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

@MikeMcDerment – Co-Founder and CEO,[object Object],July 15, 2011 – #startupfestival,[object Object]

Mike McDermentCo-Founder, CEO,[object Object]

How much…,[object Object],Should you spend to get a new customer?,[object Object]

FreshBooks helps businesses get paid painlessly, ,[object Object],so they can focus on what they love to do.,[object Object]

Users since 2004…,[object Object]

Service driven culture,[object Object]

The Shape of Things,[object Object],Quantitative,[object Object],3 million users ,[object Object],75+ in Toronto,[object Object],$4+ Billion in 2010,[object Object],3.5 years in a basement,[object Object],Qualitative,[object Object],The leading in online invoicing network,[object Object],Accounting for professionals who get paid for their time and expertise, and 95% of accounting is invoicing,[object Object],Anyone can get a free account at FreshBooks.com,[object Object]

STORY: “So there I was…lost”,[object Object]

Strong foundation,[object Object],Web app metrics 101.,[object Object]

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

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

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

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

Your Business,[object Object],Let’s meet it.,[object Object]

The good,[object Object],You’ve built the world’s greatest app!,[object Object],People love it and they pay you $50 on average when they sign up!,[object Object],You have a model business model – 100/10/1,[object Object],1 paying,[object Object]

Yea, it’s time for a fist pump,[object Object]

The bad,[object Object],Growth has slowed.,[object Object]

The ugly,[object Object],Someone got a bright idea - “let’s do some marketing!”,[object Object]

Let’s run a 6 month campaign,[object Object]

Let’s run a 6 month campaign!,[object Object]

CPA with trend line,[object Object]

Bank Balance, 1 new/month,[object Object]

The problem,[object Object],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. ,[object Object],How do you manage this? You need to know how much you should spend to acquire a customer.,[object Object]

Three answers,[object Object],For three stages of your business.,[object Object]

“Months to Payback” (0-6 mo),[object Object],CPA,[object Object],ARPU,[object Object],Ideally this number is 1, which means your customers pay for themselves in one month…but don’t hold your breath.,[object Object]

See the months grow,[object Object]

“Months to payback” (0-100),[object Object]

CPA as a % of LTV (100+ customers),[object Object],CPA,[object Object],LTV,[object Object],The goal is to have this percentage be as low as possible while achieving your desired growth rate.,[object Object]

See the CPA Grow,[object Object]

100+ : “CPA as a % of LTV”,[object Object]

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

“CAC Ratio” (6+ months of spend),[object Object]

That’s great ratio,[object Object]

…didn’t have enough data,[object Object]

“But wait, that’s not an answer…”,[object Object],True, but: “teach a man to fish…”,[object Object],Most VCs like 10-12 months APRU for CPA assuming LTV is at least twice CPA,[object Object],Bootstrapping 1-6 months likely better,[object Object],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.,[object Object]

Questions?,[object Object],@mikemcderment, mike@freshbooks.com,[object Object],PS – WE ARE HIRING!!!!,[object Object]

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

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

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