Month 4: Four essential advertising metrics for SaaS companies
By Andy Chan
Last month, we advised you to get some traction. Start creating content and start creating paid media campaigns. Reason being — you can’t analyze success or failure without data. You need to start somewhere and will never be able to refine your direction until you start moving.
Month 4 is about studying your progress and making sure that you are moving towards your goals.
Alright, so before we lift off we need to understand a few fundamental things: where did the passengers on our ship come from? How many visited our ship but didn’t board? Did they find us through display ads, or did they hear about us through a SM (Spatial Media) site?
If we can’t answer these questions, we won’t be able to measure the effectiveness of any of our campaigns; indeed, all the numbers will be alien to us.
So first things first, we need to set up an analytics tool. Google Analytics (GA) currently reigns supreme as the most used web analytics tool. It’s also free. There are other great analytics tools out there, but we’d recommend starting with GA.
However, you’re not done there: of all the metrics that will be useful to you, conversions are among the most important (i.e. the number of visitors that complete a goal, divided by the number of visitors that hit your page).
So you’re going to need to set up conversion goals in GA. Goals are something that you define yourself: whether they are a lead (e.g. a contact form completion), a download of a marketing piece, or a subscription.
After you’ve set up your goals, we recommend assigning a value to them. This is where it gets a bit murky: what is a lead worth to you? How about a free subscription?
To define these goal values, you will often need to analyze sales records (to determine the percentage of leads that convert to sales), determine the percentage of free users that convert to paid users, and calculate your average lifetime customer value (more on that later).
Spend some time looking into these numbers, and filling out goal values appropriately. For instance, if 1 out of 10 leads converts to a sale, and a sale has an average value of $1,000, then a sales lead is worth $100. If a free trial converts to a paid subscription 10% of the time, and a paid subscriber spends an average of $10,000 in their lifetime on your site, then a free trial is worth $1,000.
Lastly, we need to look at attribution reporting (multi-channel), rather than last click attribution. While last click attribution lets us know the last channel (e.g. SEO) that a customer came from from prior to purchasing on our site, it doesn’t tell us the entire picture; that is, how many other online touch points were there prior to the last one? What was the first?
This post will help you identify the problems of last-click attribution.
Google Analytics has some great reporting on multi channel attribution, found under the Conversion menu. Of particular importance is the Top Conversion Paths report. If you want to accurately quantify the effectiveness of your various online marketing campaigns, you’ll need to pay attention to multi channel attribution.
Given that there are as many metrics to measure as there are planets in galaxy XL-83489, you’re going to want to distill your reporting to the most important metrics.
These will be different across businesses, but some universally important metrics include unique visitors, conversion rate, and return on ad spend (more below).
Setting a target cost-per-acquisition (CPA) is especially necessary if you’re launching a direct response campaign (e.g. using search engine marketing) and using paid channels (e.g. Google AdWords). This is because ultimately, you are working towards driving acquisition (free trials and paid subscribers) rather than simply getting eyeballs on your ads or on your site.
You don’t want to spend more on acquiring a customer than what that customer is worth. Side note — we had a client come to us because their internal advertising team wasn’t generating leads from paid search campaigns. When we looked at their Adwords costs, and GA conversion data, we discovered they were paying $1,200 to generate a single registration to their site. Worst of all — their site was free.
So, you’re most interested in what you can acquire customers for, while still maintaining your desired profit ratio, all while taking into account other conversion metrics (e.g. free trial to paid conversion rate). This is your target CPA: it’s your desired cost to acquire a customer, which takes into account what you want your profit ratio to be, along with the percentage of users that will be paying you money.
Say we want to attract 100 travellers onto our ship for a ride to Mars, using our SEM (Space Engine Marketing) campaign. The ride is free up to the moon, at which point they need to pay or hop off. We know 10 of them are going to suffer from Sudden Space Sickness (SSS) and won’t be down for the long haul, so that leaves 90. We’re charging them $1,000 SR (Space Rubles) a pop, which amounts to $90,000 for the ride. The total ride costs us about $40,000 to operate; therefore, our revenue is $50,000.
At most, we can set our CPA at $500 if we want to break even ($500 x $100 = $50,000, which is our total revenue). If we can demonstrate that we can get a full ship with this CPA, with other travellers having wanted to get on too, we can look at dialing it down to achieve a desired profitability.
There are several conversion rates that we can use in our reporting as well as for determining other metrics (such as CPA, discussed above).
For every goal you have created, you will have a conversion rate. If you’re like most SaaS companies, you’ll probably have a goal (and thus a conversion rate) for a lead generation form, a free/trial subscription, and a paid subscription. Of course, all of these goals and conversion rates are important for different reasons, and to different people.
The conversion rate of your lead gen form is important to consider when making usability/user interface changes to the site. For example, if your lead form conversion rate is low, consider simplifying your form (cutting it down to the bare minimum fields). If the conversion rate is high, but the page it’s on is not getting many views, consider adding it to the homepage or other high traffic pages to get more exposure, and thus pump more leads into your system.
Your free trial conversion rate is generally calculated by your free trial sign ups divided by your aggregate unique site visitors. If the conversion rate is low, this could also speak to a form that needs to be culled down to its minimum number of fields. (We wrote a great post on this here) However, it could also mean that you’re missing the mark with the targeting of your marketing campaigns, or even that you haven’t clearly defined your value proposition on your homepage, and your visitors are bouncing off.
Finally, your free trial to paid subscriber conversion rate will likely be of the most importance (at least to the CEO/Board), as this conversion rate is ultimately measuring the success of the product – its features, usability, and value. For many companies, especially SaaS companies that offer a ‘freemium’ model (i.e. free trial, paid subscription thereafter), this can be a difficult metric to obtain. It often involves parsing the Google Analytics cookie, appending information such as Source, Medium and Keyword to database records, and then reporting on the conversion of these records from free to paid users. Luckily we’ve written a blog post to demystify this for you.
As a newly emerging intergalactic travel company you’re probably not profitable right off the launch pad, so you won’t be calculating ROI just yet.
Instead start on ROAS, which is one of the best indicators of success in paid marketing campaigns (e.g. Paid Search).
Return on ad spend is calculated as follows:
(Profit – Cost) / Cost
For example, say you made $50,000 profit at a cost of $25,000. Your ROAS would be ($50,000 – $25,000) / ($25,000) = 1.00, or 100%.
If you’re running paid media campaigns, include this metric in your regular reporting – and live by it.
This is an often overlooked metric. However, understanding lifetime value is critical for revenue projection and refining CPAs (as touched on above).
Lifetime value is the projected revenue that a customer / subscriber / intergalactic traveler will generate in his or her lifetime. Here’s one formula that you can use to calculate it:
(Average sale value) * (Number of repeat transactions) * (average customer retention time)
So for a SaaS company that has a monthly subscription cost of $20, analyze your sales logs to determine how long your customers stick around for. Perhaps that number is two years, or 48 months: therefore, average liftetime value would be:
($20) * (12) * (2) = $480
…with $20 being the sales value, 12 repeat transactions in a year, and two years worth of repeat transactions.