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Taking a quick blog vacation…


Here are some of the partially-written drafts I have saved in my WordPress account – no promises on whether or not I’ll finish them though :)

  • Forget about user engagement – just focus on retention!
  • Launching new product features: Metrics for internal distribution
  • The Joel Test for data-driven decisions
  • Do data-driven models lead to uninspired products?
  • Are websites really better than desktop apps for user acquisition?
  • The social gaming business 101: Lifetime value, cost per acquisition, player retention and lifetime value
  • 5 key factors for increasing retention metrics
  • Dual currencies in virtual economies
  • Elements of every virtual items-based social game
  • How to calculate an ARPU and why it’s important
  • 5 common objections to making data-driven decisions
  • “Yet another ad network?” Why the future of advertising points at more networks, not less
  • Are you building features that no one will use?
  • “OMG I’VE JUMPED THE SHARK”: 10 things to do after the TechCrunch crowd has moved on
  • Learning about retention metrics from retail and catalog marketers
  • Designing social networks: Real friends versus online friends
  • Social gaming and BBS door games: Learning from past casual asynchronous games
  • Why “launching” is old and busted

See you guys in a couple weeks…

PS. Get new updates/analysis on tech and startups

I write a high-quality, weekly newsletter covering what's happening in Silicon Valley, focused on startups, marketing, and mobile.

Video up from Virtual Goods Summit, Metrics for Virtual Goods Businesses: The Whirled Case Study

Virtual Goods Summit videos are up!
Charles Hudson was kind enough to post all the videos from the Virtual Goods Summit from earlier this year, you can see all the videos here.

The talk that Daniel James (of Three Rings fame) and myself gave is embedded below.

Here’s the outline of the content we covered:

Metrics for Virtual Goods

  • Key metrics
    • What is Whirled?
    • What is Puzzle Pirates?
    • Puzzle Pirates Metrics
  • What factors drive LTV?
    • User acquisition metrics
    • Factors that drive acquisition cost
    • Dashboard for user acquisition
  • Customer retention metrics
    • Factors that drive revisit rate
    • Whirled retention cohort %s
  • Virtual Economy overview
    • Dashboard for a virtual economy
    • Lots of graphs
  • Billing payment breakdown
    • Billing fraud
  • Questions and answers


UPDATE: Mike Gowen put up some photos of the slides here. Mindmaps and more videos from Jussi here.

PS. Get new updates/analysis on tech and startups

I write a high-quality, weekly newsletter covering what's happening in Silicon Valley, focused on startups, marketing, and mobile.

How to calculate cost-per-acquisition for startups relying on freemium, subscription, or virtual items biz models

Buying ads make sense for direct monetizing products
When it comes to products that directly monetize their audience using subscription, ecommerce, virtual items, etc., it can make a lot of sense to rely on advertising as a distribution channel. The reason for although there are 100s of millions of internet users, only a small fraction (usually <1%) will be in-market for your services at any given time. As a result, you are looking to acquire these users, and only these users, and everyone else is considered wasted energy.

Note that the freemium model is a variation on this concept – where you acquire a large base of “casual users” that stick around, and you slowly convert some % of them to subscribers. You can think of it as vertically integrating your distribution, and instead of spending money to buy ads, instead you are spending money to support this large base of free users.

Run an ad-supported consumer internet app? You better understand ad-buying too
These days, it’s simple to think that advertising is about placing javascript code on a page, and seeing what numbers AdSense gives back to you. Instead of thinking about it that way, publishers would do their customers (their advertisers) a great service by understanding what it means for ad inventory to perform or not perform. They should really understand how advertisers analyze their cost-per-acquisition so that the publisher can better service them – that’s at the heart of indirect monetization. If you’re not selling directly yourself, you’re helping someone else sell.

Get updates to this essay, plus more on cost per acquisition:

CPA, the common currency of user acquisition
The first step is to understand your user acquisition funnel, from start to end. Although there are many ways to price things, be it CPM, CPC, or CPA, the key is that it all rolls back to how much it costs you to have a registered user. You need this cost-per-acquisition number to be lower than the lifetime value number, and what you have left is profit (before cost of infrastructure, etc).

