Episode 362 | Calculating Lifetime Value (Not as Boring as it Sounds)

Show Notes

In this episode of Startups For The Rest Of Us, Rob and Mike talk about calculating lifetime value. They discuss how its done with one time versus recurring revenue and funded versus bootstrapped payback time.

Items mentioned in this episode:

Transcript

Rob: In this episode of the Startups For The Rest Of Us, Mike and I dive deep into the riveting conversation topic of calculating lifetime value. Seriously, it’s pretty interesting. This is Startups For The Rest Of Us Episode 362.

Welcome to Startups For The Rest Of Us, the podcast that helps developers, designers and entrepreneurs be awesome at building, launching and growing software products. Whether you’ve built your first product, or you’re just thinking about it. I’m Rob.

Mike: And I’m Mike.

Rob: And we’re here to share our experiences to help you avoid the same mistakes we’ve made. I want to kick today’s episode off with a question, Mike. What movie would be greatly improved if it was made into a musical?

Mike: If it was made into a musical. Hmm, that’s a tough one. My guess would be the old, black and white Frankenstein.

Rob: Okay. Yeah, I guess it wasn’t a musical but it was turned into a comedy by, what is his name?

Mike: Mel Brooks.

Rob: Yes! Young Frankenstein, is that what it’s called? But yeah, I could see them doing a musical as well.

Mike: Yep, definitely. Mel Brooks is on a couple of others that I think he turned into musicals as well.

Rob: I agree. There’s a lot of completely random questions that catch you off guard right at the start of the show.

Mike: I know. You come up with these things that are just totally off the wall and you don’t even run by me first.

Rob: It’s your new favorite thing.

Mike: My new favorite thing.

Rob: Other than answering ridiculous questions at the top of the show, what’s going on with you?

Mike: I wanted to give a quick shout out here to Tyler Tringas. We’ll link this up in the show notes, but he has a blog article that he posted talking about how he sold his bootstrap SaaS business from somebody that he met at MicroConf. Just wanted to say great job to Tyler and mention it so that people can go over and read the whole story. It’s a really lengthy article on it and where the product started, it’s called Store Mapper. It allows people to embed a map of their stores on their websites, sound like a pretty straight forward thing but he couldn’t find anything out there that did something for his customers so he built it. Fast forward a couple of years and he was able to sell it. I just want to say congratulations.

Rob: Yeah, congrats, man. I read the post, it was really in depth and really interesting and it’s posted over there on indiehackers.com.

Mike: I also wanted to read a quick listener email to us. This is from Zoren, he says, “Love the show, great tips. We’re busting our ass trying to grow [00:02:28] right now, and your show’s been great insight. Keep up the good work and maybe one day we’ll be on your show to tell everyone our story.” Really appreciate that, Zoren.

Rob: Yeah, thanks. For me this week, we actually launched a pretty big feature that took a while. It actually didn’t take that too long to build, it’s a long time to get approved and it’s an integration with Facebook custom audiences in Drip. It means that you can, in essence, have a native action right there in Drip, so that if someone’s at a certain point in the workflow or you can even just have a global automation rule that says when this happens, when anything happens, if it a tag’s applied to this person or if the lead’s core goes above something or they start checking out and they never complete their purchase, then you can just put them into a Facebook custom audience and you can then assess and retarget them when they’re on Facebook and then if they do buy, then you can pull them out of that audience.

It’s a pretty sophisticated, powerful feature, even though it was not that hard to build, but there’s a lot of possibilities to this and there are some use cases that are going live on drip.com right now. It’s a really impactful feature that took a month from the time we were code complete, about a month in order to actually get approval from Facebook because they want you to really have tested it out and you have to jump through some hoops and everything, which are warranted, I will admit. That’s been the habub this week.

Mike: That’s interesting. I’m on the other side of the spectrum with Google where I talked last week about how I was finishing up the [OWAF 00:03:59] authentication for Google to get mailboxes integrated into Bluetick. Because of the level of access that I’m asking for inside of people’s mailboxes, they have to basically fill out this form and they’re like you have to justify why you want this or why you need this level of access, I’m like, oh great. I went through and they’re like oh, it will take a minimum of three to seven days in order to get it approved, and of course I went through the process and I was like, oh, this is going to suck. Three hours after I submitted it, they said, sure, you’re good to go.

