Soren | 29 March, 2010
One of the more interesting aspects of a new SaaS business is that lifetime value of a customer is typically unknown. Since Cost-Per-Acquisition (CPA) targets are often based on customer value, how then do you properly price CPA targets for profit-driven online marketing optimization? If you keep these tips in mind, you will find it easier to think about how to evaluate your marketing effectiveness:
1. Profitability or Market Share? In the face of unknown lifetime value metrics you have a choice in how aggressively you advertise. Make this a conscious decision: How far beyond “known” value am I willing to go to obtain customers? If you aren’t the business owner or CMO, and you haven’t had this discussion, have it. Now.
2. Average Monthly Revenue? If you have variable pricing (multiple packages or tiers, for example), optimizing on average value will hurt you. When at all possible, tie specific sales value back to the most granular marketing source possible (think keyword). This will help you not to overvalue, or (worse) undervalue, pieces of the marketing campaign.
3. Profitability and Payoff Time? Know these numbers. Optimize around a specific payoff time. Control your cost of customer acquisition, don’t let it control you.
4. Continuous Re-calibration. SaaS business models need to continually be re-calibrated in order to stay on top of shifting customer performance. Don’t be the last to know that your customers are suddenly leaving before you hit break-even on your CPA.
5. Free Trials are Not Customers. A Free Trial is not a paid conversion. It might lead to one, but don’t optimize around Free Trials if you don’t have very consistent data showing these leads convert to customers.
Never (NEVER) evaluate monthly ad spend against monthly revenue for the current month. In a SaaS model, your revenues this month largely did not stem from marketing that happened this month, so why evaluate them that way? Tie all customer revenue back to when the customer first landed on the site. That is marketing effectiveness.