Paid advertising for SaaS businesses can be costly! We want to help you make sure you are properly monitoring your channel CAC and understanding if a channel is viable to scale, as well as understanding how each channel compares to your organic channel CAC.

In order to do this we have put together a process to follow that takes into consideration the 3:1 LTV:CAC Ratio as the backbone of our testing strategy. We want the LTV:CAC Ratio to always be greater than 3:1. This will keep healthy SaaS growth at the top of our growth testing as well.

First let’s gather the information we need on a monthly basis for the correlating channels below.

All Channels need monthly:

• • ARPA
  • Churn Rate
  • Sales Cycle

Channel specific items include:

Organic

• • Monthly Sales & Marketing Spend (Organic related Expenses)
  • Paid Management Fee (Break this out from above)
  • Visits
  • Visitor > Trial/Demo Conversion Rate
  • Trial/Demo > Customer Conversion Rate

• • CPC (Average given by Capterra)
  • Visitors (Which is expected clicks)
  • Trial/Demo > Customer Conversion Rate

Adwords and other CPC channels

• • CPC
  • Monthly Sales & Marketing Spend (Organic related Expenses)
  • Paid Management Fee (Break this out from above)
  • Visits
  • Visitor > Trial/Demo Conversion Rate
  • Trial/Demo > Customer Conversion Rate

Now that we have the information we need for each channel we will break down the process for testing if a channel is viable, as well as setting proper goals for new and current channels.

1. 1. Fill out current numbers in Channel CAC goals G Sheet​. Note: fill out all areas in yellow with data from above
   2. From these numbers determine their Channel CAC goal numbers
   3. Determine time frame of test needed:Determine Time Frame for test by using 3 months at a minimum or taking the Sales Cycle and multiplying by 3, whichever is greater. For example: If their sales cycle is 1 week, then test for 3 months at a minimum. If it is 3 months, then test for 9 months at a minimum.
   4. Determine the expected budget:It should be $3,000 / month at a minimum or the Channel CAC Goal number, whichever is greater. To determine the total budget it would be calculated as: Channel CAC Goal X Time Frame = Total Budget for TestFor example, the Channel CAC goal is $1,000 and the time frame of the test is 6 months. Then the budget will be $6,000.
   5. If the results after the testing time period show a 3:1 LTV:CAC ratio then continue optimizing the channel. Or, if you did not hit this goal but still shows promise then determine testing for 3 more months. If not, eliminate the channel

Example Video & Breakdown

To put this into practice we have created and example scenario with baseline metrics and goals to show how this would work.

Below are the outlined details from the above video:

Example Baseline Details:

• • ARPA = $200
  • Sales Cycle = 1 month
  • Churn Rate = 1%
  • Channel = Adwords
  • Outputs
    • Test Time Frame = 3 Months

Current Numbers:

• • CPC = $10
  • Initial Monthly Ad Spend Investment = $5,000
  • Paid Management Fee = $1,000
  • Visitor > Lead (Trial/Demo) Conversion Rate = 1%
  • Lead (Trial/Demo) > Customer Conversion Rate = 15%
  • Outputs:
    • LTV = $20,000
    • CAC = $8,000
    • LTV:CAC Ratio: 2.5:1

Goal Numbers:

Goal is to increase conversion rate on the landing page to 2%

• • CPC = $10
  • Goal Monthly Ad Spend Investment = ?
  • Paid Management Fee = $1,000
  • Visitor > Lead (Trial/Demo) Conversion Rate = 2%
  • Lead (Trial/Demo) > Customer Conversion Rate = 15%
  • Outputs
    • LTV = $20,000
    • CAC = $4,000
    • LTV:CAC Ratio = 5:1

Test Details:

• • Test Time Frame= 3 months
  • Monthly Budget = $5,000

Total Budget for Test = $15,000 ($5,000 / month for 3 months)

Example outcome:

We will test the Adwords channel for 3 months to try to increase the conversion rate of the landing page to try to hit our goals. At a minimum we want to be at a LTV:CAC Ratio of 3:1 to continue optimizing this channel. However, if we are showing progress at the end of 3 months we can continue to test with the same goals. However, this channel will be turned off if it does not meet a 3:1 ratio soon after.