because we do see a very  large chunk of our new trials coming in from word of mouth. It kind of  reintroduced the discussion just recently on the team that we probably need to start investing  in this. This is very timely for us as well. I just did a little  bit of research this morning and I saw that there’s a lot more tools out  there, which is also not surprised in the SaaS world. There’s a bunch more companies  out there that offer this type of thing productized for your company so you don’t  have to build it from scratch. In general, if you start with a version one,  what would you do. Would you do customer development, talk to your customers, figure out  what kind of an offer would be compelling to them and then test it out  in a very lightweight way before you fully productized it? Are there things that you’ve  seen work better than others, like discounts work better than an added free month of  the year, or a free upgrade of the plan, or does it all depend on  your customer vertical and your product?

Hiten Shah:

It actually all depends on your unit economics and what your current customer acquisition cost  is with your current channels, and what your lifetime value is. This applies to every  industry, consumer, B2B, or anything. If you don’t have a good handle on that you  could either be giving up too much or not giving enough to incentivize people because  you don’t know where your limit is. That’s why I don’t really recommend this strategy  super early unless you’re really savvy about what you think the reasonable customer acquisition cost  is for your business and what LTB is. I see a lot of people get  this wrong. Really, these referral programs are supposed to be one of your cheapest channels,  regardless of what you give away. Right?

Steli Efit:

Yeah.

Hiten Shah:

If that’s true, then you have to know what customer acquisition cost looks like, or  at least what your rough lifetime value looks like. If you’re kind of early on  you can sort of start predicting that based on your monthly churn or some kind  of benchmarks from your industry, even though I don’t really like benchmarks a lot. You  need some kind of guess at, our lifetime value is, let’s say $600. Our margin  is high because it’s a SaaS business, so let’s not worry about that. Then we  can spend up to $200 to acquire a customer, 100 or 50 or whatever. Obviously  you want to get that customer acquisition cost as low as possible always, but this  is kind of a way to really think about and figure out where you start.  After that, all your offer stuff, that’s what you test. You figure out whether it’s,  give them $100 credit, or give them two months free, or give them an extra  longer trial period, or whatever is what’s right for you. You need a basis of  cost, otherwise you can really get into a lot of trouble.

Steli Efit:

