SaaS marketers in the B2B sector have a simple task before them: achieving the best possible return on ad spend (ROAS) for their company.
To many marketers, that simply means maximizing the number of conversions they can squeeze out of their budget via low cost-per-acquisition (CPA) channels. More subscribers means more money, after all.
The trouble with that outlook is that revenue is not the product of subscribers alone. Rather, long-term revenue is the product of subscribers and time. All marketers know that certain clients bring more revenue over time than others, but very few really build their marketing campaigns around the lifetime value (LTV) of their prospects.
Those who intend to maximize ROAS, however, do not have the luxury of neglecting LTV any more than they do CPA. Either is only half of the equation.
To truly make the marketing budget go as far as it can, SaaS marketers must first know how to use LTV and—crucially—how to predict it. Below is a brief guide to doing just that.
LTV, CPA, and Maximizing ROAS
Say there are two marketing channels available to a SaaS provider: LinkedIn and cold-email outreach. Say that LinkedIn can consistently produce subscribers at a $20 CPA, whereas cold emails produce subscribers at a $10 CPA.
Which channel should get a bigger share of the company's marketing budget?
All else being equal, most marketers would—and should—choose cold-email outreach; it has a lower CPA. All else is never equal in the real world, though. The marketer should already be asking about what kind of subscriber either channel generates.
Say that subscribers gained via LinkedIn have a low churn rate and remain subscribed for six months, on average, whereas those gained via cold email have a high churn rate and remain subscribed for only one month.
Suddenly, LTV becomes a factor.
If the SaaS provider charges $100 per month for its software, a $20 investment into the LinkedIn channel yields $600 in revenue, but the same amount invested into cold-email outreach yields only $200. LinkedIn offers better ROAS and thus becomes the more favorable channel by a margin.
In reality, low churn rate is only one factor of LTV. When combined with upsell potential, the varying characteristics of clients can have an exponential effect on how far each marketing dollar will go.
Employing Usage to Predict LTV
Knowing that LTV is an important factor in selecting high-ROAS channels is one thing; making use of that information is another.
The fundamental obstacle at the heart of LTV is that it's a lagging indicator. LTV cannot be established until after the client's lifetime has elapsed, which is of course far too late for deciding whether or not that client should be targeted in the first place. Lagging indicators are inherently retrospective and, on their own, are insufficient for informing future-minded decisions.
This is where usage rates enter the discussion. It is well established that early engagement with a software correlates positively with a subscriber's ultimate LTV. Customers who make use of the product are more likely to have found it useful, and are therefore more likely to continue paying for its use or be upsold on further uses.
Therefore, high usage predicts high LTV.
The real benefit of employing usage rates in this way is that they are a leading indicator—they look forward, not backward. Early engagement metrics can be used to indicate LTV long before the client's lifetime has run its course.
In fact, marketing channels that are segmented according to short-term usage rates can give marketers workable estimates of ROAS in 1-6 months, as opposed to waiting years for LTV figures to emerge on their own.
Considering that channels that produced high-LTV clients in the past will not necessarily produce high-LTV clients in the future, the importance of using a leading indicator becomes evident. This predicted LTV can then be weighed against the current CPA of each channel to determine probable ROAS and direct future-minded marketing investments.
Bottom Line
Marketing is about converting ad spend into revenue. In an industry like B2B SaaS where recurring revenue is the lifeblood of the company, that means chasing loyal clients—not sales.
Marketers who build their campaigns around CPA alone will end up filling impressive conversion quotas at the expense of long-term value.
Those who are able to identify clients with high usage rates and target the channels from which they come, meanwhile, will provide their companies with a holistic, forward-looking model that incorporates both LTV and CPA.
Such marketers can determine the channels that will provide the most value to their company in the future, and they can allocate their marketing budget with confidence and care.
More Resources on SaaS Marketing Metrics and LTV
The Bow-Tie Model: Purpose-Built for SaaS Companies (Article 2 of 3)
Where to Look for the Right KPIs for SaaS Marketing in Uncertain Economic Times
How to Create Efficient Paid Ad Campaigns Using the LTV:CAC Ratio
Digging in the Wrong Place: Misunderstanding Where SaaS Growth Comes From (Article 1 of 3)
