Posted in How To on January 16th, 2014
This post will help you calculate if a PPC campaign at a certain cost-per-click (CPC) bid will work for your SaaS business as a profitable customer acquisition channel. It is divided into two parts. I will start with a hypothetical example to explain how the calculations work. Then, there is a free ‘PPC Viability Calculator’ Google Spreadsheet you can use to figure out if Adwords (or any other PPC channel) works for you. If you’re chill with the math, click here to jump to the calculator.
We created this calculator because not all Adwords keywords that we bid on were actually profitable for us and while the world may hail Adwords, sometimes you’ve to just step back and look at the data.
Hypothetical example when bidding a certain amount is not viable
Step #1: Find a keyword you want to bid on
The first step is to find a keyword that is relevant for you. As an example, let’s assume your web app is a self-service tool to create and host landing pages, so you want to bid for ‘landing page creator’ as your keyword. Go to Google Adwords and click on Keyword Planner tool under the Tool menu.
Click on ‘Get traffic estimates for a list of keywords’ and type ‘landing page creator’. This will show you a graph of how many clicks and impressions the keyword gets in a day and at what cost.
Step #2: Decide your average CPC
In the example below, I wanted an average CPC of $4, so I shifted the slider to bring it close to that.
If I get 100 clicks on the ad for the duration of the campaign, then I’ve spent a total of $400.
Step #3: Calculate number of freemiums/free trials
Assuming the Adwords visitor to freemium/free trial conversion rate is 10%, then I’ve acquired 10 free trial users at a cost of $400 — meaning $40 per free trial convert.
Step #4: Calculate number of paying customers
According to this report by Totango, the standard ‘free trial to paid conversion rate’ is 15%. So, the number of paid customers will be 15% of 10 (number of free trials). This gives us 1.5 paying customers (I’ll go with 2 paid customers to simplify calculations).
Step #5: Figure out your customer acquisition cost (CAC)
Remember at the end of Step 2 we calculated our total PPC ad spending to be $400. The total number of paying customers we got after spending that money were 2. So, the average customer acquisition cost (CAC) is $400 / 2 = $200.
Step #6: Calculate the lifetime value (LTV) of your customers
To do this, simply find out what is the average number of months a typical customer sticks around and the $ value of most commonly bought subscription plan. Suppose your most commonly bought plan is $49 and the average life time is 6 months, then the lifetime value of a customer (LTV) will be $49 x 6 = $294
Step #7: Compare CAC with LTV
We found at the end of Step 5 that our average customer acquisition cost (CAC) is $200 and on an average they are giving us $294 in a lifetime.
LTV = $294
CAC = $200
LTV > CAC
From a purely marketing perspective this seems okay. But then there are other costs like salaries, rent and hardware which have to be accounted for. If you’ve got the exact number down, you’re golden. If not, then aim for LTV > 3 CAC.
Hypothetical example when a keyword is viable
Let us assume all calculations to be the same till Step 5 (CAC = $200). Now suppose your most commonly bought plan is $129 and the average billing cycle of your customer is again 6 months. The lifetime value of a customer will be $129 x 6 = $774 and you’re good to go crazy spending as much as possible on Adwords.
Situations when Adwords isn’t profitable enough
Generally speaking, two situations where Adwords (or other PPC channels) is not good enough for B2B SaaS apps is when
- You’re a tool in a space where there are one or more solutions/platforms
- You’re in a space where multiple service businesses exist
The reasons for Adwords not being viable in such situations is that the Contract Value for platforms and service engagements are much higher than a tool. Also, they usually have annual contracts (so the average lifetime goes up) while you’re on monthly. This simply means they can spend more on acquiring leads and can outbid you.
Here’s the Adwords / PPC viability calculator
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Know all that you need to get started:
- What is A/B Testing?
- Is it compatible with SEO?
- How to start your first A/B test?