I love it, that makes a ton of sense. I’ll share a little bit about  my experience with referrals and how to do it, and I kind of put together  a system over the years. When I first started in my first business and I  did sales kind of one on one with the customer in person, I realized that  one of the biggest challenges that most other people had in this industry was that  they constantly were running out of prospects. They had to constantly either do a lot  of cold calls or a lot of just high volume, very low quality work. They  always had these high highs and low lows, a month where they had this really  amazing prospect and they closed this massive deal, and then the next a drought, the  two months where they’re struggling and nothing was working. I think I fairly quickly realized  that that model sucks. I started realizing that, why don’t if I sell to somebody  and they’re happy, why don’t I just get really good recommendations from them. I realized  that most salespeople wouldn’t ask for referrals, or would do it in a very half-assed  way. The moment you close the deal, it’s kind of a very endorphin inducing, exciting,  it’s a big win. You’re excited, the customer just said yes, handshake, wrote the check,  whatever it was. Most salespeople, they don’t want to ruin that moment by asking for  something more. Or when they do, they do it in such a half-assed way because  they don’t want to get rejection because they just worked so hard to get a  yes, they don’t want to get a no right after that. A lot of times  people would close a deal and then would go in a very weak way and  ask the customer, “You know what? If you ever think of anybody that you could  recommend us to, we always appreciate that.” Which is a very kind of wishy-washy, hey,  we’d appreciate if you’d do this on your own time and on your own motivation.  The customer would always go, “Yeah, yeah, of course, of course,” and then forget about  it instantly. What I started doing and what worked incredibly well for me, and I’ve  taught this to many people and it worked really well for them, this is one  of the most underutilized engines for growth in sales. I would actually, in some cases  I would tell people they cannot buy from me if they won’t give me referrals  if they’re a happy customer. I would tell them, “Listen, I spend all my time  servicing my customers, making sure that I’m an expert, making sure I give you the  best recommendations. But that only works because my happy customers refer me to other happy  customers. That’s the deal I make in my business, and if that’s something you’re not  happy with or you’re not comfortable with, I’m cool, but then we won’t be able  to do business together. If you are fine with this, now let’s shake hands and  agree that, you know, if you buy from me and you’re happy with that, that  you’re going to give me referrals. And that allows me to focus on servicing you  versus s- focusing all my time on, on acquiring other customers.” Nobody ever told me,  “No, I want you to spend all your time doing marketing, PR, and sales, and  not serving me.” Everybody I ever made this pitch to agreed to that. Then, when the deal closed and we got the handshake I would remind them, “Hey, we’d originally  agreed, and this is the moment. All I want, I don’t want tons of names.  All I want to begin with is your best recommendation, just one person you know  you highly respect that you think should be aware that this solution or this product  exists, and that I exist, and that they should chat with me.” Here’s the kicker.  Nine out of 10 people when you ask them the first time, they will tell  you they don’t know. They will go, “Huh, I need to think about it,  just not sure.” Here’s the uncomfortable part. I’ve realized that if you let them off  the hook too early, at that point you’ll never get a referral. If you push  and nudge them just one more time, just a little bit, you’ll get something. If  I asked 10 people and nine told me, “Huh, Steli, yeah, I, I remember, but  I need to think about this,” if I pushed them one more time and went,  “You know, I get it, and, and over the years hopefully you’ll think about this  a lot if you’ll give me lots of referrals. But just to start us off,  just one person you like in this industry. One person you like, let’s just think  of one name right now. Let’s just take a few minutes and come up with  a name.” If I nudge people just one more time, out of those nine people  five or six would give me a name. The other ones might still push back  and go, “Dude, back off,” or, “I need to think about this,” or whatever their  reaction would be. Then I would leave them alone. Just by nudging them one more  time I would get a name. Here’s the kicker, here’s the thing where it makes  it into a system. If I got a referral and that referral turned into a  customer, I would always make them close the feedback loop. What I mean by that  is that the moment that referred prospect turned into a customer, I would ask them,  “Hey, who do we have to thank for, for this deal happening?” They’d always look  at me and go, “Well, you?” I’m, “No, no, no. Who put us in touch  in the first place?” They’d always go, “Uh, well, Bob.” “Exactly. Can you do me  a favor and write Bob a quick thank you note and I’ll do the same,  so he knows we appreciated this connection and it actually turned into something fruitful.” Closing  that feedback loop would make … The moment Bob receives those thank you emails from  both of us, what does Bob do? He thinks of, who else do I know  that I need to put in touch with Steli? That made it into a system  that really generated consistent new, very high quality referrals. This is not thousands of people,  but every single one, most of them would close and they’d be really good, really  big deals for me. That’s kind of the system that I’ve cultivated over the years  from talk to many people. In the early days when you do one on one  sales as a founder, I would highly recommend really pushing for referrals. Even down the  line if you have a sales force that sells kind of larger deals, I would  make a real investment and effort to make referrals part of a sales process.

Hiten Shah:

Honestly, I don’t understand why people don’t do it that way. It’s amazing, that was  amazing. You just gave people the formula and the secret away. In my opinion, this  is the secret to sales referrals. It’s pure gold. If your company’s doing sales, I  don’t see why you wouldn’t do it the way you suggested. Especially if you believe  in your product. Don’t do sales if you don’t believe in your product and you  know what value it can drive.

Steli Efit:

The main reason I’ve identified that people don’t do this is that they ask for  the referral and they get a little pushback, and they instantly fold because, as I  said, they just closed the deal and they don’t want to sour the relationship. People  are just so happy about the close that they don’t want to risk any negativity  around it, so they’re very weak in the way that they ask for referrals. If  you can get over that and you put that system in place, it’s super powerful.  It just takes some discipline and a little bit of guts to do that. All  right, anything else? Let’s wrap this episode up. We’ve done a little bit on the  marketing side, a little bit on the sales side. Any tip you want to add  on terms of doing referral sales and referral marketing well for people?

Hiten Shah:

No, this is great. It’s got to end on what you said because everyone just  needs to do it that way. I’m surprised you gave it away.

Steli Efit:

All right, there you go. Here’s something we’ll ask you in return for. If you  listen to us and you went, “Holy shit, I’m going to do this, it’s going  to change everything,” number one, keep us in the fucking loop. Let us know if  you do it, let us know how well it worked. We love to hear from  you. Number two, go to iTunes right now, give us a rating, give us a  review, and how about referring this podcast to one person you know and you like  that’s doing a startup, that’s involved in startups that you think would benefit from knowing  that we exist. How about that?

Hiten Shah:

Yeah, how about that? Go for it.

Steli Efit:

All right. Thank you so much, guys, we’ll be here very soon.

Hiten Shah:

Bye.