Calculating your customers lifetime value (with code)

This is a guest post written by Auston Bunsen. Auston is the organizer behind SuperConf, an awesome conference for web entrepreneurs which I had the privilege to attend in February. If you’re in the South Florida area, make sure you go next year!

I watched a Mixergy interview with Jason Fried [link] and at one point he talked about how they (37Signals) hired a data guy to generate metrics, more specifically Customer LTV.  Andrew asked how LTV  is calculated & if there was software available to help figure it out.

This is my answer to that question. It’s how I’ve done Customer LTV calculations & segmenting at companies I’ve worked with/at. Hope it’s useful!

Disclaimer: Code may not be 100% working & some of this stuff is very lego-like. Take this with a grain of salt, it’s just how I do my LTV stuff.

The Customer Lifetime Value Formula

For a SaaS startup today, the formula in it’s simplest form is as follows.

Customer LTV  = Revenue Per Month * Number of Months being a customer

Getting The Necessary Data

If you’re lucky, you will have a record (in a table or datastore) of all payments (& hopefully declines) that a given customer has made.

If you don’t have this you may be able to get it from your payment gateway via their API. If you can, do yourself a favor & do a retroactive import of this data & store it on your servers. It’s important!

Once you have this data, you can just create a script to run through all customers & generate an average LTV. Here is an example in SQL:

If you’ve enjoyed reading this, you can follow the author on Twitter @Bunsen.

For more startup news, follow us on Twitter @startupfoundry.

The thinking behind Mint’s original marketing plan with Noah Kagan

Noah Kagan created the original marketing plan for Mint in 2007 (which you can see here). I posted the document on TSF and the response was overwhelming. Numerous readers called the document “pure gold” for startups looking to improve their marketing efforts.

I decided to ask Noah to come on the show so he could explain the “why” behind the document. I wanted to get inside his head so startups could learn from him. Enjoy the half hour interview.

Noah has since moved on from Mint to AppSumo. AppSumo has been a great sponsor for TSF and they’re good at what they do (Deals for geeks). Check them out.

Be sure you take a look at Mint’s Original Marketing Plan (circa 2007) in another tab so you can follow along!

For more startup news, follow us on Twitter @startupfoundry.

Data without intelligence is dangerously misleading. Focus on the right users.

Startups love numbers. Data is king in the A/B testing world. Numbers allow entrepreneurs to quickly quantitative decisions with hard data. In this data-driven world it’s easy to forget that data without intelligence is dangerously misleading.

For example:

Back during World War II, the RAF lost a lot of planes to German anti-aircraft fire. So they decided to armor them up. But where to put the armor? The obvious answer was to look at planes that returned from missions, count up all the bullet holes in various places, and then put extra armor in the areas that attracted the most fire.

Obvious but wrong. As Hungarian-born mathematician Abraham Wald explained at the time, if a plane makes it back safely even though it has, say, a bunch of bullet holes in its wings, it means that bullet holes in the wings aren’t very dangerous. What you really want to do is armor up the areas that, on average, don’t have any bullet holes. Why? Because planes with bullet holes in those places never made it back. That’s why you don’t see any bullet holes there on the ones that do return.

From Kevin Drum’s article on MotherJones.com

I see a lot of startups focus solely on increasing the number of users they have. I’ve received pitches from startups that say things like “Over 5,000 users have already signed up!”, and I’ll say “That’s fantastic but how many people are actively using your service?”. Total users are just bullet holes in the wing.

The right way to view total users

Looking at total users is a useful way to determine demand for an idea. If you haven’t launched yet and you already have over 1,000 users sign up, you can start gauging the market. Total users can help you quantify a market but it’s a poor way to measure the health of your startup.

Focusing on the right users.

User engagement is the metric you need to measure to understand if people like your execution. After you launch it’s not about how many users signed up, it’s about how often they interact with your product. The users who use your site three times a day are exponentially more important than the ones who check it once a month.

