Why CPL, CPA and CLTV Matter to CMOs in SaaS Companies

First off, let's look at important KPIs and do a quick recap in how you measure these KPIs, how they correlate with each other and how they will impact your marketing strategy.

KPI's every CMO needs monitor

Among other advanced marketing metrics on your dashboards, these 4 KPIs should be on your weekly agenda to reach a sustainable growth model.

1. Cost Per Lead (CPL)

Cost per lead (CPL) is a marketing metric that measures the expense incurred to acquire a lead. A lead is typically defined as a potential customer who has expressed interest in your product or service, often by providing their contact information. CPL is calculated by dividing the total marketing spend by the number of leads generated. You can measure your CPL towards all marketing efforts or specific campaigns.

2. Cost Per Acquisition (CPA)

Cost Per Acquisition (CPA) is a critical metric that measures the average cost of acquiring a new customer. To calculate CPA, simply divide your total marketing (and sales) expenses by the number of new customers acquired within a specific period. In the SaaS industry, where competition is fierce and customer retention is key, understanding and optimizing your CPA is essential for sustainable growth. A high CPA can indicate inefficient marketing strategies or an unsustainable business model. It's important to continuously evaluate and optimize your acquisition channels to ensure a healthy CPA ratio.

Marketers frequently struggle to measure their CPA due to the complex processes, numerous touch points, and various teams involved in winning a customer. To tackle this, I recommend starting from the ground up with your individual marketing channels and campaigns. You can start to calculate your CPA with this guide and template. Gradually enhance your reporting infrastructure and intelligence by implementing a CRM like HubSpot and connect your acquisition channels. Setting up paid advertising channels such as Google AdWords, Facebook, or LinkedIn is straightforward. Once you start tracking the cost per lead, cost per opportunity, and the total cost to close a customer, you will gain an entirely new perspective on the effectiveness of your marketing initiatives.

3. Annual Recurring Revenue (ARR)

Annual Recurring Revenue (ARR) in SaaS represents the annualized value of recurring revenue from your existing subscriptions. It provides a clear picture of predictable revenue streams on an annual basis, excluding any one-time fees or irregular revenue. ARR is calculated by multiplying your monthly recurring revenue by 12 months. Track the growth of ARR over time to evaluate the performance and health of your SaaS business. Consistent ARR growth is an indicator of product-market fit and successful customer acquisition and retention strategies.

4. Customer Lifetime Value (CLTV)

Customer Lifetime Value (CLTV) is the total revenue that a customer is expected to generate throughout their relationship with your company. By understanding the CLTV of your customers, you can make more informed decisions about how much to invest in acquisition and retention strategies.

Calculating the CLTV for your SaaS business:

To simplify this equation for SaaS businesses, you would measure the revenue gained through a customer during its lifespan.

For example, if your customer generates 5,000 USD in ARR during the first 2 years and due to upselling 10,000 USD in year 3, then your CLTV will be 20,000 USD (5,000 x 2 years + 10,000 x 1 year).

What's an Acceptable Cost Per Acquisition (CPA)?

This calculation is probably the most empowering and career-enhancing skill any CMO or B2B marketer can master 📊

CPA < Revenue

If your CPA is higher than your revenue, it indicates a fundamental issue with your marketing efforts or business model. Your revenue (use CLTV to start with) always needs to be higher than your CPA. Why is this so important? Let us look at some potential consequences and considerations if your CPA would be higher than your CLTV.

If your CPA is higher than your CLTV you might experience...

1. Negative Profitability:

You are spending more to acquire each customer than the revenue you expect to generate from them over their entire relationship with your business. This leads to unsustainable financial losses.

2. Cash Flow Problems:

Consistently spending more on acquiring customers than what they bring in can lead to significant cash flow problems, potentially jeopardizing your business’s ability to operate and grow.

3. Unsustainable Growth:

Even if you manage to grow your customer base, the costs associated with acquiring these customers will outweigh the revenue, making growth unsustainable in the long term.

