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Andy Brice 2 days ago -
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Anon E. Mouse 2 days ago -
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Anon E. Mouse Jason Cohen a day ago
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This is a great post, Jason. I've worked with a lot of start-ups and one of the hardest things for them to do is predict any rational financial projections. As you pointed out, there just is no data. Every once in a while we get lucky and the company we are modeling on happens to release a bunch of early company data that helps, but generally no. These are some great benchmark numbers.
I have often done these sort of back of the envelope calculations for myself and others. The only number I wasn't sure about was what percentage of LTV to spend to get the sale. I tend to aim for somewhere around LTV/4. Intuitively it feels about right. So I was interested to see you came up with a similar ratio.
Yes, and I agree even LTV/3 is reasonable. The more cash you have on hand the lower the denominator can be.
Great post, Jason. I heard about it in Twitter: Good content always helps for buzz!
As other entrepreneurs, I´m not sure how to apply this bootstrapping model in my specific case. We´re working in a license revenue model, not SaaS.
How can we approach to the MRR formula? Is LFV=Price? How to define period of revenue like your "x20" proposal?
Best from Spain
It's actually even easier and more accurate when you're on a licensed model, because you don't have to guess at LTV. LTV is simply the price you charge. So if you need CAC = LTV / 3 or LTV / 5, then you just take it from there.
Thanks Jason. That´s exactly what I was thinking... The pity is: I can´t define final price without considering CAC and CPC in a SEM channel, and price can be a barrier for some early adopters.
But, who said bootstrapping was easy?
Incredibly easy-to-read article and very useful thanks. We've got a fairly mature (3+ years) SaaS product with around 400 customers. Our average customer lifespan is 377 days, and MRR is around $20.
Do you think we should focus on improving the product and raising that MRR, or growing?
Good question. That cancellation rate is dangerously high -- you won't be able to grow the business to an interesting size because you're losing so many customers. Of course increasing MRR is always wise, and since it's so low right now, it might be relatively easy to get it up to $30 or $40. That's wise to do as well, but you can't ignore the fact that half your customers aren't getting value after a year.
Thanks for the reply Jason. Much appreciated :)
Fantastic post Jason, much appreciated *bows* :)
The obvious-though-unstated corollary is that "consumer" level apps can't use advertising to grow, since $5/mo allows for only $0.20CPC of which there ain't none.
Yes I completely agree. In fact I just made this exact point in my Microconf keynote just hours ago. :-) This another reason why I don't think self-funded startups should sell a consumer product. B2B for the win.
In fact, you could go the other way and say: "if your niche has a price of x/click, you need to charge 25x/mo for your service".
Are you finding $2/click anywhere?
So if you have to pay $5/click for traffic, you need to charge $125/mo!
Another great point! Yes I like thinking about it the other direction.
Yes we can find $2/click (or equivalent) in lots of places.
Yes if you're unable to find something for less than $5/click, then you need something expensive -OR- you need to have a reason why you can relax one of the assumptions.
Example: Raise money because acquiring customers at all is more important than profitability. Then you're fine.
Example: Prove that you can convert at 5% instead of 1% because you're a badass at the landing page.
Example: Prove that you can convert at 5% instead of 1% because the lead-quality is 5x better than average.
Example: Have a pricing model where people naturally pay more over time, so you know you'll make it back eventually.
Example: You have a viral model so that one customer actually have a much higher LTV.
This is just the start of what is possible, but yes, unless you can demonstrate that one of the assumptions is wrong in your case, then $5 CPC requires big-time revenue on the other side to be profitable.
Can you share some of the places (that actually generate clicks) where you can find $2/click? In the niche in which we operate CPC in adwords has reached obscene prices.
Of course it varies by niche and marketing channel, so that's not really possible to answer in a vacuum. If you have low MRR and you're in an expensive, competitive space, that sounds like a business that's very hard to make work financially, and you'll probably need to get creative about how to get customers -- out-think instead of out-spend -- and of course it's unlikely to find such a method ever.
My startup definitely can't “spend as much as possible” but I do feel like there's some room in that first year to “spend to acquire the data.” What are your thoughts on spending a good amount on AdWords for a very limited amount of time (maybe 3 to 6 months) just to get some good SEO / conversion / target audience data?
I think if you're not spending $5k/mo you're probably not getting that much data, in fact. False-positives will overwhlem real results.
Unless you've raised money for the purpose of identifying new marketing channels as fast as possible, I think you should focus on getting real revenue from real signups rather than "just lean" in the generic Lean Startup manner.
Hi Jason,
I really like posts like this where there's lots of equations to help SaaS businesses. A SaaS publisher can apply that to their business to create a workable model and help them work out a plan.
Rgds,
Good point. This is exactly my problem with books like Lean Analytics. You need lots of data _first_ before you can do something useful with it. If you have 30 daily visitors to your site, you really can't measure things like conversion rate.
Incredibly helpful. Thanks, Jason.
