Last time I wrote about “CEO Steve,” who runs a SAAS (software as a service) business. Steve was about to waste everything he invested on marketing because he didn’t have any framework for quantifying success.
This column will reveal the three essentials Steve (and you) need(s) to know to make a sound marketing investment.
#1: Know Your Conversion Rate
Steve’s company had gone through a beta period during which it signed up paying customers. That means the company had a simple “conversion rate” from its efforts:
Conversion Rate (CR) = customers acquired ÷ unique visitors to the landing page
No need to overcomplicate this. The company drove people to a landing page and acquired customers as a result. That’s the conversion rate. For this example, let’s say:
1 customer acquired ÷ 20 landing page visits = CR 0.05 or 5%
#2: Calculate Lifetime Value
The second thing Steve needs to know is how long customers stay customers, and how much they pay over that lifetime. He charges on a monthly basis, so a simple lifetime value (LTV) calculation would look like this:
Lifetime Value (LTV) = average monthly rate * average life time
Again, not complicated. Multiply what the average customer pays per month by the number of months they typically stay customers. Steve might have to start with assumptions about monthly rate and average life time to get to a projected LTV. He may also need to adjust both as results come in.
Steve settled on these, based on the monthly price and the knowledge that it is difficult for customers to stop using his service once they purchase it:
- Average monthly rate: $100
- Average lifetime of a customer: 12 months
- LTV = $1200
#3: Set an Acquisition Cost
How much Steve should pay to acquire a customer is a function of LTV, cost of providing service, and target profitability. Steve’s board set a profitability target of 10% of revenue, and other business costs came to 80%. That means Steve has 10% of each customer’s LTV to invest in customer acquisition.
We know LTV is $1200, so the formula is:
LTV ($1200) * Investment in Customer Acquisition (10%) = Target Cost Per Acquisition ($120)
Putting It All Together: How Much Steve Can Invest in Marketing
So this is where it gets exciting…calculating how much Steve can invest to acquire customers.
By multiplying the Target Cost per Acquisition by the Conversion Rate, Steve knows he can pay $6 to drive visitors to his landing page. Here’s the math:
Conversion Rate (5%) * Target CPA ($120) = Cost per Landing Page Visitor ($6)
It’s that simple. Steve should be striving to achieve a $6 cost per landing page visitor from his marketing investment, whether he’s buying media from a third party or investing in earned social media efforts.
About Chris Elwell: Chris is a founding partner and president of Third Door Media, the publisher of Marketing Land and Search Engine Land. TDM accelerates customer acquisition for its clients by providing trusted content and targeted marketing programs that deliver qualified prospects. You can reach Chris at chris[at]thirddoormedia.com.