FOWA: How Much Should You Spend Marketing Your Startup?

Don’t waste your time and money on social media, says Mike McDerment, CEO and Co-founder of Freshbooks, the online invoicing service.

“E-mail is more effective than a tweet,” he believes.

For its subscription-based Web business, Freshbooks has had a lot more success with online advertising. And that success is  measurable by how much money you put into advertising to acquire customers and keep them. But those measurements are not so clear cut when it comes to determining how much you should be spending, and if you’re maximizing your potential.

In a great presentation at the Future of Web Apps in Las Vegas, McDerment walked through three different ways to measure your success with advertising, assuming you’re running a subscription-based SaaS business:

How many months does it take to get your money back? – This is a common Return on Investment (ROI) question. Ideally you want it to be just one month. But if a customer sticks around for a long time, you could spend more than just a month’s worth of earnings. This measurement gives you no information if you’re maximizing your growth potential.

How much should you spend for the lifetime value of a customer? – If you acquire a customer and they stick around for an average of 12 months, then the monthly subscription x 12 is their lifetime value. What percentage of that amount are you spending to acquire them? The challenge here is you need to actually know the lifetime value up front, but you may not know for years.

What is your Cost of Acquisition (CAC) ratio? – This will tell you if you’re spending enough and if your marketing is effective enough. While it’s a great indicator, you need to be spending continuously on advertising before it becomes a stable and effective number to track.

In general, these three measurements should be used sequentially, over time.

Comments

  1. BY Onefineham says:

    The cost of starting up email marketing campaigns can be on the high side, but it is definitely a must have for the tool kit. Social media marketing is less expensive dollar wise but can eat up more time and produces less easily measurable results.

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