How to Calculate AdWords Profitability for your SaaS Business
Google Ads (formerly AdWords) is a core digital marketing channel for most businesses. But how do you know whether it will be profitable for you?
In this post we’ll show you how to calculate if a PPC campaign will work for your SaaS business as a profitable customer acquisition channel. We’ll also provide a free PPC Profitability Calculator you can use to figure out if AdWords (or any other PPC channel) works for you.
Six easy steps to calculate the profitability of Google Ads
Step 1: Find a keyword you want to bid on
Find a keyword that is relevant to your product or business. As an example, let’s assume your product is a self-service tool to create and host landing pages, so ‘landing page creator’ will be a relevant keyword. Go to Google Adwords and click on Keyword Planner tool under the Tool menu.
Click on ‘Get traffic estimates for a list of keywords’ and type ‘landing page creator’. This will show you a graph of how many clicks and impressions the keyword gets in a day and at what cost. See here how to create high-converting search ads.
Step 2: Decide your average CPC
If the CPC you’re willing to bid is lower than the maximum shown, shift the slider to bring it to your desired CPC. In this example, we set it at $4.
With CPC set at $4, 100 clicks on the ad will cost a total of $400. If I get 100 clicks on the ad for the duration of the campaign, then I’ve spent a total of $400.
Step 3: Calculate the average number of free trials
Assuming the AdWords visitor to free trial conversion rate is 10%, then you’ve just acquired 10 free trial users at a total cost of $400 — meaning $40 per free trial customer. Tip: optimizing your landing pages will help to maximize conversions from website visitors into free trials and customers. VWO Testing allows you to A/B test any element on your website and increase conversion rates.
Step 4: Calculate the number of paying customers
According to Userpilot, the average conversion rate for free trial to paying customers is 25%. But let’s be conservative and use a 15% conversion rate for this example. So the number of paid customers will be 15% of 10 (number of free trials), giving us 1.5 paying customers.
Step 5: Calculate your customer acquisition cost (CAC)
The number of paying customers acquired from that investment was 1.5. So, the average customer acquisition cost (CAC) is $400 / 1.5 = $266. This may sound expensive, but to understand whether you’ve made a profit we need to take into account the revenue from a customer on average.
Step 6: Calculate the average customer lifetime value (LTV)
Simply determine the average number of months a customer pays for your product before churning, and the value of the most commonly bought subscription plan. Suppose your most commonly bought plan is $49 and the average lifetime is 10 months, then the average customerlifetime value (LTV) is $49 x 10 = $490
Step 7: Deduct CAC from LTV to calculate gross profit
LTV = $490
CAC = $266
Gross profit = $224
So we calculate that from this Google Ads cost, you’ll make a profit of $224. From an AdWords purely marketing perspective, this seems okay as this marketing channel is profitable. But in truth, there is more to consider.
Considering profitability more broadly
AdWords probably won’t be your only marketing channel, and there are other costs beyond media spend to calculate the Return On Investment (ROI) of all your marketing efforts. But you can use these same calculations to determine the profitability of any sales or marketing spend. Also, consider other operating costs such as salaries, rent, and hardware to calculate the profitability of your company overall. If you’ve got the exact numbers down, you’re good. If not, then aim for LTV to be at least three times CAC.
Here’s the AdWords / PPC Profitability calculator
Access the calculator on Google Spreadsheets here.