Rob: Oh, that’s cool. Good for them then, for keeping that queue short. You totally understand why they do that, right?

Mike: Oh, totally, definitely. That wasn’t the issue. The issue is I didn’t look to see that that was what I was going to need to do. I don’t know, I think the part of it might have just been the stuff that I was asking for and why and the documentation that I had to send in. I was pretty detailed in what I was requesting and why it needed to be done. Though I suppose it paid off.

Rob: Yeah, that makes sense. The other thing for me is the iTunes reviews, we now have 544 worldwide reviews in iTunes. Our most recent one that comes from Honey Mora from Canada and his subject line is: Ton of practical tips and lessons. He says, “I’ve been a listener for about four years now. I love what Rob and Mike share each week, I’m hooked. I’ve been following Rob’s Stewardship Approach since launching several premium WordPress plugins first and a few months back launching my first SaaS. Thank you for all you guys do.” He’s at repurpose.io.

Thanks for that review, Honey. We would appreciate if you’ve never given us a review, hop into Stitcher, Downcast, Overcast, whatever it is you use, or iTunes and click that five star button. You don’t even need an entire review or shout out or anything like that. Just clicking that five star helps keep us motivated, it helps us rise to the top of the rankings, helps us get more listeners, and the more listeners we have, the more we can do at the show, frankly, and it motivates us to keep putting out episodes.

Mike: The only other thing I have is I am speaking at the Cold Email Success Summit next week. We’ll link that up in the show notes but it’s not really quite an online conference but it’s an online summit where you can go and there are 20 different speakers that they’ve pulled from the world of email marketing to talk about various topics and give their insights and discuss what’s working and what’s not and give you actionable tips and things that you can do to help with your email marketing reference.

Rob: That’s cool. We’ll include a link in the show notes to that.

Mike: Awesome. What are we talking about this week?

Rob: This week, I outlined an entire episode around a single listener question from Andrea [00:06:28]. If you have a question that you think could make an interesting or even just a topic suggestion that you think could make an interesting episode for us, you can email that to us at questions@startupsfortherestofus.com or feel free to call it into our voicemail line at 888-801-9690.

Andrea says, “Hey there, thanks for an amazing podcast. I have a question for you. A few times in the show, you’ve talked about customer lifetime value and how important it is for knowing how much to spend on user acquisition. That makes a lot of sense, but how do you calculate your CLV (Customer Lifetime Value)? I’ve seen some examples on how other people calculate it, it would be interesting to hear your perspective on how to do it for SaaS. Thanks.”

And just one quick note, I am going to use LTV for lifetime value. He calls it CLV, some people call it CLV, some people call it LTV, it doesn’t matter what you call it, it is the total amount of revenue that you are going to get on average from each of your customers. The reason that this is helpful to know is it can dictate the whole slew of things. The higher it gets in general, the healthier your business is, the more you can spend to acquire customers, and even the more you can spend to support them, to create educational material for them, more you can spend on feature development. This value grows and your customer count grows, those are the two things that multiply by each other.

If you make about having 500 customers with a total lifetime value of $100, that’s only $50,000. That’s the lifetime value of all those customers that they’re going to pay you the entire time that they are customers of yours. Now if they are a one time customer, you get that all upfront, meaning one time purchase. If it’s a recurring purchase, you will get that overtime but that’s not a ton of money to hire people, pay for server hosting, pay for whatever other – there are a ton of expenses; pay yourself, run ads, do all the stuff you need to do. Whereas if you take the same $500 customers and you just multiply that by 10, let’s say a reasonable lifetime value of $1,000, now we’re talking about $500,000. It’s a whole different ball game of how you can treat your customers.

