Measuring Customer Happiness: Dharmesh Shah’s 2010 Business of Software Conference Presentation
Posted on by Zuly GonzalezCategories Business of Software, Events, Startups5 Comments on Measuring Customer Happiness: Dharmesh Shah’s 2010 Business of Software Conference Presentation

This post is part of a series of posts from the 2010 Business of Software conference (BoS2010). For a summary of the conference, and an index to the other presentations, click here.

Dharmesh’s 2010 Business of Software presentation: “Building A Great Software Business: Notes From The Field”

Zuly Gonzalez & Dharmesh Shah at BoS2010

I’m a big fan of Dharmesh. I’ve been following him for sometime now, so I was really looking forward to his presentation.

Before heading out to Boston, I watched Dharmesh’s 2009 and 2008 BoS presentations (to see the videos go to the end of this post). It was nice to see some recurring topics in his presentations, because that indicated to me that these were important enough ideas for him to repeat.

Dharmesh’s 2010 talk was packed full of insights – customer acquisition, customer retention, customer data, transparency, and venture capital. Dharmesh provided us with lots of useful equations and data throughout his presentation.

How to Measure Customer Happiness

To have a successful software business, you need happy customers. It’s simply not enough to just acquire lots of customers – you need to retain them. And to retain your customers, you need to make them happy.

Let’s look at customer acquisition first, and then customer retention.

Customer Acquisition

The total Cost Of Customer Acquisition (COCA) is determined by dividing the number of dollars spent on Smarketing by the total number of customers. Smarketing, as defined by Dharmesh, is the total cost of sales and marketing.

Definition of Smarketing by Dharmesh Shah at BoS2010
Image credit: Mark Littlewood

The Lifetime Value (LTV) of a customer is the value, in terms of dollars, that you get from a customer for the expected length of time he’s your customer. For example, if you have a customer that pays $10/month, and you expect him to be a paying customer for 4 years, then the Lifetime Value of that customer is $480.

LTV = annual revenue from customer * expected length as customer

A customer’s LTV should be greater than your COCA. If it’s not, that means it’s costing you more money to acquire a customer than you’re making from that customer. That’s a bad business model…and sure to fail! If the LTV is much greater than the COCA, then it’s time to start pumping more money into the business to start acquiring more customers.

These may seem like obvious points, the problem is that very few of us actually take the time to do these calculations. Keeping an eye on these numbers will help you make better business decisions.

Customer Retention

It takes a fair amount of capital to obtain a customer. Therefore, once you acquire a customer, it’s important to retain him as a customer for as long as possible. Customer churn, or customer turnover, is the rate at which your leaving customers are replaced by incoming customers.

Customer churn can be measured in several ways. The simplest way is to look at what percentage of customers are actually staying onboard versus leaving. Another way to measure customer churn is to look at what percentage of leaving customers are high paying customers versus customers on your lower priced plans.

When looking at customer churn, the higher the number of customers staying on compared to the number of customers leaving, the better. However, the above methods of looking at customer churn can lead to deceiving numbers. A better way to measure customer churn is to measure the discretionary churn.

Discretionary churn measures how many users actually have the option of canceling your service. For example, a customer tied into a 6 month subscription plan, may not be happy with your service, however, he won’t have the option to cancel for another 6 months. So, discretionary churn is a much better way of measuring customer churn than the above methods.

Customer churn can be a good measure of a customer’s happiness with your product or service. However, it is imperfect, because the absence of churn doesn’t necessarily indicate customer happiness. And this takes us to HubSpot’s Customer Happiness Index (CHI).

Customer Happiness Index (CHI) by Dharmesh Shah at BoS2010
Image credit: Betsy Weber

What Is the Customer Happiness Index

The guys at HubSpot created the Customer Happiness Index (CHI). CHI is a number from 0 to 100 that measures the probability any given customer will cancel, given the option to cancel. CHI is determined by three factors:

  • Frequency of product use: By looking at the frequency of use, you can assume that the more a customer uses your product, the happier they are with it, and the less likely they are to cancel.
  • Breadth of product use: By looking at the breadth of use, you can assume that the customers who use more features, are happier with your product, and again are less likely to cancel.
  • Sticky product features: This one is important, and probably not so obvious. Sticky features are features that provide a lot of value to your customers, especially when compared to your competition. Those customers that use sticky features are likely to be happier, and thus less likely to cancel. HubSpot has found that this factor is more important than frequency of use and breadth of use – irregular users that use sticky features tend to stick around longer than those that use frequently and use lots of features.

