How to spend money to successfully grow your web app business - Mike McDerment

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Once you've made the world's great product, what next? It's time to tell the world! But wait, getting the word out is expensive. In this talk we’ll explore how to spend a dollar to make two, and answer the all-important question: “how much should I spend to get a customer?"

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How to spend money to successfully grow your web app business - Mike McDerment

  1. @MikeMcDerment – Co-Founder and CEO<br />July 15, 2011 – #startupfestival<br />
  2. Mike McDermentCo-Founder, CEO<br />
  3. How much…<br />Should you spend to get a new customer?<br />
  4. FreshBooks helps businesses get paid painlessly, <br />so they can focus on what they love to do.<br />
  5. Users since 2004…<br />
  6. Service driven culture<br />
  7. The Shape of Things<br />Quantitative<br />3 million users <br />75+ in Toronto<br />$4+ Billion in 2010<br />3.5 years in a basement<br />Qualitative<br />The leading in online invoicing network<br />Accounting for professionals who get paid for their time and expertise, and 95% of accounting is invoicing<br />Anyone can get a free account at FreshBooks.com<br />
  8. STORY: “So there I was…lost”<br />
  9. Strong foundation<br />Web app metrics 101.<br />
  10. Average Revenue Per User (ARPU)<br />monthly recurring revenue<br /># paying customers<br />Q: “On average, how much do people pay us?”<br />A: We have 10 customers and they are collectively paying us $500/month, therefore ARPU is $50.<br />
  11. Cost Per Acquisition (CPA)<br />marketing spend<br /># new paying customers<br />Q: “How much do we spend to get a customer?”<br />A: We spent $1000 and got 10 new customers, therefore CPA is $1000.<br />
  12. Churn<br /># of cancellations<br /># paying customers<br />Q: “At what rate are customers cancelling?”<br />A: Of our 100 customers, 5 cancelled last month. Therefore our churn rate is 5% and people stay with us for 20 months.<br />
  13. Lifetime Value (LTV)<br />ARPU x # of months<br />Q: “How much is a customer worth to us?”<br />A: Our customers pay $50/month and stay with us for 20 months. Therefore our LTV is $1000.<br />
  14. Your Business<br />Let’s meet it.<br />
  15. The good<br />You’ve built the world’s greatest app!<br />People love it and they pay you $50 on average when they sign up!<br />You have a model business model – 100/10/1<br />1 paying<br />
  16. Yea, it’s time for a fist pump<br />
  17. The bad<br />Growth has slowed.<br />
  18. The ugly<br />Someone got a bright idea - “let’s do some marketing!”<br />
  19. Let’s run a 6 month campaign<br />
  20. Let’s run a 6 month campaign!<br />
  21. Let’s run a 6 month campaign!<br />
  22. Let’s run a 6 month campaign!<br />
  23. Let’s run a 6 month campaign!<br />
  24. Let’s run a 6 month campaign!<br />
  25. Let’s run a 6 month campaign!<br />
  26. CPA<br />
  27. CPA with trend line<br />
  28. Bank Balance, 1 new/month<br />
  29. The problem<br />SAAS/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. <br />How do you manage this? You need to know how much you should spend to acquire a customer.<br />
  30. Three answers<br />For three stages of your business.<br />
  31. “Months to Payback” (0-6 mo)<br />CPA<br />ARPU<br />Ideally this number is 1, which means your customers pay for themselves in one month…but don’t hold your breath.<br />
  32. See the months grow<br />
  33. “Months to payback” (0-100)<br />
  34. CPA as a % of LTV (100+ customers)<br />CPA<br />LTV<br />The goal is to have this percentage be as low as possible while achieving your desired growth rate.<br />
  35. See the CPA Grow<br />
  36. 100+ : “CPA as a % of LTV”<br />
  37. “CAC Ratio” (6+ months of spend)<br />(GM Q2 – GM Q1) * 4<br />Marketing Spend Q1<br />Goal is to be between .5 and 1. If you are greater than 1, you are not spending enough. Less than .5, too much.<br />
  38. “CAC Ratio” (6+ months of spend)<br />
  39. That’s great ratio<br />
  40. …didn’t have enough data<br />
  41. “But wait, that’s not an answer…”<br />True, but: “teach a man to fish…”<br />Most VCs like 10-12 months APRU for CPA assuming LTV is at least twice CPA<br />Bootstrapping 1-6 months likely better<br />How 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.<br />
  42. Questions?<br />@mikemcderment, mike@freshbooks.com<br />PS – WE ARE HIRING!!!!<br />

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