Focus on increasing user engagement. It’s a better indicator of the health of your startup.

For more startup news, follow us on Twitter @startupfoundry or like us on Facebook.

The Humanization of Business.

Gary Vaynerchuk started with nothing and turned himself into a celebrity. Gary has a loyal following and has already written two New York Times best sellers. He has done this by engaging with his customers around the clock and hustle.

I caught up with Gary while he was on tour promoting his latest book The Thank You Economy. I asked Gary to talk to TSF readers about how they could connect with their customers in meaningful ways. In this interview Gary gives some fantastic tips for founders on how to build meaningful relationships with clients and engage their user base. You don’t want to miss this interview.

How can a startup strapped for cash connect with customers?

• Use search.twitter.com. Actively seek out your customers.
• If your site doesn’t have traction yet, search for things that your audience would be talking about and join the conversation. Just don’t spam it.

You have just under a million followers on Twitter. How do you stay engaged when your startup starts gaining that much traction?

• Intent. Gary wants to be connected with his audience so he makes it a priority.
• What is the end goal for the user? Make your product be all about solving your user problems. Don’t lose tract of this.
• Spam doesn’t work. Consumers have strong BS radars and it undermines their trust. Don’t play games with them.
• Do you care about people giving you the shootouts? Let them know you care.
• Hard work matters. That can separate you from your competitors. It’s all about hustle.

How do you have transparency with your users?

• Act human. Treat every engagement as if it’s happening face to face. You are a person, not a machine.
• We are living through the humanization of business.

What’s one piece of advice you can give to startups?

• You’re living through a bubble. Build for the long haul and make money.

“Once the color pallet matches our business cards, we’ll ship”

“Once we tweak the UI color pallet to match our business cards, we’ll ship.” said the self-titled CEO. It was an unusually warm autumn day as Startup Employee X couldn’t believe the words coming out of the CEO’s mouth. This was the fourth delay on a project that was over budget, behind schedule, and they were losing market share to their competitors.

Startup Employee X began to notice a pattern. Every time the product was ready to go the CEO got cold feet and found an arbitrary problem. Employee X worked tirelessly to convince the CEO they were ready to ship, but he refused to listen. The Employee could see the writing on the wall and decided to resign his position.

By the time spring rolled around, the company still hadn’t shipped their product and their bank account was quickly dwindling. The company laid off the majority of it’s staff. The CEO still refused to ship. Three months after that, the company shut down. They never shipped anything.

You could (rightfully) blame the ineptitude of the CEO for the companies failure but I believe the heart of the problem lies in the CEO’s fear of shipping. Unfortunately I’ve seen many founders exhibit some of these same characteristics (thankfully not to the same degree). Things change substantially when you have some skin in the game. It’s far worse to never ship anything then to ship and fail.

Be brave, focus on what’s important, and get some skin in the game. Ship.

For more startup news, follow us on twitter @startupfoundry.

The anatomy of a viral landing page

Last month I built the Startup Death Clock as a mini promo piece for The Startup Foundry. Six hours after launch, the startup death clock received over 10,000 unique hits, hundreds of tweets, and significantly increased traffic to TSF. In this article I’m going to break down things that I learned while building death clock and I will also share a few mistakes I made along the way that you should avoid.

Simple, simple, simple

Design is an exercise in restraint. Make things as simple as possible. Your goal is to have your users share the site with their friends. You’re going to want to make sharing the page as simple as possible. It’s better for a viral page to gain traction than to be absolutely perfect at launch. Iterate quickly and capture eyeballs.

Pick a time to strike (and get lucky)

Color, the photo sharing company that raised $41 million, launched on March 23rd. I released The Death Clock on March 24. Topical events are a fantastic way to learn about your users. Leverage well known events in your community to your advantage.

