The formula you must understand in order to not lose money on free

We all get that users expect some form of free. And we’re all familiar with the rule that a product’s Customer Acquisition Cost must be lower than its Lifetime Value. However, according to Ryan Koonce of Mammoth Growth, there’s another number that must be taken into account in order to ensure that you don’t lose your shirt on your free or freemium offers, and that’s Cost to Service, which includes things like

* storage/server costs
* message and SMS costs
* other SaaS MTU costs (such as analytics)
* onboarding costs

We usually don’t think about these things because we don’t feel they’ll add up (and for some they may not). But for most, these costs will and do add up over time and at scale.

Therefore, the real formula to understand in order to not lose money on free is
Customer Acquisition Cost plus Cost to Service must be less than Lifetime Value

CAC + CTS < LTV

If this isn’t the case, then you’ll need to find ways to trim spending on your free users and shift those resources to your paying customers.

To learn more, check out Killing FREE: How to make every SaaS customer pay, hosted by Kissmetrics.

image: markus spiske via Visualhunt / CC BY 2.0