Mike McDerment – Co-Founder and CEO discusses metrics for measuring customer acquisition costs
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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
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Mike McDerment – Co-Founder and CEO discusses metrics for measuring customer acquisition costs
- 1. @MikeMcDerment – Co-Founder and CEO July 15, 2011 – #startupfestival
- 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.
- 7. The Shape of Things Quantitative 3 million users 75+ in Toronto $4+ Billion in 2010 3.5 years in a basement Qualitative The leading in online invoicing network Accounting for professionals who get paid for their time and expertise, and 95% of accounting is invoicing Anyone can get a free account at FreshBooks.com
- 8. STORY: “So there I was…lost”
- 9. Strong foundation Web app metrics 101.
- 10. Average Revenue Per User (ARPU) monthly recurring revenue # paying customers Q: “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 customers Q: “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 customers Q: “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 months Q: “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 Business Let’s meet it.
- 15. The good You’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 – 100/10/1 1 paying
- 16. Yea, it’s time for a fist pump
- 17. The bad Growth has slowed.
- 18. The ugly Someone 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 problem 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. How do you manage this? You need to know how much you should spend to acquire a customer.
- 30. Three answers For three stages of your business.
- 31. “Months to Payback” (0-6 mo) CPA ARPU Ideally 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) CPA LTV The 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) * 4 Marketing Spend Q1 Goal 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)
- 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 CPA Bootstrapping 1-6 months likely better 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.
- 42. Questions? @mikemcderment, mike@freshbooks.com PS – WE ARE HIRING!!!!