Seems like many people are confused about ads and if they're right for them
Since there are almost no *good* resources about it, and I've been doing ads for almost 10 years, I started writing about SaaS ads 🤓
The first one is be about when does it makes sense to run ads for a SaaS.
It's still a draft but should give u some good insights already
(website version available in first comment, much easier to read)
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There are many types of ads, and while a good chunk of what you will find here can be applied everywhere, I'm going to specifically focus on online ads (Facebook Ads, Google Ads, Reddit Ads, LinkedIn Ads, etc)
1. You want Volume and Speed
Yes, this one is the obvious but I had to mention it. 😅
Unlike "free" marketing channels like SEO or organic content, ads will cost you some money. So, why pay for ads when you can get users for free?
Let's say you are selling a $100 product, and you make $50 of profit per customer.
Let's compare 2 scenarios, one with full organic growth (A), and one where you run ads (B).
Scenario A: 10 sales with $50 of profit = $500 total
Scenario B: 100 sales with $20 of profit = $2,000 total
Scenario A might gets you more profit in percentage, but Scenario B gets you more total profit.
Basically, ads allow you to trade off profit (and speed) in exchange for volume.
If you prefer high-profit slow growth, ads might not be the best fit for you.
Now, I mentioned "free" channels above. I specifically wrote "free", because... it's not really free.
With organic channels like SEO or other, the cost is your time and energy. You create content that platforms and people might like, and in return, they might show your content to their audience. But the only way to see results is with time, you won't get millions impressions overnight.
With ads, you're leveraging someone else's audience to grow faster. What it costs you in money, it makes it up in time. You pay money, and you get impressions immediately.
Instead of waiting for weeks or months to see if your new landing page converts better, ads gets you immediate data, in exchange of money.
But this also means... you need to have your finance in order
2. You have your finance in order
There are 2 essential numbers when you run ads:
Your lifetime Value (LTV): How much revenue you make per customer
Your Acquisition Cost (CAC): How much you spend to acquire a new customer
If your Lifetime Value is higher than your maximum Acquisition Cost, you ads are profitable and you can acquire new customers profitably.
So how do you calculate all that?
Lifetime Value (LTV)
The Lifetime Value is the sum of all the money you make from a customer over the span of their relationship with your business.
How to calculate LTV for Subscriptions
How to calculate LTV for One-Time Payments
It might be hard to calculate if you're just starting out and don't have data about churn or extra purchases.
When you lack the data, just try to make an educated guess, aiming on the pessimistic side just to be safe.
Customer Acquisition Cost (CAC)
The Customer Acquisition Cost is the cost you can afford to spend to acquire a customer.
The acquisition cost itself it determined by your ads result, so you can't calculate it in advance, but you can calculate your Maximum Acquisition Cost.
For this, take your Lifetime Value and substract all the average operational costs per user (AI usage, hosting, etc).
That's your Maximum Acquisition Cost.
If the cost of getting a new user via ads (or any kind of paid marketing) is below this amount, you make profit.
If you're exacty at this amount, you're breaking even. If it's above, you are at a loss.
For example:
$120 LTV - $10 Cost per user = $110 Max Acquisition Cost
If your ads costs you $109 per new customer, then you make profit.
Of course, you don't want to make just $1 of profit per customer, so you need to define a Target Acquisition Cost. But you have to stay realistic.
You can use our free Ads Profit Calculator tool to test different scenarios with your LTV, conversion rate, and ad costs.
Keep it mind it's impossible to know the exact cost in advance, as it completely depends on your industry and your marketing strategy.
This brings us to our next point...
Managing your Cashflow
Since it costs money, you also have to manage your cashflow, esspecially if you have a subscription model.
Let's take one of my previous businesses as an example: Talknotes
Talknotes had a $12/month subscription, and it costed me up to $50 to acquire a new paid user
That means that I was loosing money upfront: $50 Acquisition Cost - $12 subscription = $38 loss per user upfront.
But... why would anyone want to loose money on ads? 🤨
Well, you aren't loosing money. Not really. You're just delaying the revenues.
My lifetime value was something around $80, but since it was paid in monthly subscriptions, it took me a few months to make the money back.
It means I was loosing money upfront, to (maybe) make money over time. Exactly like an investment (because it is one!)
So, if your revenues are delayed, it means you need to have some cash available to make up for the upfront loss.
But luckily, there is an easy way to mitigate this: Yearly details.
In truth, for Talknotes I was not loosing any money upfront, I was actually making profit.
How?
Because I offered a cheaper yearly subscription to make up for the upfront loss. The yearly option was at $60, close to a 60% discount from the monthly price, so it was an amazing deal for users.
Around half of the users went with the yearly deal. This mean that I was making a profit upfront, AND I still had the higher profit from monthly subscribers.
This allowed me to scale Talknotes from $1,500 MRR to over $7,000 in just a few months, before I sold it.
💰 Total profit: $200,000 exit over $40,000 profit (For $70k total sales)
Had I stayed with organic channels to maximize profit, I would never have been able to grow as fast as I did and sell it. And even if I decided to keep it and shut down all the ads, I would have kept making profit from the recuring subs as well as the natural organic growth (word of mouth, etc).
This is actually what the new buyer did, he shut down most of the ads, but the app kept growing to $10k of MRR while generating profit every month.
All that because I was fine loosing money on the short term to maximize growth.
So, consider what matter the most to you:
Maximizing profit at the cost of your time and energy (organic channels)
Maximize growth at the cost of your profit (ads)
But if you choose to maximize growth, make sure your finance are in order so you don't run out of cash and are forced to stop your ads.
But finance is only one part of the equation...
3. You have a proven product & positioning fit
Simply said, if you don't have feedback or customers yet, you are moving blindly. It's not directly a problem per se, but if you launch ads and they don't work, you will have no idea if it's an issue with your ads, your landing page, or your product.