Things that I screwed up: (abridged version)

• I should have made an option to Tweet out your score. I believe more people would have shared the link if it was personalized.
• It would have been fun to incorporate different levels of success (Ramen profitable, Quit your day job, etc. instead of just “37signals”).
• Don’t take things too seriously. After I launched the death clock I had one user absolutely pissed at me (perhaps he didn’t like to know ). I let one user out of 10,000 spoil my mood for a few hours. This was incredibly stupid of me. Grow thick skin and don’t take things too seriously.

What have you learned?

I’m very interested to hear about what you’ve learned with your experiences. Feel free to share what you’ve learned in the comments!

Could an Online Startup Incubator Succeed?

The Idea:

Build a startup incubator that runs online. This incubator could leverage expert mentors all over the world while lowering the barrier of entry for founders and entrepreneurs (who would no longer need to move). Your talent pool wouldn’t be constrained geographically. Theoretically this gives you a huge talent advantage.

What makes an incubator great?

Nobody runs an incubator better than Paul Graham. Paul launched YCombinator in 2005, and many (myself included) would consider YC to be the best incubator worldwide. They aren’t perfect, but they get a lot of things right. After interviewing several YC alum I can confidently say YC’s biggest strength is their people network. Anyone can offer money to a startup but the connections that Paul Graham and company provide are simply unrivaled.

I asked Paul Graham (Founder of YCombinator) about an online incubator and he said:
“It would not work, at least not with current technology
for doing things remotely.  The kind of interactions the
startups have with us and with the other startups need
to happen face to face.”

Fair enough. Paul doesn’t think you could put a YC style incubator online and maintain the same quality experience. I would agree with his initial assessment, but I believe an online incubator that challenged our preconceived notions of how an incubator functions could flourish online.

Barriers to entry:

I asked Sanjay Parekh (from Shotput Ventures) his thoughts on an online incubator and he said:
“Personally I have a hard time seeing how this works – successfully. There
are just some aspects to early stage startup formation that you lose when
doing things online.

I think that a lot can be said about the real world
interaction. I know the startups that we (Shotput Ventures) have funded
have generally done a great job communicating over email but I also see
them regularly at either meetings they setup or randomly at events in town.
When that happens, I feel like I can brainstorm and help them a lot
faster than if I’m limited by the bandwidth between my brain, my hands, the
keyboard, and the Internet. The bandwidth between my brain, eyes, ears,
and mouth is tremendously more capable for these interactions.”

Conclusion:

I’m stuck on the fence if an online incubator would work. I can’t shake the feeling that with the right people it could be wildly successful. I’m very interested in this concept and have been thinking about it for a long time. I’m eager to hear what you think in the comments.

Does anyone feel like blowing $20k on an experiment?

Your MVP is a Ford Pinto but it’s better than a Ferrari without wheels.

Recently on TSF we’ve been talking a lot about “Minimum Viable Products” (MVP) and I’ve had several readers write in asking me why I was so high on the concept. My reasoning behind it is threefold. If I missed anything I would appreciate you sharing your experiences in the comments. 

Gain traction:

The point of your MVP is to act as your “beater” vehicle. Remember that Ford Pinto you flipped burgers in high school to pay for? It’s purpose was to take you from point “A” to point “B”. You wouldn’t want to pick up a prom date in it, but it took care of your daily commute.  You MVP is the same concept. It’s not your dream car, but it can still take you places.

It allows you to learn what features you should actually spend your time on.

Don’t try to build everything at once. Focus on a few  features and see how the community responds. Never create in a vacuum.

It doesn’t matter how fast a Ferrari can go if it doesn’t  have wheels

Theoretical performance means nothing if the rubber can’t meet the road. It’s much better to have something launched (even if it just has the core features) than something that is perpetually “just a few weeks away from launch”. As King said Let your community grow alongside you: Ship unfinished apps.

A Ford Pinto will take you much farther then a Ferrari without wheels.

For more startup news follow us on Twitter @startupfoundry and Facebook.