We’re going to dive in today, we’re going to talk quickly about how to calculate it, and I have just a very simple and very streamlined way to do it. There are different ways to do it, there is more specific, in detail, and advance ways to do it, but especially for a podcast, we don’t want us just reading off a bunch of equations. We can link out to some more advanced stuff, there are some great stuff from Tom Tungus, there’s someone who dives into this really deep and they have five different formulas and it’s the simple one and then they add another thing and then you have the cost of goods sold and then you add this, and the that. It gets super complicated by the end, but for now, we will just dive at a more of an entry level but then I really want to talk, we are going to get in deep into some rules of thumb that I have for payback time on advertising and then run through a couple of examples that are very close to real world apps just so you can get a better sense of why all this matters.

To kick us off, if you think about having a one time purchase business, like a WordPress plugin, or even DotNetInvoice, which is an old product of mine versus a recurring business, there’s a big difference on how you calculate lifetime value. We aren’t going to spend a ton of time on one time purchases, it’s obvious if you are going to do a really simplified version of calculating it, you’re just going to look at your purchase price. To be honest, if you have multiple purchase prices, let’s say you have a $50, $100, $150, and again, these are one time sales, you should know at this point what you breakdown has been historically. You should be able to go back pretty easily, do an export out of Stripe and just basically, you want the average of all the purchases that people have made and that’s what I would start with.

As you get more advanced, you might have upsells, you might have cross sells, maybe there’s an annual payment that comes once a year, there’s all that stuff that you can add in later but this is a five second estimate of what people will pay you on a one time basis. An example, DotNetInvoice is a one time sale downloadable invoicing software, the purchase price was $329, and then we had a bunch of different add ons and we could do the math, it was 20% of people who bought DotNetInvoice bought one of the add ons and the average price of the add ons was $99, you can do that math and then 20% times the 99 is another $29, so it actually raises the lifetime value up to $349, give or take. What you’ll notice with that example is if I had just said DotNetInvoice is $329, and that’s the number I’m going to go with right off the cuff just so I would have it, it’s actually pretty close to the ultimate value.

That’s something I want you to think about is, ultimately, you’ll want to get down to the dollar because once you’re paying for ads and you’re running big time marketing spend, it does matter. But in the early days, when you’re just trying to get a sanity check on things or just trying to get an idea of how much someone is worth starting with one time sale, starting with the purchase price, that’s a fine way to do it especially if you’re prelaunch because you’re not going to have all the numbers that I just threw out right of who’s going to purchase what of which tier, just make a judgment call. If you’re one purchase price, use that. If you have three tiers, I would take the average of the bottom two. An example of the $50, $100, $150, I would take the average of the $50 and $100 and I would obviously say I have $75. That’s the lifetime value I would have going into a one time purchase business. Next we’ll dive into how to calculate it for recurring.

Mike: I think the analogy I might try to draw between calculating the lifetime value and how it relates to your business is that when you’re looking at this, you would think that calculating lifetime value is really straight forward and easy as okay, how much money you’re going to make per customer, but once you start digging into the details as Rob illustrated, if you get into things like cross sells and upsells, those things start to change what your lifetime value actually looks like. It’s very easy when it’s just a flat number and it’s one time payment but anything else, let’s say that you’re paying affiliates, that eats into whatever that margin is. If you’re doing cross sells, or upsells, maybe it adds 20% to the revenue but only for 50% of the customers, then it starts to get complicated.

It’s almost like the very simplistic analogy is okay, this is how you calculate gravity but depending on how close you are to center of gravity or how far away you are, there’s all these other little things that come into play. Then there’s air friction and lots of other stuff. It starts to get more complicated, and there are other things that you can add in that may make a difference or you may decide to gloss over them just based on what it is that you’re trying to get at and why you’re trying to get at that number. If it’s try to maintain profitability or optimize your profitability, you might dig in and say yes, these things actually matter to the calculation. In other cases you may just say, I don’t care, I just need a back of the envelope number so that I know kind of what I’m shooting for. It really depends on where you are in the process of trying to figure out how much money each customer is making you.

Rob: Let’s flip over to recurring which is what we’ll focus on for the rest of the episode. Obviously this works with SaaS, but also works for membership sites, something where someone pays you on a recurring basis. This can be used for quarterly or annual or whatever. We’re going to look at monthly because it makes the most sense for what we’re talking about.

