When I first started out building my first company the "Start-up Math" was by far the most underrated part people talked about. Sure, I knew how to build and design apps, that was the sexy part, but it was the math that turned out to be the really fun part. Fun, yet elusive and challenging all at the same time. I found myself several times saying "I don't know" but, I had good mentors around me that knew it well and helped shed some light on the calculations
How do you determine how much you can spend to get customers? This is what people refer to as cost to acquire (CTA). This is pivotal to know to determine if you'll survive.
To understand CTA you'll need to calculate your revenue per user? Then calculate how long will they be a paying user or the Life Time Value (LTV)?
To calculate the revenue per user we have to determine the total revenue generated during a predetermined time period. In our business that time period is 30 days. Since the number of users is changing everyday we also take an average of the number of users over a 30 day period which will give you the Average Revenue Per User (ARPU). A number that becomes vital in determining how much you can spend to acquire customers.
Let's say for example our indy game generated:
Revenue = $3,012 for month 1
Users = 26,316 in the first month
ARPU = $0.11
Next we need to calculate the Life Time Value of our customer (LTV). In order to do this you need 2 things:
1. Average customer lifespan
2. Customer retention rates. In our case it's 65% (we measure this using a tool like Apsalar)
If you do the math you get:
52(ARPU)*Average Customer Lifespan
52(.11)*.12 = $0.67 and if we retain 65% thats 0.43¢ for the LTV
Month 1___________thru___________Month 12
.11 .07 .06 .05 .04 .03 .02 .01 .01 .01 .01 .01
This assumes we keep that customer playing our game for at least 1 year. The real under lying principal here is the value of the product you've created for them but, that's for another blog post.
This gives us a number of 0.43¢ to use to acquire customers. This isn't much to work with, CTA install rates for mobile apps can and usually exceed .50¢ and depending on the platform can be as high as $2.50 or more for typical campaigns.
As you can see with the current model we'd go broke pretty quickly trying to acquire customers in traditional ways with PPC or paid ads. As a startup it's imperative to find other ways to acquire and if your building an app build viral loops into the product to game the system. Build your product where the viral coefficient is >1.0 and in order to do this you have to remove all barriers for mass adoption. This will present a good test to launching only the features that you need. How do you determine what you need? Features that make your app virally spread along with the core functions is ALL you need.
In our case we implemented several social mechanics into our game Trivi.al that allow for a nice daily trickle of NEW app store installs for FREE, while we leverage PR and social buzz generation to get to a critical mass value that would allow for rapid, scalable paid customer acquisition. We're still working on that piece.
As the app starts to scale, these numbers will change and we can make better predictions about where we're going but for now if you're just starting up this "Start-up Math" will help you make the right decisions.