The goal is to reduce the amount of uncertainty as much as possible to save money.
Having 3 unknown variables (product - positioning - ads) is a recipe for disaster, because you won't be able to properly figure out what's working and what's not.
If you have no clicks, it could be your ad's design, it could be your messaging, or it could be your targeting. You will have no way of knowing.
3. You have a good Funnel
None of what we mentioned above matter if your funnel sucks. For an online business, your funnel is the whole business.
If it's broken, all the money and time you put into marketing will be wasted.
This is especially true for ads, because ads platforms like Facebook or Google penalize you for not converting users they send you.
If your landing page sucks, platforms will see that they are sending traffic to a low quality page, which will lower your user experience score and predicted action rate.
User Experience Score is an internal metric often used by platforms, to determine the cost of your ads and many other things.
This means that if you have a funnel that does not convert, you will pay way more for your ads
Now, here is the good thing: You have 100% control over your funnel. This is the only thing in the advertising process where you have absolute control over
You can always improve your ads and targeting, but the result is still dictated by an algorithm, not you.
On the other hand, you can improve your landing page at any time, the only thing dictating how good it performs is your copywriting skill.
It's much easier (and faster) to improve your landing page and funnel than making better ad creative.
Improving your landing page conversion rate from 0.5% to 1% means you get twice more sales with the same amount of traffic. Which means your ads will be twice cheaper. That can be the difference between making profit or not.
You can use the Ads Profit Calculator to see how different conversion rates impact your profitability and how even a small improvement can make a huge difference!
There are many ways to improve your conversion rate, and this will be a whole article on its own.
But the bottom line is:
Algorithm will penalize you for not converting users they send you.
Unlike ads, you have 100% control over your landing page and funnel
Doubling your conversion rate means doubling your sales for the same amount of ad spend.
So, get your funnel in order!
Now, before we finish our article, there are a few additional things that are important to consider.
3. Audience Size & Identifiability
Audience Size
Obviously, there is no point running ads if your audience can't be reached by the ad platforms.
I think the best way to illustrate this is with an example, so let's take ScreenshotOne as an example.
ScreenshotOne is a SaaS that allows you to take screenshots of websites. Since it's an API, you can use it pretty much however you want to take screenshots.
So, what kind of ads should we run if we want to promote it?
First, we need to answer the question: "Who would use a Screenshot API?"
Developpers, of course.
But not ALL developpers. Developpers building a software that need website screenshots in a way or another.
We're close, but not quite yet. There is more to consider.
Adding an API to your app is complex and take lots of work. It's usually something you do only once, and once you have a solution, you don't touch it ever again (unless the solution sucks and you need to change it).
So, in this very specific example, we are targetting developpers that are building a software that need website screenshots, AND don't have a solution yet.
That's a VERY small and VERY specific audience!
If you use an large-scale Interruption-based platform (like Facebook Ads), it will have a hard time finding customers because it's using AI under the hood to find people who are similar to the ones who already took action on your website. For it to work, you need to have a somewhat large pool of audience.
However, if you use a Search-based platform (like Google Ads), that works mainly with user intent (ex: searching "Screenshot API" on Google), you will be able to reach out to your audience easily, because you're basically advertising where they are looking to find a solution.
Simply said, interruption-based platforms don't need an advanced AI to find the right people, because the right people identify themselves via their Google searches.
Note: I'm purposely simplifying some things here. Google Ads does have an AI under the hood, it's just very different from Facebook Ads.
So, does that means that if your audience is small and ultra specific, or if you need to reach them out at a very specific time of their buying journey, search-based platforms are usually better?
Yes... and no. Like everything, there are exceptions!
Which adds our second criteria, identifiability, or how easy it is to identify the audience.
Identifiability
A great example I can think of to illustrate this is weddings. While the pool of "getting engaged" audience is large, it's something that only happens (hopefully) once in a lifetime. And yet, Facebook can still figure out who is getting married, and even has a specific targetting option for that (source)
This is because getting engaged created a big shift in consumed content, and platforms Facebook or Reddit can figure out who is getting married based on that, thanks to their internal data (ex: content watched on their platforms) as well as external data (ex: Content watched on websites with a tracking pixel installed).
Taking back our first example, it would be VERY difficult to identify a developper looking for a screenshot API, because there is no significant change in behavior platforms can catch up with.
They won't spend weeks watching videos about it, it probably takes a few days maximum to pick a solution and install it and that's it.
In this case, the only way to identify the audience would be trough their intent, meaning you need to advertise where they are looking to find a solution (Google Docs, Blog posts, Youtube tutorials, etc)
There can be more to consider in some specific cases (ex: Retargeting or Brand awareness ads), but that will be for the last part of the article.
In the meantime, to recap this part:
Pick the right platform based on the audience size and identifiability
Small audiences Search intent / Time-sensitive products = Interruption-based platforms
Large audiences Time-insensitive products = Search-based platforms and interruption-based platforms
Audience Size: How large is your audience? Especially considering the timing
Identifiability: How easy is it for platforms to identify the right audience, at the right time?
4. Pre-orders and other special cases
In the article, I kept mentioning there were special cases etc. This is what we will talk about here!
There are some situations where the rules mentioned above don't necessarily applies
Pre-orders, Waitlists, etc
There are cases where making a MVP would take too much time, and you would rather have some proof the market will want the product before actually building it. This is when pre-orders, waitlists or other market pre-validation tactics can make sense.
There are usually 3 ways to do this:
Waitlists: Explain what the product will be, then let people join the waitlist to know when it will be ready.
Pre-orders: Explain what the product will be on the landing page, then let people pre-order it
Fake landing page: Pretend the product exists, with a