{"id":13441,"date":"2017-09-11T18:00:59","date_gmt":"2017-09-11T17:00:59","guid":{"rendered":"http:\/\/blog.intercom.com\/?p=13441"},"modified":"2024-10-22T19:21:59","modified_gmt":"2024-10-22T18:21:59","slug":"the-power-of-payback-periods-in-online-advertising","status":"publish","type":"post","link":"https:\/\/www.intercom.com\/blog\/the-power-of-payback-periods-in-online-advertising\/","title":{"rendered":"The power of payback periods in online advertising"},"content":{"rendered":"

There’s a common misconception among SaaS marketers and analysts about measuring the success of online advertising campaigns \u2013 and it could be putting a ceiling on their growth.<\/p>\n

Most SaaS marketers and analysts measure the success of their campaigns with lifetime value (LTV), cost of acquiring a customer (CAC)<\/a>, and the margin between the two. It’s the correct first step to take when analyzing any campaign. After all, LTV margin is the fundamental metric that demonstrates whether a campaign is sustainable.<\/p>\n

However, when choosing how to allocate limited capital between two LTV-profitable campaigns, most fail to do any analysis beyond this first step. They simply optimize towards the campaign with the highest margin.<\/p>\n

Unfortunately, focusing solely on LTV margin can come at a significant cost to customer growth, revenue and profitability. The key to determining the best campaign, and what most marketers fail to consider, is the rate at which a campaign returns capital, also known as the payback period.<\/p>\n

The inspiration for this post came from my experience hiring online marketers and analysts. I use a simplified version of the examples below as an interview screener. The vast majority of candidates flunk it \u2013 with more than 90% (including experienced SaaS marketers and analysts) never initiating a discussion around payback periods.<\/p>\n

Using two examples below, I show the price many pay by optimizing simply to LTV margins and the upside possible by understanding payback periods.<\/p>\n

The premise for each example<\/h2>\n

Imagine you\u2019re the head of online marketing at a SaaS company<\/a> and you are given $1 million to acquire customers. You\u2019re optimizing for growth. You have data on just two successful campaigns, and you can only invest your $1 million in a single campaign.<\/p>\n

To make the right decision, you need to follow these three steps:<\/p>\n

    \n
  1. Understand your unit economics (LTV, CAC, Margin).<\/li>\n
  2. Understand your payback period.<\/li>\n
  3. Consider how that payback period impacts your ability to reinvest in the business.<\/li>\n<\/ol>\n

    Now let\u2019s go through our first example.<\/p>\n

    Example 1: The higher LTV margin doesn\u2019t always win<\/h2>\n

    You can choose one of the two campaigns (A and B) below:
    \n<\/p>\n

    Using our framework, we know the first step is to calculate our unit economics. So we do the following:<\/p>\n

    Campaign A:<\/p>\n