By religiously following the CHI scores of customers, HubSpot can identify early on which customers are unhappy. They can then take a proactive step towards fixing the problem by calling up the customer before they cancel. This action has helped HubSpot keep about 33% of their previously unhappy customers.

Dharmesh did warn against taking their success rate too much to heart. Although they may have prevented a customer from canceling this month, if the customer’s happiness level isn’t brought up significantly, odds are that customer may still cancel the following month.

The cool thing about CHI is that it can be used to measure other aspects of your business, not just which customers are likely to cancel. You can also use CHI to:

  • Measure the quality of the leads generated by your marketing efforts
  • Make decisions on which product features to keep, remove, add, enhance, etc
  • Make decisions on how much to compensate your sales folks.

How to Improve the Customer Happiness Index

“Invest in the experience, not the product, and everyone wins.”

Dharmesh used a quote from Kathy Sierra’s 2009 BoS presentation to set the mood:

Don’t make ___(fill in the blank)____ software. Make ___(fill in the blank)____ superstars. For example, don’t make marketing software. Make marketing superstars.

The key is to think about your customers. Think about what they want out of your software, what they want to accomplish. Make them awesome at what they do. Case in point, meet Molly:

HubSpot's Molly the teddy bear presented by Dharmesh Shah at BoS2010
Image credit: Mark Littlewood

The stuffed teddy bear in the picture is Molly. Molly is the customer’s stand in, and is required for quorum at all of HubSpot’s management meetings. Most meetings don’t happen without someone saying, “What would Molly say?”. It’s a good way to remember that your software is really about your customers, and making them great at what they do.

However, Dharmesh did point out that although customers are very good at finding problems, they are not so good at finding solutions for those problems. So remember that it is your job to find solutions to their problems. (Side note: This reminds me of the old project management cartoon about project requirements 🙂 )

Increasing Customer Happiness Through Services

Another way to increase a customer’s CHI score is by providing consulting services. HubSpot decided to not only offer consulting services to their customers, but to also charge for those services. Why charge? If a customer pays several hundred dollars for a few hours of consulting they will:

  • See more value in it, than if it were a free service. Something that costs $500 is definitely better than something that costs $0, right?
  • Get more out of their consulting session. If the customer is paying $500 for consulting you better believe that they are going to get their money’s worth out of the session. The customer will ask questions, and make sure they understand everything, just because they paid for the service.

A customer that knows how to get the most out of your product will be a happy customer (assuming you have a good product), which will increase their use of your product, as well as their LTV. Therefore, you should work towards making that happen – whether you charge for it or not.

HubSpot’s profit margins on consulting are actually very low. However, they continue to offer these services because it increases their customers’ CHI scores, which in the long run means greater overall profits for the business.

How to Gain (and Keep) Customers With Branding

Your brand is an important part of your business – and of acquiring and retaining customers. The most important thing your business can do (aside from creating a brilliant product) is to not screw with your customers. Dharmesh strongly advises against the Salesforce philosophy – don’t trick people into buying your product. To put it in Dharmesh’s words, “Brand is what people say about you after you have left the room.”

HubSpot Tidbits

Dharmesh shared some HubSpot philosophies, including how much company information they share, and why they decided to accept venture capital.

Transparency Trumps Secrecy

Except for salary information, all of HubSpot’s data is available to all employees. All data! This includes financial information. (Side note: This seems to work for HubSpot. I recently saw the below tweets from HubSpot employees.)

Although HubSpot makes all of their data available to its employees, the data is off limits to the public. The reason is that they don’t see any real benefit to doing so.

