DISQUS

Andrew Chen (@andrew_chen): How to calculate cost-per-acquisition for startups relying on freemium, subscription, or virtual items biz models

  • spanky · 1 year ago
    Nicely put, Andrew. When it comes to acquisition, I typically put on my blinders - and ignore CTRs, CR, CPMs, CPCs, etc. and focus primarily on CPA and LTV when determining a thumbs up or down. Sometimes a source of traffic might have a really high CPM, yet has a higher CTR and CR, and leads to about the same CPA & LTV as other campaigns.

    Additionally, I calculate both a paid CPA and an overall CPA, and a viral ratio to get from one to the other. That ensures that the "viral angle" is built into the decision making. You then take that viral ratio and apply it to your campaign's paid CPA to get a campaign's overall CPA. And if the campaign's overall CPA is below LTV, then you're good-to-go.
  • Andrew Chen · 1 year ago
    One argument for looking at total impressions is that you get some branding value out of it, which helps you in longer-term LTVs - but I agree, looking at the CPA and LTV are probably worth focusing 99% of your attention on.

    Great point on the viral ratio and making that explicit!
  • spanky · 1 year ago
    Good point - don't want to forget about branding. Maybe I'm calling "viral factor" the wrong thing - it's actually the "freebie factor." If you calculate overall CPA as total media spend divided by total sign-ups, and back out a freebie factor - which includes direct viral, WOM, SEO, etc. - then it takes into account the branding value. It's just that it's really hard to measure and might take time to see. So a campaign that gets tons of impressions, but shows little direct LTV, might actually increase the freebie factor over time, and drive down overall CPA, which is the ultimate goal.
  • Glen Moriarty · 1 year ago
    Thanks for the overview. Very helpful information. We worked through a similar process with some MBA professors at William and Mary (part of a tech incubator) and they detailed much of what you detailed above. Nice work!
  • rtwomey · 1 year ago
    Great overview. I typically focus on two critical parts of this for my freemium service: breadth and conversion ratio. I first ensure that we have a steady flow of new users coming to our service and registering for the free account, then I make sure I'm spending enough time getting our conversion ratio as high as possible. It's death if either of these sides of the equation get out of balance.

    I've found that getting people to sign up for a free account is often the easy part: convincing enough people to sign up for the paid version is where the real work lies. :)
  • Andrew Chen · 1 year ago
    yep, and in fact an interesting calculation is figuring out how much it costs to support a free user, and count that as part of your "cost" for acquiring paying users. That way you can compare, apples-to-apples, against paying users acquired via advertising.
  • Eric Dewhirst · 1 year ago
    We try and tie it back to traffic source after we have acquired new members and monitor them over a month. We find that with Google we get targeted and committed members and from Facebook we get enthusiastic at first but they return rate falls off faster. To us it is the difference between people window shopping and those that come in the store to really check you out. A new member is really only worth it if they get engaged and it is that challenge to find them and give them what they are really looking for.

    As a side note - I really appreciate the quality of your posts - you say the tough things that I sometimes try to forget but need to stay on top of.

    Cheers - Eric
  • GJ · 1 year ago
    basic and brilliant
  • Vin · 1 year ago
    Greetings folks,

    I'm not from the Internet marketing space. I'm currently working on a start up that is internet based and am looking to learn a method of assuming (budgeting) a CPA for my business plan. Any help would be GREAT!!!

    Thanks,
    Vin
  • St. James · 8 months ago
    This guy's analysis is smoking hot!!!!
  • Jesse · 7 months ago
    "it is better to have a small user base of incredibly loyal followers, than it is to have an enormous user base of casual ones."
  • Dave Doctor · 2 months ago
    Thanks, very helpful. Your survey banner on the top right inspired me to research adding a fixed ad banner to my site. I found this helpful tutorial: http://designm.ag/tutorials/fixed-position-banner/. I also posted a request for code to place it on the far right and left, rather than the top or bottom.
  • dave doctor · 2 months ago
    Your twitter badge obscures the table.