Mike McDerment discusses metrics for determining how much a company should spend to acquire new customers, including: - Cost Per Acquisition (CPA) which is marketing spend divided by the number of new paying customers acquired to determine how much is spent per customer. - He outlines three approaches to evaluating CPA based on the company's stage: CPA compared to ARPU for early startups, CPA as a percentage of Lifetime Value for larger companies, and CAC Ratio for more established companies spending on marketing for 6+ months. - The goal is to balance growth objectives with available cash resources by keeping CPA ratios such as CPA to ARPU, CPA to LTV, and

1. @MikeMcDerment – Co-Founder and CEOJuly 15, 2011 – #startupfestival

2. Mike McDermentCo-Founder, CEO

3. How much…Should you spend to get a new customer?

4. FreshBooks helps businesses get paid painlessly, so they can focus on what they love to do.

5. Users since 2004…

6. Service driven culture

7. The Shape of ThingsQuantitative3 million users 75+ in Toronto$4+ Billion in 20103.5 years in a basementQualitativeThe leading in online invoicing networkAccounting for professionals who get paid for their time and expertise, and 95% of accounting is invoicingAnyone can get a free account at FreshBooks.com

8. STORY: “So there I was…lost”

9. Strong foundationWeb app metrics 101.

10. Average Revenue Per User (ARPU)monthly recurring revenue# paying customersQ: “On average, how much do people pay us?”A: We have 10 customers and they are collectively paying us $500/month, therefore ARPU is $50.

11. Cost Per Acquisition (CPA)marketing spend# new paying customersQ: “How much do we spend to get a customer?”A: We spent $1000 and got 10 new customers, therefore CPA is $1000.

12. Churn# of cancellations# paying customersQ: “At what rate are customers cancelling?”A: Of our 100 customers, 5 cancelled last month. Therefore our churn rate is 5% and people stay with us for 20 months.

13. Lifetime Value (LTV)ARPU x # of monthsQ: “How much is a customer worth to us?”A: Our customers pay $50/month and stay with us for 20 months. Therefore our LTV is $1000.

14. Your BusinessLet’s meet it.

15. The goodYou’ve built the world’s greatest app!People love it and they pay you $50 on average when they sign up!You have a model business model – 100/10/11 paying

16. Yea, it’s time for a fist pump

17. The badGrowth has slowed.

18. The uglySomeone got a bright idea - “let’s do some marketing!”

19. Let’s run a 6 month campaign

20. Let’s run a 6 month campaign!

21. Let’s run a 6 month campaign!

22. Let’s run a 6 month campaign!

23. Let’s run a 6 month campaign!

24. Let’s run a 6 month campaign!

25. Let’s run a 6 month campaign!

26. CPA

27. CPA with trend line

28. Bank Balance, 1 new/month

29. The problemSAAS/Subscription business model means the dollars come much much later. So if you want to grow quickly, you are going to run into cashflow problems. How do you manage this? You need to know how much you should spend to acquire a customer.

30. Three answersFor three stages of your business.

31. “Months to Payback” (0-6 mo)CPAARPUIdeally this number is 1, which means your customers pay for themselves in one month…but don’t hold your breath.

32. See the months grow

33. “Months to payback” (0-100)

34. CPA as a % of LTV (100+ customers)CPALTVThe goal is to have this percentage be as low as possible while achieving your desired growth rate.

35. See the CPA Grow

36. 100+ : “CPA as a % of LTV”

37. “CAC Ratio” (6+ months of spend)(GM Q2 – GM Q1) * 4Marketing Spend Q1Goal is to be between .5 and 1. If you are greater than 1, you are not spending enough. Less than .5, too much.

38. “CAC Ratio” (6+ months of spend)

39. That’s great ratio

40. …didn’t have enough data

41. “But wait, that’s not an answer…”True, but: “teach a man to fish…”Most VCs like 10-12 months APRU for CPA assuming LTV is at least twice CPABootstrapping 1-6 months likely betterHow much to spend to acquire a customer is really a board and/or management decision based on two things: how fast you want to grow and how much cash you have in the bank.

42. Questions?@mikemcderment, mike@freshbooks.comPS – WE ARE HIRING!!!!