So you want to build something that looks like this:

Source Ads bought
CTR Clicks Signup % Upload pic Users Cost CPA
Google 1M 0.50% 5,000 20% 50% 500 $5,000.00 $10.00
Ad.com 20M 0.10% 20,000 10% 50% 1000 $20,000.00 $20.00

The above is an example of two traffic sources, Google and Advertising.com (the latter being an ad network), as well as clickthrough rates, signup %s, and the cost per acquisition.

A couple important notes on the above:

  • the SOURCE of your traffic is the most important segmentation – make sure you track acquisition and LTV numbers, since you often get vastly different numbers depending on where you are buying ads
  • you want to break down your funnel into as small of steps that make sense, from the clicks into the signup page into any intermediate profile forms and then the final registered numbers. Your funnel may be larger or smaller
  • Google might charge you CPC and Ad.com might charge you CPM, but you have to normalize that back into how much it costs you to acquire a registered account. In a CPC model, you don’t care about the CTR much since you don’t pay for impressions that don’t result in clicks, whereas you do care about CPMs
  • the only difference between a good CPA and a bad CPA is whether it’s above or below your customer LTV
  • In addition to tracking source of traffic, you may also want to track important factors like what campaign it was in, what creative it corresponded to, the banner ad size, and other things that might affect CPA. The last thing you want is a variation that is very unprofitable, but is obscured by being grouped together
  • You may also want to group all your marketing channels into the above, including email, partnerships, blog traffic, viral invites, etc. Obviously for stuff that’s free traffic, the CPA is infinity, but it’s good to know what kinds of funnel %s the other traffic throws off, for comparison’s sake

Got all that? Good :)

What factors influence ad performance?
The second thing worth considering is what factors actually influence GOOD numbers for CPAs versus what numbers are generally bad.

I made a quick, anecdotal table below to enumerate some of the factors:

Type Options Importance
Source of traffic Ad networks, publishers ++
Cost model CPM, CPC, CPA +
User requirements Install, browser plug-in, Flash +++++
Audience and theme Horizontal vs vertical ++
Funnel design Landing page, length, fields +++
Viral marketing Facebook, Opensocial, email +++++
A/B testing process None, homegrown, Google +++++

A couple additional notes:

  • As mentioned previously, the source of traffic is very important – you should dedicate a significant amount of time buying lots of different kinds of traffic to see what works
  • Cost model is something you should be able to normalize into CPA and mostly ignore, except for cashflow and risk reasons
  • User requirements can be a huge issue – if you are forcing users to download, that will kill your CPA. Similarly, asking a demographic that doesn’t have credit cards for their credit number can kill you. Make sure that you understand your audience and that your funnel is optimized for them
  • Audience Theme revolves around the concept that strongly themed products are often quite vertical in nature, which causes a large % of users to reject the product. For example, a site for teens obsessed with vampires is much narrower than a web email site. The narrower the theme is, the harder it is to find appropriate ad inventory to buy
  • Funnel design and A/B testing is key – definitely worth investing in
  • Similarly, for those who can find a viral angle in their product, that can be a huge benefit as well. It has the capability to create order-of-magnitude decreases in the CPA, which can be the difference between profitability and bankruptcy! But this also has issues if your product is not widely appealing enough, since virality depends on a horizontal offering to work

If you have questions or comments, feel free to leave a message!

PS. Get new updates/analysis on tech and startups

I write a high-quality, weekly newsletter covering what's happening in Silicon Valley, focused on startups, marketing, and mobile.

Amazon Associates stats for this blog

The Secret History of Silicon Valley (next Thurs, Nov 20)

List of essays from this blog is now up to date!

Twitter links from last week (posted 11/09/2008)

Usability presentation for iPhone apps and store

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Quick link to another fave blog Altgate, by Furqan Nazeeri

Twitter links from last couple weeks…

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Quick weekend links from my Twitter