How “Hybrid Open Source Software” Companies are managing customer acquisition costs.

It is no surprise that customer acquisition is the bane of online businesses, especially enterprise software providers who must deal with long sales cycles and uncertainties while closing multi-million dollar subscription deals. It is not unusual to see these costs exceed even expected revenues in the early days of a SAAS providers journey. We will look at the trajectory of three relatively young companies (7-10 years) who seem to be making all the right moves to reduce customer acquisition costs (CAC) or sales and marketing costs as described in financials. Enterprise sales are about long cycles, repeatedly reaching out to the right stakeholders and the usual sales process funnels and shenanigans.  

We will look at the financials of Box Inc., Hortonworks Inc. and one of the latest entrance into the public markets Cloudera Inc.  Looking at the past three years of financials of these three companies below shows a clear trend of controlling the CAC. Initially, where the sales and marketing costs as a percent of revenue started off at numbers higher than 100%, gradually over the next three years the companies have brought these numbers down to much more acceptable levels and are trending in the right direction. The key to enterprise sales obviously is scale and we can see revenues have been rapidly increasing at all these three companies while the rate of sales and marketing costs have increased at a slower pace which of course is the key to success in reducing customer acquisition costs. While Box is a pure play cloud storage platform, Cloudera and Hortonworks have combined the best of open source with robust proprietary software to create enterprise grade platforms.

In addition to the traditional methods of reducing CAC, given the enterprise nature of their customers, the two primary methods these companies have followed are partnerships and developer relationships. All three companies have partnered with larger firms like HP Enterprises in the case of Hortonworks and Dell and Intel in the case of Cloudera to push their offerings as value additions thru existing sales channels that large companies already have in place. Box has focused one building a strong ecosystem of partners who include Value Added Resellers, Service Providers, and System Integrators to sell their offerings thru their existing channels.

Both  Cloudera and  Hortonworks have made massive investments in the open source and developer community to keep the stakeholders excited about their offerings. They have a large number of their engineers working and contributing to the open-source projects that form the genesis of these companies. Box early on made developer relations a key part of their push to enable new applications on the storage platform. Getting the developer community excited is a key aspect of making the platform more valuable by developers building new applications and use cases and also helps to convince the decision makers in large organizations to buy your products. Sendgrid a cloud-based customer communications platform built early traction with the developer community along this model and the loyal following has allowed them to effectively compete against similar offerings from larger players like AWS and Google.

While CAC has always been a minefield for enterprise software, in the new era of Hybrid Open Source Software companies like Hortonworks, Cloudera, Docker,  developer relations and partnerships to build ecosystems are probably the most effective tools to keep CAC in check and get out of the death spiral that has devoured many.

Leave a Reply

Your email address will not be published. Required fields are marked *