The Evilness of Venture Capital

HubSpot is not Dharmesh’s first startup, but it is his first venture backed startup. Most of us think of pure evil when we think of Venture Capitalists, but VCs can play an important role in some businesses. Most software startups don’t need venture capital, and are actually doing themselves a disservice by pursuing it. But there are a few select startups that can benefit from venture capital.

If you are aiming for quick, high growth (like Facebook), or are starting a business that requires a lot of upfront capital (like a hardware business), then it might make sense to obtain venture capital. At HubSpot, they made a decision early on that they:

  1. Wanted to become the dominant player in the industry.
  2. Were looking for rapid growth.

Because you need a lot of money to accomplish both of these goals, they chose to look for venture capital. A key part of HubSpot’s strategy was to acquire these funds before they actually needed the money. The reason being that:

  1. It is easier to obtain venture capital before you need it, than it is if you are already in need of it.
  2. You get better terms early on because since you aren’t desperate for the money you can always back out.

Do note that once you take VC funds, you move from solving your customers’ problems to solving your investors’ problems. And the two rarely align with each other.

Key Takeaways From Dharmesh’s BoS2010 Presentation

These are the main points I got out of Dharmesh’s BoS2010 talk:

  • Log as much data as you have, even if you can’t use it now. You may be able to use it in the future.
  • Measure your customers’ happiness. Come up with your own metrics if you have to, but look at those numbers closely. Determine what makes happy customers, and what doesn’t, and adjust your business model accordingly.
  • Dream big, and execute small. If someone offers to buy your company, seriously consider it, even if it’s not what you dreamed of. Selling gives you cash, which allows you to move on to your next dream 🙂
Memorable Quotes

Some memorable quotes from Dharmesh’s BoS2010 presentation:

  • “Don’t make customers happy. Make happy customers.”
  • “Brand is what people say about you after you’ve left the room.”
  • “Venture capital isneither necessary nor evil.”
  • “Services are low margin…except when they’re not.”
  • “Invest in the experience, not the product, and everyone wins.”
  • “Customers are very good at finding problems, not at finding solutions for those problems.”
  • “Transparency trumps secrecy.”
  • “Dream Big. Execute Small.”
Dream Big, Execute Small presented by Dharmesh at BoS2010
Image credit: Betsy Weber

More on Dharmesh Shah

Dharmesh Shah is the founder and CTO of HubSpot, a venture-backed software company offering a hosted software service for inbound marketing. Prior to HubSpot, Dharmesh was the founder and CEO of Pyramid Digital Solutions. Pyramid was a three time recipient of the Inc. 500 award and was acquired by SunGard Data Systems in 2005. Dharmesh is also the author of, a top-ranking startup blog with over 20,000 subscribers and 100,000 members in its online community. Dharmesh is the co-author of Inbound Marketing: Get Found Using Google, Social Media and Blogs.

You can find Dharmesh’s startup blog here.

Follow Dharmesh on Twitter here.

Dharmesh’s summary of his 2009 BoS presentation can be found here, on his blog. And his summary of his 2008 Business of Software presentation can also be found on his blog.

What are your thoughts on Dharmesh’s presentation? If you attended BoS2010, did I miss an important point? What was your favorite part of Dharmesh’s presentation? What was your key takeaway from his talk?

Leading a Tribe: Seth Godin’s 2010 Business of Software Conference Presentation
Posted on by Zuly GonzalezCategories Business of Software, Events, StartupsLeave a comment on Leading a Tribe: Seth Godin’s 2010 Business of Software Conference Presentation

This post is part of a series of posts from the 2010 Business of Software conference (BoS2010). For a summary of the conference, and an index to the other presentations, click here.

Seth’s 2010 Business of Software presentation: “Are you afraid to truly make an impact? The opportunity for linchpin organizations and the people who run them.”

Being a great programmer is no longer sufficient to succeed. Creating a piece of software that works is no longer an indicator of success. Times have changed. And in a world where we are bombarded with brands and products, we must create a unique experience to succeed.

