A Smart Bear: Startups + Marketing + Geekery - Latest Comments in Bootstrapped CPC rule of thumb: MRR/25

Re: Bootstrapped CPC rule of thumb: MRR/25

Dan Andrews — Wed, 04 Sep 2019 14:22:42 -0000

Still reading 6 years later... :)

Re: Bootstrapped CPC rule of thumb: MRR/25

Jason Cohen — Sun, 23 Jun 2013 15:42:15 -0000

I don't think there's a middle ground. They have very different goals, so they often should make very different decisions.

Averaging the two doesn't automatically make sense. Rather, decide what your personal goal is, exactly, then make decisions which are consistent with maximizing the chance you can be successful with those goals.

Re: Bootstrapped CPC rule of thumb: MRR/25

Shola Abidoye — Sun, 23 Jun 2013 14:42:33 -0000

Thanks, Jason! I think your perspective on these issues is so...well-balanced. That's the only word (phrase) I can think of. You understand the mind of the self-funded startup. But you don't look upon funding as a kiss of death either. IMHO, both communities (funded and self-funded) could do a better job of learning from one another. This is slightly tangential but....what can be done to highlight the "middle ground"?

Re: Bootstrapped CPC rule of thumb: MRR/25

Jason Cohen — Sat, 22 Jun 2013 19:51:03 -0000

Sure, and I said the same thing in my article.

It depends completely on the trade-off you can make between higher growth or higher cash spend. Skok is writing for *funded* startups, whereas the guidelines in this article is for *bootstrapped* startups.

Funded startups should trade higher short-term cash-burn for higher growth-rate, because they aspire to be huge, and you can't get huge (and stave off competition) without high growth (nowadays, and in tech).

Re: Bootstrapped CPC rule of thumb: MRR/25

Shola Abidoye — Sat, 22 Jun 2013 19:48:16 -0000

This is a great post. David Skok talks about a CAC/3 ratio - any thoughts? Here's his piece ( http://www.forentrepreneurs... Startup Killer: the Cost of Customer Acquisition )

Re: Bootstrapped CPC rule of thumb: MRR/25

Jason Cohen — Sat, 11 May 2013 12:18:07 -0000

LTV/3 probably does make sense. Really, you need to model your business yourself and see what ratio results in a business with the kind of cash-flow you want at a reasonably small scale.

Re: Bootstrapped CPC rule of thumb: MRR/25

Alex Papworth — Sat, 11 May 2013 04:52:01 -0000

This is PERFECT timing for me so thankyou Jason. I'm doing some customer validation experiments at the moment with facebook advertising.
This gives me a great framework for verifying my back of fag (cigarette) packet calculations.
Perhaps more importantly, I can compare each of the steps for my scenario and adjust the final costs.
My concept is community professional coaching so much of the costs (in theory) are borne by the community members making contributions and sharing expertise.
So. .. I'm considering whether I can justify increasing the ratio. For example, CAC =LTV/3.
What do you think?

As further clarification , although currently boot strapped, I have another funding source which allows me to run small non profit generating experiments.

Re: Bootstrapped CPC rule of thumb: MRR/25

Jason Cohen — Thu, 02 May 2013 12:55:45 -0000

1) If it's impossible for them to get a refund, for example a pro-rated return if they cancel in 3 months, then yes you know LTV = MRR x 24, or even better if some of them stay beyond that point. Indeed, companies like WP Engine and Rackspace have more like MRR x 48 or MRR x 60 because of low cancellation rates due to service and the nature of the customers. Of course in the presence of data you should certainly adjust that calculation.

2) In a recurring-revenue company, CAC is the sales cost only, which means sales, marketing, adverts -- the costs incurred one time in order to get the sale. What you're referring to is what's known as "cost of revenue," meaning costs associated with actually serving the revenue. In the case of my company WP Engine, that's all server and support costs. Those are also VERY important, and are the cost components of GPM.

In the way you described it, you're talking about a non-recurring-revenue business. In that case, all costs of revenue and costs of sale should be bundled together as "COGS" (cost of goods sold). That math is actually much easier than the recurring-revenue model, because you know the totality of the revenue and of those marginal costs, so you can target e.g. COGS = LTV / 3 like we did at ITW or (hopefully) something stronger than that.

Re: Bootstrapped CPC rule of thumb: MRR/25

Marco — Thu, 02 May 2013 09:53:30 -0000

Thanks for sharing such an interesting post, couple of questions:

1) let's say they pay in advaance for 24 months could we say:

LTV = MRR x 24

2) Is CAC basically the Ad cost, or is the total cost. For instance: let's say I buy form a vendor a domain a 1$, I resell it at 5$, and doing Ads to get this order costed me 2$. Is CAC just these 2$ or it's 3$ (2$ + 1$ of the cost of the domain I resell)

Re: Bootstrapped CPC rule of thumb: MRR/25

jon pittaluga — Wed, 01 May 2013 06:25:27 -0000

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?

Re: Bootstrapped CPC rule of thumb: MRR/25

Anon E. Mouse — Tue, 30 Apr 2013 20:56:21 -0000

Thanks for the reply Jason. Much appreciated :)

Re: Bootstrapped CPC rule of thumb: MRR/25

Jason Cohen — Tue, 30 Apr 2013 16:53:51 -0000

Yes, and I agree even LTV/3 is reasonable. The more cash you have on hand the lower the denominator can be.

Re: Bootstrapped CPC rule of thumb: MRR/25

Andy Brice — Tue, 30 Apr 2013 15:26:55 -0000

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.

Re: Bootstrapped CPC rule of thumb: MRR/25

Jason Cohen — Tue, 30 Apr 2013 12:30:21 -0000

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.

Re: Bootstrapped CPC rule of thumb: MRR/25

Jason Cohen — Tue, 30 Apr 2013 12:28:52 -0000

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.

Re: Bootstrapped CPC rule of thumb: MRR/25

Jason Cohen — Tue, 30 Apr 2013 12:27:07 -0000

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.

Re: Bootstrapped CPC rule of thumb: MRR/25

Jan Lukacs — Tue, 30 Apr 2013 08:20:51 -0000

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.

Re: Bootstrapped CPC rule of thumb: MRR/25

jon pittaluga — Tue, 30 Apr 2013 06:55:41 -0000

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

Re: Bootstrapped CPC rule of thumb: MRR/25

Anon E. Mouse — Mon, 29 Apr 2013 22:12:14 -0000

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?

Re: Bootstrapped CPC rule of thumb: MRR/25

Luke — Mon, 29 Apr 2013 21:16:45 -0000

Fantastic post Jason, much appreciated *bows* :)

Re: Bootstrapped CPC rule of thumb: MRR/25

Jason Cohen — Mon, 29 Apr 2013 16:50:57 -0000

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.

Re: Bootstrapped CPC rule of thumb: MRR/25

Jason Cohen — Mon, 29 Apr 2013 16:47:21 -0000

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.

Re: Bootstrapped CPC rule of thumb: MRR/25

BillSeitz — Mon, 29 Apr 2013 16:04:49 -0000

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!

Re: Bootstrapped CPC rule of thumb: MRR/25

BillSeitz — Mon, 29 Apr 2013 16:00:47 -0000

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.

Re: Bootstrapped CPC rule of thumb: MRR/25

Jason Cohen — Mon, 29 Apr 2013 14:38:54 -0000

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.