To calculate lifetime value, the simplest formula is to take your average monthly revenue per user, per customer and you divide it by your churn percentage. If your average revenue per customer per month is $30 and you have a 10% monthly churn rate, then you’d have $30 over 0.1 and that means your lifetime value is $300. It’s not complicated, it’s just hard to explain on a podcast but basically your average customer lifetime, how many months they stick with you is one divided by churn. Again, it would be 1 over 0.1, so that would give you 10, and then your lifetime value is your average monthly revenue per user which is also called ARPU (Average Revenue Per User). ARPU times the amount of moths they stick around times the lifetime. The amount of months they stick around is 10 and the ARPU in this case is 30. 30 times 10 is 300.

Again, the simple way to do it, we don’t really need to derive it here like I’ve just done but it’s basically your average monthly revenue per user divided by your churn percentage. There is a more advanced way to do it, we’ll link over to profit wealth. We want to get down to the penny and how all these things come into it. But what’s interesting is you think about HitTail where an earlier SaaS app I had, had pricing tiers that were 10, 20, 40 and 80 and then it went up from there if you got really big. If I would to look at a SaaS app that had pricing tiers of 10, 20, 40 and 80, this is actually similar to what HitTail had. Those were the pricing tiers for that. You could take a reasonable guess. Typically, when I’m looking at a SaaS app, if I’m going to guess what the average revenue per user is, it tends to be one from the bottom. In this case 10, 20, 40, 80, I would from an outside perspective say it’s probably around $20. Maybe it’s $22, maybe it’s $25, something without expansion revenue specifically.

Expansion revenue is like what Drip or people as the ad subscribers goes up quickly, the costs. But in an app like HitTail or app where people choose a tier and stay on it, it’s going to tend to be somewhere on the lower end. If your average monthly revenue per user is $20, you can see how driving churn down drives this lifetime value up. If your churn is 10%, which is quite high, you only have $200 total from the lifetime. But if you cut that in half down to 5%, then you’re looking at to having $400 that you’re essentially grossing from that customer over their lifetime.

Mike: The thing to keep in mind with that churn rate is that as that churn rate goes up, it dramatically starts to affect the lifetime value. If you think about it strictly from a percentage, I think it was 5% churn is the example that I’ve used in a MicroConf talk in the past where if you have 5% churn, then on a year over year basis, you’re churning over 60% of your customer base and it actually gets a lot worse than that because it is 5% per month, not necessarily the total of the entire time because you have to calculate it at each point where somebody could potentially churn out of the application. That 5%, great number to have but you really want it over 5% over the course of the year, not 5% per month. You can get in trouble if your churn rate starts to climb and you end up churning over most of your customers on a yearly basis. That’s a really bad position to be in.

Rob: And I’ll just throw in this little tid bit here, this isn’t even in the outline but it’s interesting, you can get to the point where you have net negative churn, your churn is actually negative because your existing customers are expanding. It’s called expansion revenue like I just talked about. In a business where it is based on something that is constantly growing, let’s say imagine Amazon EC2, Amazon S3.

Mike: I think Stripe would be a good example.

Rob: Stripe’s a good example. Yup.

Mike: Stripe takes a percentage of the purchase price for their customers but as those customers grow and they sell more, Stripe grows their own revenue because of that.

Rob: Right. If they have a bunch of people signing up and some are churning but the ones who are there are growing 10% per month each, just as an example, you can imagine that their churn is negative and that’s crazy multiplier, crazy multiplier on lifetime value.

Why are we even thinking about lifetime value, why do you care? The big deal is lifetime value gives you an idea of what you can spend to support and to build the product and they acquire, but there’s even more interesting aspect that we can drill into and it’s not directly lifetime value but it’s based around payback time, payback duration.