Seth Godin at Business of Software (BoS2010)
Image credit: Mark Littlewood

Today, everyone and their mother can whip up a working software program. Competence is no longer a scarce commodity.

Because the cost of producing and marketing a software product is closely approaching $0, it is becoming an increasingly crowded market, full of competition. It is now harder than ever to stand out from the crowd. As a result, success in the software industry is now dependent on your ability to create a tribe – a movement, a place of belonging, a community – and lead it.

Creating a Tribe and Leading It

People want to belong to a tribe – it’s human nature. People are also waiting to be led, and it’s your job to lead them. But how, you ask? You must be creative, but most importantly, you must tap into their emotions. Make them feel something – joy, compassion, anger, outrage, importance, etc. Make them feel like they are part of something bigger, something lasting, something good.

Seth gave several examples during his talk, but there was one example I felt a deeper connection to. Seth explained how one man from the SPCA was able to lead a movement to make the city of San Francisco a no-kill city. He later went on to accomplish the same thing in other U.S. cities, with no money and no recognition. How did he accomplish such a feat? Because this was about more than just one man, and because it touched the hearts of people like you and me. This was about improving the lives of many.

Your mission, should you choose to accept it, is to create a movement, and lead it! But software that’s boring will never turn to a movement. When considering a product’s viability, Seth says there are four things you should ask yourself:

  • Who do I need to reach? And how can I reach them?
  • Will they talk about my product to others?
  • Do I have permission to continue talking to them after I’ve reached them?
  • Will they pay for my product?


Seth Godin at the 2010 Business of Software conference (BoS2010)
Image credit: ©John M. P. Knox

The Network Effect

In the old days, using software was a lonely experience. Today, software is used by millions to connect with each other. Question number 2 above, is central to making the network effect work for you. If you create value and provide a unique experience for your users, they will market your product for you.

When considering a software’s network effect, ask yourself:

  • Is my product creating a demonstrable value?
  • Is it easy and obvious for someone to recruit someone else?
  • Is my product open enough to be easy to use, but closed enough to avoid becoming a commodity?

Key Takeaway From Seth Godin’s Presentation

The best way to sum up Seth’s Business of Software presentation is to use his own words: “Software won’t succeed because it was written by a brilliant programmer. It will succeed because of the business brilliance behind it.”

Memorable Quotes

Some memorable quotes from Seth’s BoS2010 presentation:

  • “The reason to fit in is to be ignored.”
  • “Software that’s boring will never turn to a movement.”
  • “People are waiting to be led.”

Seth summarized his BoS2010 presentation on his blog. You can find it here.

More on Seth Godin

Seth Godin is a renowned speaker and bestselling author of 10 books that have been translated into 20 languages, and have transformed the way people think out marketing, change and work. He is responsible for many words in the marketer’s vocabulary including permission marketing, ideaviruses, purple cow, the dip and sneezers. His latest book, Tribes, is about leadership and how anyone can become a leader, creating movements that matter.

You can find Seth’s marketing blog here.

Follow Seth on Twitter here.

View Seth’s 2008 Business of Software presentation: ” Too important to be left to the marketing department”

What are your thoughts on Seth’s presentation? If you attended BoS2010, did I miss an important point? What was your favorite part of Seth’s presentation? What was your key takeaway from his talk?

The 2010 Hacker Challenge
Posted on by Zuly GonzalezCategories Events, Security1 Comment on The 2010 Hacker Challenge

October is national Cyber Security awareness month, and what better way to promote it than with the 2010 Hacker Challenge.

The 2010 Hacker Challenge Logo

The Hacker Challenge is a competition in which Department of Defense Sailors, Soldiers, Marines, Airmen and civilian government employees try their hands at solving computer and network security problems. It’s a free and open competition designed for beginner to intermediate level security professionals and enthusiasts, and is designed to engage military and civilian members in a fun and educational way.

It started three years ago as a way to address training deficiencies in some of the military’s mandatory computer security training courses.

Hacker Challenge 2010 Details

The 2010 Hacker Challenge begins on October 27, 2010, and ends November 10, 2010.  During this two week period, participants will work at their own pace to solve the challenges. If you’re interested in participating in the 2010 Hacker Challenge, you must sign up before October 25, 2010.