4. Difficulty in Scaling:

Investors and stakeholders are less likely to support scaling efforts if the underlying unit economics aren't favorable. They typically look for businesses where CLTV greatly exceeds CPA, indicating potential for profitable growth.

5. Strategic Shifts Required:

You may need to reevaluate your customer acquisition strategies, marketing expenditures, sales processes, or pricing models to bring CPA down or increase CLTV. This could involve optimizing marketing

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Average CPA for SaaS Companies By Industry and Customer Type

You might wonder why the CPA in our examples is set so high. By examining the entire sales and marketing funnel, you can see how quickly these numbers add up. Although every business's CPA is unique and varies by industry and customer type, benchmark reports can provide valuable insights for comparison.

The collected data from Firstpageage.com give you a good indication about where you currently are. The higher you go up market, the higher the CPA. The CPA is defining what you can spend the generate a customer and thus on the marketing strategy and channel you can use.

Why your CPA defines your marketing strategy

Keep in mind that the CPA significantly influences your marketing strategy and choice of channels, as it helps determine the most efficient and effective ways to allocate your marketing budget. Let's break this down for each customer type:

Low CPA for Small to Medium-sized Businesses

For SMBs, focus on digital advertising through platforms like Google Ads, Facebook Ads, and LinkedIn Ads, as these are cost-effective and scalable. As your CPA doesn't give you much room for expensive activities (e.g. events), you need to stick to efficient marketing channels. You should focus on PLG strategies and avoid to involve sales reps and customer success as much as you can.

Medium CPA for Middle Market

When targeting the middle market, you can start utilizing Account-Based Marketing (ABM) for a personalized approach as you can have a higher CPA, but also need to deal with longer sales cycles. LinkedIn Ads are effective for reaching professional networks where decision-makers from mid-sized companies are active. Use webinars, virtual events, whitepapers, and case studies to establish your company as an authority. Industry conferences and trade shows provide valuable networking opportunities, while personalized and segmented email campaigns help in nurturing these potential clients.

High CPA for Enterprise

For enterprises, the sales cycles are longer and the CPA is high. You will probably focus on SLG-driven strategies. The benefit: You can invest more heavily in ABM efforts to target high-value accounts with personalized campaigns. Develop high-value content such as in-depth whitepapers, research reports, and comprehensive case studies demonstrating ROI. Participate in executive events and roundtables to engage with C-suite executives and key decision-makers. Employ direct sales outreach to build strong relationships, and form strategic partnerships and alliances to enhance credibility. High-end digital advertising on platforms like LinkedIn and industry-specific sites, along with a visible presence in industry publications and conferences, will enhance your company’s leadership position.

What You Can Do to Lower Your CPA

Lowering your CPA involves optimizing various aspects of your sales and marketing strategies. Focus on cost-effective acquisition channels, improve targeting and personalization in your campaigns to reach your ICP, and invest in customer retention (talk to your CRO and Customer Success team!) to maximize the lifetime value of acquired customers.

As adding and allocating all sales and marketing costs often isn't possible you can start by doing that for a specific channel. However, no deal is being won by a single person, marketing or sales activity and you should keep an holistic view - as the customer journey usually is more complex and includes many different touch points.

Final Thoughts

Understanding and effectively managing metrics is not just a function of good financial stewardship but a cornerstone of strategic growth for any B2B marketer in SaaS companies. These metrics provide critical insights into your marketing efficiency, customer value proposition, and overall business sustainability. They even define your strategy and channels you can use.

For SaaS CMOs, optimizing marketing channels to strike a balance between CPL and CPA while maximizing CLTV is paramount. This often means tailoring your strategies to different customer segments—whether they're SMBs, middle-market companies, or large enterprises. By doing so, you can ensure that your marketing spend is not only attracting the right customers but also nurturing them into long-term, profitable relationships. Ultimately, having a deep understanding of these key performance indicators empowers you to make data-driven decisions that align marketing efforts with broader business goals.

Continue your learning experience and check out 10 Advanced Metrics Every SaaS Company Should Track.