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When is Pay Per Click Advertising Viable in SaaS?

By Ryan Law on Fri, Jun 24, 2016

Depending on who you talk to, Pay Per Click is either a cost-effective lead generation channel, or it's a blackhole of wasted time, energy and money.

Today, I'm demystifying the pros and cons of PPC, and looking at four scenarios where Pay Per Click advertising makes perfect sense for SaaS companies.

1) When It Isn’t Your Primary Channel of Growth

There's a certain appeal to PPC as a mechanism of growth: input X produces output Y, and it's your job to maximise the difference between the two. This appeal can be strong enough to encourage SaaS companies to rely on it as their primary mechanism of growth, but there are huge problems with this approach.

  1. Relying on Pay Per Click means your growth has a direct relationship with your expenditure. Spending more to grow more may be tolerable; but maintaining a constant rate of growth necessitates a minimum spend, each and every month. Even minor deviations will damage your growth.

  2. If your solution exists in a well-established niche, you’ll come into direct competition with companies that have a much bigger ad budget than you. If you get sucked into a competition of who-can-spend-the-most, you’ll always get beaten by bigger, more established competitors. As Jason Lemkin says, bigger companies will be willing to bear exorbitant Customer Acquisition Costs, simply because they aren't relying on it for growth: they're just trying to capture marginal additional customers (say 10% of their total customer base), and the high CAC is offset by the relatively low CAC of the other 90%.

  3. If you're in a relatively novel, emerging niche, a different problem appears: it's unlikely the search volume will be high enough to generate the growth you need. With competitors appearing all the time, rate of growth matters, and you risk being beaten to the punch by competitors that have a more diversified approach to growth.

2) When the Maths Works Out

For paid customer acquisition to be profitable for your company, a simple relationship has to hold true: your customer's lifetime value (CLTV) needs to be greater than the cost of acquiring them (CAC).

CLTV > CAC

Sounds simple, right? But to illustrate how problematic this can be, I'm gonna draw on an example from Andrew Chen:

The upper and lower bounds of this example translate into a CAC of $100 and $500. Acquiring 100 users (equivalent to $2000/month in revenue) would cost either $10,000 or $50,000.

As well as the serious hit your bank balance would take to fund this, you'd need to have an iron grip on churn: to get the CLTV high enough to break even, you'd need customers to subscribe for a minimum of 5-months and 25-months respectively (and this is excluding extra costs, like ongoing service).

So to make PPC work for customer generation, you either need a super low CAC or a sizable CLTV. It's easier for B2B companies to hit the necessary CLTVs, but B2C companies can really struggle (it's the problem Drew Houston had targeting DropBox at consumers: his initial foray into PPC saw a CAC of $388 for a CLTV of just $99).

3) When You Promote Content, Not a Free Trial

There's a reason PPC CAC is so high: most SaaS companies target short-tail, bottom-of-the-funnel keywords, with a view to promoting their free trial and getting new customers signed-up in as few steps as possible.

In competitive niches, this means that most of your product-focused keywords will be too expensive to bid on. In less competitive niches, keywords won't have enough volume, or the average consumer won't understand enough about your solution to jump into a trial.

Solution time: promote downloadable content instead.

"Instead of promoting a free trial, and the expensive sales-focused keywords that come with it, try promoting a downloadable eGuide or a free cheatsheet. If you're selling your SaaS into digital agencies, ditch the free trial sign-up form, and offer an eGuide that looks at agency profitability."

source: 4 SaaS PPC Secrets to Boost Your Paid Advertising ROI

Sharing content allows to to solve both of these problems:

  • Instead of targeting super competitive product-focused keywords (like "HR software free trial"), you can create content to target less competitive long-tail keywords (like "improve small business hiring process"), and capture lead data at a fraction of the cost.
  • Sharing content allows you to educate prospects, explaining how your product solves their problem, and why it's better than existing solutions. This is particularly important in B2B, where long sales cycles and complex products require a real process of education.

4) When You’re Trying to Experiment

It's time to repeat Paul Graham's famous SaaS mantra:

"Do things that don’t scale."

When you're in the super-competitive early stages of growth, two things matter:

  • Customer insight, to help you work out what to build, and how to build it.
  • Speed, to help you build it before anyone else.

Pay Per Click hits both of these nails square on the head: allowing you get insight from real-world customers ASAP, even if it's too expensive to scale.

It's important to remember that you’re getting benefit from your PPC above and beyond new customers and revenue: you’re getting data. You're learning which messages resonate with people, which problems you can solve, which features they want and how much they'll pay for them.

In the early stages of growth, this is more valuable than developing a more scalable process. To grow faster than your competitors, you need to learn faster, and Paid Advertising can be invaluable for "outlearning" your rivals.

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