Teams of up to 6 members are allowed, including one person teams.

The Hacker Challenge is comprised of two parts – a written portion and a hands-on portion. The written portion involves a series of questions that will test a participant’s knowledge of technology and security topics. The hands-on portion will test the participant’s security knowledge through the use of tools during practical exercises. Some challenges will be easier than others. For a few examples see the sample Hacker Challenge questions below.

This is a friendly competition, and does not involve the use of any malicious software. There are also strict rules on cheating, and what is considered cheating. Any team caught cheating will be disqualified, and it will be publicized on the Hacker Challenge blog.

Sample Hacker Challenge Questions

Below are a few of the questions you might find in the Hacker Challenge competition. These questions were taken from the 2009 Hacker Challenge. Remember this contest is for beginner to intermediate level security enthusiasts.

1) Download and crack the passwords found at this link.

2) You perform a banner grab against a customer’s web server and get the following response. What does it mean?

GET / JUNK/1.0
HTTP/1.1 200 OK
Date: Sun, 15 Jun 2003 17:17:47 GMT
Server: Apache/1.3.23
Last-Modified: Thu, 27 Feb 2003 03:48:19 GMT
ETag: "32417-c4-3e5d8a83"
Accept-Ranges: bytes
Content-Length: 196
Connection: close
Content-Type: text/html

3) Download the packet capture in the below link and look at the device with the MAC address of 00:12:0E:6F:B4:4B. What is this device, and what do you think it’s doing during the time period traffic was captured?

4) Watch Hak5 episodes 1 and 3 from season 4 and pay attention to the sections dealing with the “WiFi Pineapple.” Discuss how the WiFi Pineapple is able to masquerade as a “trusted” AP and suggest at least one way that a user can tell this type of attack is occurring.

5) Dig through the below captured packet and state the following things: (a) What browser is being employed? (b) What application on the browser will be used? (c) What OS is being used? (d) What device did this packet come from?

0000    00 04  5a f2  25 d8  00 12  0e  6f b4  4b  08  00   45  00
0010    00 de  a2 ab  40 00  40 06  b5  3d ac  14  14  05   4a  dc
0020    d7 3b  05 f9  00 50  c5 5f  13  be 38  8e  eb  66   50  18
0030    0b 68  c9 47  00 00  47 45  54  20 2f  63  68  75   6d  62
0040    79 5f  76 69  64 65  6f 73  2f  62 61  6c  6c  73   2e  66
0050    6c 76  20 48  54 54  50 2f  31  2e 31  0d  0a  48   6f  73
0060    74 3a  20 72  62 65  6c 6f  74  74 65  2e  6e  65   74  0d
0070    0a 41  63 63  65 70  74 3a  20  2a 2f  2a  0d  0a   55  73
0080    65 72  2d 41  67 65  6e 74  3a  20 4d  6f  7a  69   6c  6c
0090    61 2f  35 2e  30 20  28 63  6f  6d 70  61  74  69   62  6c
00a0    65 3b  20 55  3b 20  43 68  75  6d 62  79  3b  20   4c  69
00b0    6e 75  78 29  20 46  6c 61  73  68 20  4c  69  74   65  20
00c0    33 2e  30 2e  34 0d  0a 50  72  61 67  6d  61  3a   20  43
00d0    68 75  6d 62  79 0d  0a 43  6f  6e 6e  65  63  74   69  6f
00e0    6e 3a  20 63  6c 6f  73 65  0d  0a 0d  0a

For more information on Hacker Challenge 2010, visit the official website.

Coming Soon: The Advanced Hacker Challenge

If you are a security professional in the advanced category, don’t lose hope. In late 2011 an advanced Hacker Challenge will be introduced, and it will be completely different from the basic/intermediate version. The new advanced version will be almost completely hands-on. The advanced version write-ups will require a deeper understanding of security concepts, and the targets will be a bit of a challenge. And FYI, some of the advanced challenges will require participants to sign a “release of liability” form.