Let’s say that there’s this common mistake of beginning startup founders, thinking that they can take their entire lifetime value and they can spend that to acquire a customer. If you had $500 LTV, I could go out and spend $500 to acquire that customer. That is far from the truth. There are three major reasons why that is, first one is that you’re going to have expenses, you’re going to be paying employees, you’re going to be paying yourself, you’re going to have hosting, you’re going to have Stripe cost, payment processing, there are a ton of expenses that are out there. When you are small you can get those small, but especially as you get big, your expenses will become a larger and larger percentage of that lifetime value. That’s the first thing to keep in mind. That’s where if you want to do the exhaustive LTV calculation where it’s net LTV, you can start deducting out expenses on a per customer basis, just takes a lot longer. When you’re small, it isn’t such a big factor, I wouldn’t necessarily do that earlier on.

Second thing is you don’t want to spend $500 to acquire a customer who’s going to bring you $500 because you want to make some type of profit, you want to have a business that actually generates some type of money that you put in your pocket. The third one is that you are likely to run out of cash. Imagine if you have a really long customer lifetime, people just stick around forever. Let’s say they stick around for 50 months and you get $10 a month from them. The lifetime value would be $500. But if you spend $500 to acquire them, or even if you spend $300 or $400, you don’t get payback for 30-40 months and unless you have a massive pile of cash, you are going to get killed. Frankly, you’re going to go out of business, it’s what’s going to happen, you’re going to run out of cash.

There is this whole concept of payback duration or payback time that doesn’t go all the way up to the LTV, it only goes for certain number of months to the point where you have enough cash to cover it and basically enough comfort to cover it. So Mike, you want to talk a little bit about these rules of thumb that I’ve used over the years for a funded company’s payback time and bootstrapped company payback time.

Mike: Yeah. The difference between them is striking because with a funded company, they have money to burn because they’ve gotten money from their investors and the whole purpose of that money is to not just find the customer but to also leverage the channels that are going to get them more customers. Not necessarily as concerned about profit. They can burn through the money that they are getting and it doesn’t matter as much to them, they’re really trying to spend that money in order to identify the channel that’s going to get them the most customers as quick as possible and then they’re going to use that to start optimizing what the revenue is. Sometimes they don’t even do that, sometimes they don’t care about revenue at that stage at all, they’re really just looking to get users.

If they are looking for a return on their investment though, they’re typically looking at something less than a year because they have the money to burn and they have the money to invest in those channels and the purpose is to get that money in the door overtime so that when the year comes up, then they have the money back in the bank. As Rob had given the example, $10 a month over the course of 50 months, let’s say that it’s $100 a month over the course of 12 months. They want to get that return within a year.

With a bootstrap company, you really can’t do that. Most people do not have the runway in order to be able to make that happen. This is where people are really looking to get that payback within two, three, four months at the most. If you have more cash in the bank, you can stretch it out to six or seven but if you don’t, you really need that payback very quickly, maybe one or two months at the most. This is an area where if you’re selling annual plans, it can make a huge difference in your ability to leverage channels that are going to cost you a lot of money to acquire those customers because if you can sell an annual plan, you get all the money up front, you don’t have to wait for it to come in. Maybe not everybody signs up for an annual plan but if you can get a certain percentage of them to sign up for an annual plan, then that calculates into what your upfront revenue is and what your payback time is on average. It’s not going to say everybody’s going to pay back within this period of time, whether it’s three months or upfront. But you also want to make sure that you have the money in the bank to be able to reinvest in wherever the channel is that you’re finding that’s working.

Rob: Yup. I remember when I first started running ads with HitTail was Facebook ads and my payback time that I was looking for was I think two months or three months because I didn’t have a lot of cash and then I did some deals. I did an AppSumo deal and I got $11,000 in cash from that and then I upped it to a four-month payback. And then I got even better at it, and I realized I wanted to spend more and grow faster so I went to five months and eventually I was at six months payback because I was comfortable with it and I had enough cash coming in from existing customer to cover that. It’s a really interesting thing to see how comfortable you are and how much cash you have in the bank. I would say as a bootstrapped founder like you said, somewhere between two and four months is where most people typically start.

