Subscriptions are the lifeblood of the SaaS company. It should not be surprising, then, that nothing is considered more important to its marketing department than the conversion of a prospect into a paying customer. SaaS marketers invest tremendous amounts of time and energy minimizing cost per acquisition (CPA) so that they can maximize the amount of new paid subscribers coming in each month. Is that not, after all, what marketers are meant to do?
Not exactly. The role of the marketer is to ensure that their company receives the highest possible return on ad spend (ROAS) from its marketing budget. That objective, in turn, requires prioritizing predictable, long-term sources of revenue. A distinction is thus created between the sheer number of acquisitions—quantity—and the number of customers that will continue to engage with, make use of, and even be upsold upon the offered software—quality. When channels that generate the latter are prioritized, marketing dollars begin to go much further.
CPA Is Only Half the Equation
Consider the following scenario. Social media marketing channel A—say, Facebook—is consistently able to produce subscribers at a $1 CPA. Meanwhile, social media marketing channel B—say, LinkedIn—does the same at a $2 CPA. Which channel should get the larger share of the social media marketing budget? For most marketers, the answer would be obvious: Facebook will provide twice as many new subscriptions as LinkedIn, and is therefore the better investment. In lieu of further information, this would be true.
The marketer should, however, be asking a very important question: what type of subscriber does each channel generate? Assume for the sake of argument that those who sign up via Facebook have a short-term usage rate and tend to only stay subscribed for one month, while a LinkedIn subscriber has a long-term usage rate and tends to stay subscribed for six months. In that case, the long-term usage rate with $2 CPA from LinkedIn translates to a higher monthly recurring revenue (MRR) than the short-term usage rate with $1 CPA from Facebook. If a SaaS provider charges $50 per month for a subscription, then they pay $1 for the Facebook ad to generate $50 in revenue. If they paid $2 for the LinkedIn ad conversion, meanwhile, that ad spend generated $300 in revenue. Spending more on CPA to maximize usage rate is a better use of the ad budget than merely minimizing upfront costs.
Usage, LTV, and Choosing the Right Channel
But how much does long-term usage really matter? Most professionals already know the answer to this question, even if they have not applied it to their marketing strategy. Subscriptions are often the first expense to be cut when times get difficult for the average customer, so retaining subscribers with high lifetime value (LTV)—that is, quality customers—is imperative for a SaaS company to maintain a consistent revenue stream. Usage rate, while not equivalent to LTV, is an excellent predictor of LTV.
That is because customers who consistently use a software product are far more likely to continue their subscription, trust the brand, purchase additional services, and upgrade their subscription. The total amount a customer spends with a SaaS provider determines their LTV, so customers with higher usage rates almost always have a higher LTV. But LTV, which measures the full lifetime value that a subscriber offers the business, is a lagging indicator. One cannot find out a customer’s LTV until they are no longer a customer, making it inherently retrospective. This limits their ability to inform future decisions.
Usage rate, meanwhile, is a leading indicator. If a SaaS provider can gain access to a new customer’s usage data within the first one to six months, they can use that information to predict the LTV of a customer long before their subscription has run its course. SaaS companies should focus on usage rates for precisely this reason. The best channel is not necessarily the channel that has generated the highest LTV subscribers in the past, but rather the one that is predicted to generate the highest LTV subscribers for the future. By weighing predicted LTV—that is, usage rates—against CPA, marketers can determine precisely which channels will yield the highest ROAS.
Bottom Line
There is more to SaaS marketing than merely tracking and allocating ad spend based on CPA. If reaching a monthly quota of new customers is the company’s top priority, they will almost certainly miss out on the compounding revenue that a valuable and predictable subscriber-base can offer. They will incorrectly and inefficiently allocate their ad spend because they are focused on the wrong metrics. But by identifying the prospects that actually use the product long-term as a leading indicator of LTV, marketers can view their initial ad investments in the context of lifetime returns, provide cash flow forecasting to their finance team, make the case for proper ad spend to their leadership team, and ultimately invest in the channels that create the most profitable and consistent revenue streams for their company.
About Angela Hill
Partner, CMO & CSO. Works with engineering, medical device, biotech, pharma, outsourced IT, fintech, software, AI, manufacturing, healthtech, business consulting, wealth management, and professional services companies to accelerate sales growth.
