How annual pre-pay creates an infinite marketing budget

by Jason Cohen - @asmartbear, https://www.linkedin.com/in/jasoncohen/
Jason built 4 tech startups, both bootstrapped & funded, alone and with co-founders, all to $1M+ annual revenue, sold 2,  currently at the 4th, https://WPEngine.com with 200k customers and 1200 global employees. He’s an angel investor, founding member of Capital Factory, an Austin incubator/co-working space, and has been writing about early-stage startups since 2007.
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Dozens of founders have used this technique to transform the cash-flow of their businesses. Now it’s your turn.
Multiple founders have told me the ideas in this article were responsible for the financial success of their startup.
They might be exaggerating out of kindness, but if it’s even 10% as useful for you, it will have been worth your time.

We’ll explore how growth affects cash-flow, and conclude with several techniques that can transform the cash-flow of your business.

The cost of a dollar of MRR
What does it cost a SaaS company to add $1 of new monthly recurring revenue?

Using the typical acronyms:
CAC (Cost to Acquire a Customer) is the total cost to get one new paying customer⁠—Marketing and Sales costs, including fully-loaded salaries.1 The simplest way to compute it is “total spend in a month” divided by “total new customers added during that month.”

ARPC (Average Revenue per Customer) is the average monthly-recurring revenue you get from a customer. The simplest way to compute it in aggregate is “total recurring-revenue in a month (MRR)” divided by “total number of paying customers during that month (N)”.

1 --- In smaller companies, typically the founder and others are spending time on marketing and sales activities as well; include the fraction of their time, or the salary that you would have to pay someone else to do those same tasks. Also include commissions.

Since it costs CAC dollars to get ARPC new dollars of recurring-revenue:
The cost to create one more dollar of MRR = CAC / ARPC

If you haven’t done it before, computing this metric will be eye-opening.
Let’s posit a hypothetical company with a $10/mo consumer-targeted SaaS product, where they pay $1.60/click for Google Ads; that traffic converts at 5% to a free trial, and those trials convert at 40% to a paid customer. Their CAC is $80,2 and their ARPC is $10, therefore we would say “it costs them $8 to create $1 of MRR.”

2 ---$1.60 / 0.05 / 0.4 = $80

It’s tempting to conclude that “It takes 8 months of customer revenue to ‘pay us back’ for the marketing and sales costs of getting that customer. That customer is unprofitable before then, and becomes more and more profitable after.” (Figure 1)

But, unfortunately, it’s worse than that.
Revenue we can spend
All companies have mandatory expenses associated with delivering the entire product to the customer. Not just the product itself, but everything else the customer expects, like being able to pay with a credit card or call tech support:

• credit card processing fees
• tech support3
• infrastructure (if SaaS)
• professional services (if consulting)
• bill of materials (if physical goods)
• Anything else which, if missing, the customer would say “You’re not delivering the product I paid for.”

3 --- Even if you’re a solopreneur, doing support yourself, wanting to claim that therefore “support costs me nothing,” the opposite is true: Your time is valuable; you could have used that time for anything else, such as marketing or building a new feature. How should you account for this? Use whatever it would have cost to hire someone else to do the service for you, and remember that low-wage people who aren’t fluent in your language, can’t provide the level of service you’re currently providing!

Read the rest of this post here.