One other thing I wanted to point out is there is there’s this rule of thumb with lifetime value to CAC ratio. CAC is Cost to Acquire the Customer. LTV to CAC ratio, in general is in funded circles but they say it should be about 3:1. Meaning if your LTV is $1,200 that your cost to acquire them should be right about $400. If you go over $400, let’s say you’re at $800, it means you’re spending too much to acquire customers and actually there are funded companies that do this because they’re trying to go after growth and they’re nowhere near profitable. These are the kinds of the companies that I think that a lot of us roll our eyes at because it’s like yes, you’re growing and yes you’re bragging about how you’re killing it but you’re never going to make money until you prove that you could acquire customers for less.

And then in the funded circles, if they say you’re acquiring customer’s, lifetime value is $400 and you’re only spending $100 or $200, then you’re actually missing out on growth. They’re not saying it should be below 3:1, they’re saying it should be at 3:1 or as close as you can get there. Personally, when I’ve done this, I have often not spent 3:1, I have often done below that like 4:1 or 5:1 because the rest is profit. If you are a bootstrap founder, you have to think about that. The less you spend, the slower you will grow but the more profit you will have. You want to balance that, you want to grow really fast, you can obviously have that ratio be even higher.

For the last few minutes of today’s podcast, I wanted to run through a couple examples of some real numbers to wrap your head around what it actually looks like to run ads and to think about payback time. What I’m saying is, as reasonable clickthrough rates and reasonable ads cost at different times, you have to find the right ad network to be able to justify some of these but let’s go back to lower price SaaS, which is $10, $20, $40 and $80 a month with average earn per user at $20 point, churn is 10% a month just to make it simple. Obviously you’d want to get lower than that but it’s easy math, that makes your lifetime value of $200.

Interesting thing, we’re just going to look at two scenarios, back in the day, when I was running Facebook ads, this is 2012, I was getting clicks for $0.30, that is not impossible to do at this point but there are ad networks still today where you could find those. At the time, Facebook was a [00:24:50] ad network and when Google AdWords was [00:24:53], it was cheap clicks that Jason Cohen and talked about getting $0.05 clicks when he first started the SmartBear. You have to go outside these mainstream areas because they are overcrowded with highly funded. It’s where everyone’s playing and so the clicks are more expensive, but if you can find networks or other opportunities for getting inexpensive clicks, be creative with it, that’s where you can get these $0.30, $0.40, $0.50 clicks.

Let’s say we were getting ad clicks at $0.30 piece, let’s say 2% of the people who came to our website converted the trial, that number is high but for a lower priced SaaS app, that’s really curiosity based, it’s possible although we’ll look at the next example as I think is probably a little more realistic these days. 2% conversion to trial and then half of your folks, this is credit card upfront, 50% convert from trial to paid. With that, if you do the math, $0.30, 2%, 50%, it takes you out to $30 to acquire each customer and you would get a payback in 1 1/2 months. You would want to run that all day and all night and you would actually want to pay more per click to drive more traffic faster. I would consider doubling one of those numbers, if you literally were getting 2% conversion rate to trial, that is a pretty hefty rate.

The second example is pretty much the same example, but I doubled the cost from $0.30 to $0.60 and then I cut the conversion to trial in half from 2% to 1%, which I’ll admit is a bit realistic. It’s $0.60 per click and 1% converting to trial and half converting to paid, that gives us a cost to acquire of $120 and that’s a 6 month payback. Realize that if you’re driving 100 customers new customers a month from this ad approach, that’s going to be $12,000 in cash that you’re going to need to do it. It puts into perspective, those are just loose numbers, if you add a higher average revenue per user, not uncommon to have $80 or $100 average revenue per user, then these numbers become very different. You can pay a lot more per click. If you pay a lot more per click, your conversion trial’s probably also going to be lower with a higher price point thing. These things will have to shake out.

But this is the analysis that I have done many times when I’m thinking about are we ready to start running ads and is there a scenario under which this is feasible and then we can reasonably grow a business using ads because every business is not cut out to do pay acquisition.

Mike: I think the most important piece to keep in mind when you’re looking at the numbers and try to figure out whether or not it makes sense to go after a particular advertising network is how quickly you’re going to get that return on your investment back. Because if it is six months, and if it’s costing you $10,000 to pump into that, you’re not going to see that $10,000 that you paid this month until six months out. In order to get yourself to that six month period or get yourself through it, it’s going to cost you $50,000, $60,000 and yes it decreases as you go on because you’re getting more money from the customers in the third month than you were in the first month, but the reality is you need a lot of money to make something like that work. That’s why funded companies can do it and bootstrapped companies really don’t have the ability to. Again, that’s also why the annual plans and getting the money upfront helps so much with being able to grow the business in an advertising space because you get that money and you can spend it, and in fact, almost gives you negative churn as a result of that.

Jason Cohen has talked about that at MicroConf. I think there’s a talk that you can find on the MicroConf website under the videos section from 2013 or so where he talks about exactly that.

Rob: Yeah. To be honest, even though we’ve been talking for more than half an hour, this really is high level introductory. I say introductory and I hope it was easy to understand but I will say that the kind of rules of thumb that I’ve thrown out here are from years and years of experience running this across multiple SaaS apps, many, many small businesses and this is the way that I think about paid acquisition as I’m diving into it. I was trying to think of any networks these days, like ad networks in particular, that would probably have tripleclicks, I think Twitter is one, and I think Instagram is another. I don’t know if Instagram’s up to Facebook cost yet, I know Instagram’s a pain, it’s not necessarily B2B, it’s got to be visual and all that stuff. Those are the two networks I think have a decent reach that could potentially have cheap clicks. I don’t think Facebook does it these days anymore, last time I ran ads, the cheapest I was getting was the $0.60 clicks but a lot of them were mostly between $0.60 and $1, I think it’s even higher than that now.

That is why these businesses like Facebook and Google mint money and why they’re worth so much, why the stock market values them so high because they know that overtime, if they’re successful and if they figure out their ad tech, which is pretty hard to build, if they figure that out, it’s just going to grow overtime and that’s good for them. It’s not necessarily good for the advertisers in the sense of it becomes more and more expensive to run ads.

Mike: I think the one wrench to throw in this entire thing is that even if you’re paying money to get those people to your site, there is the chance that they may not convert right away and they may just end up on your email list and you may need to figure out, okay, it cost me this much to get somebody onto my email list, but later on did they convert into a customer and that’s where you start getting into a really advanced analysis of what your sales funnel looks like. Maybe some people convert, maybe some people never convert or just unsubscribe and they will never become a customer but those are the places where it becomes very difficult to start making some of these calculations because then it’s not as straightforward as I paid $1 for this ad and 1% of the people converted. It’s probably a little bit more than 1% but it’s hard to know overtime, then you end up with problems trying to figure out what your attribution looks like. Attribution is an entirely different world, we could probably spend an entire episode on trying to figure out attribution but it’s complicated to say the least. I’ve talked to a lot of people who said trying to figure out what your attribution looks like is very, very difficult.

Rob: Yup. This is all good points. It’s not necessarily a purchase right off the bat from an ad, especially not from Facebook. They’ve tweaked their algorithms so actually they made that harder. If you look at someone like Brennan Dunn with       Double Your Freelancing, he talks about every email subscriber he gets is worth x dollars and I forget what the number is. I imagine he’s been public with it, but it’s something like $10 or $11. He knows that if he runs Facebook ads and can just get someone to opt in, that down the line, if he does all the math, on average, it’s about $10 or $11 based on how much a bunch of people don’t buy and the ones that do buy these many things from him.

It’s interesting, if you can run ads and getting someone on the email list is not that hard, depends on the list, depends on the time and clicks and all the stuff but I’ve done it pretty consistently for between around $1 at the low end up to maybe $5, $6 on the high end. What I was just talking about, it’d be pretty interesting, you could see how you could mint money with the business model that makes money based on people being on an email list.

Mike: I think that sounds like a good place to wrap it up. If you have a question for us, you can call it into our voicemail number at 1-888-801-9690 or you could email it to us at questions@startupsfortherestofus.com. Our theme music is an excerpt from We’re Outta Control by MoOt used under Creative Commons. Subscribe to us in iTunes by searching for Startups and visit startupsfortherestofus.com for a full transcript of each episode. Thanks for listening, we’ll see you next time.

 

 

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