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Paul Wright, General Manager Western Europe and MENAT at AppsFlyer, explains why marketers need to start focusing on payback periods instead of the traditional LTV & CAC or long-term ROAS, when measuring the success of their campaigns.
In the current business climate in the GCC, immediate gratification has become something of the norm. CFOs, CMOs, and investors, have placed their sights on the bottom line and expect ROI windows to shrink to the greatest possible degree.
Marketing campaigns need to adjust to these new priorities. And that means new metrics. As esteemed mobile app Growth Consultant Thomas Petit points out, "To adapt, marketers should adopt a new paradigm when running campaigns, one that focuses on payback periods and especially short[er] payback periods instead of the traditional LTV & CAC or long-term ROAS."
Indeed, today, those traditional forms of measurement alone just won’t cut it. Marketers have little influence over monetisation, conversions, and average revenue per user (ARPU), so many have concentrated on decreasing acquisition costs and engagement costs (CAC and CPI). There is an argument that this is the wrong focus and may attract the wrong users, leading to lower lifetime value. Put simply, if you opt for clickbait, your cost per impression may plummet but users at the top of the funnel may see this as deception and switch off their engagement with the brand permanently. So, the smart marketer looks beyond CAC and CPI too. And the smart organisation finds a way to break down silos between acquisition and monetisation teams.
Predicted = uncertain
Lifetime value’s status as a glimpse of the future causes trouble for modern marketing teams. “Revenue someday” is not what executives want to hear, especially in a challenging economy. Accurate modelling is easier said than done. Teams need to get their hands on large data samples or reliable analyst resources. Despite all this, assuming perfect access to optimum sources, LTV remains a hypothetical. In the modern world, predicting future revenue from past cohorts is a headache because too many variables are in constant flux — the marketing mix, the product experience, schemes, promotions, and more.
We must also consider the world outside. Economic turbulence has a significant influence on buying behaviours, tastes, and demands. Amid all this, how do you know if you will see positive ROAS in a month, a year, or five years? Any negative cashflow will require financing, and we live in an era where capital is expensive. This negative ROAS could be fatal to a newly formed company. Today’s investors want to see a path to profitability rather than growth at all costs. And VC-backed startups are now under pressure to demonstrate profitable operations or an easy-to-follow route to this scenario. As such, the metric of today is the payback period.
Payback is a user-acquisition (UA) metric for the modern age. When we look at the ratio of lifetime value to customer acquisition cost, we are asking how much return is expected, but not when it is expected. Ad spend is immediate, or at least within the 30-to-90-day margin of credit periods. But LTV occurs over time and is speculative in nature. The payback approach estimates the gap between revenue and costs over time to find the moment when positive margins first occur. In essence, payback accounts for the cost of cash and as such, is a welcome tool at a time of uncertainty and limited cashflow. The shorter the payback period, the sooner the business can move to reinvestment mode and pull ahead of competitors who are still trying to secure external investment.
Ideal worlds
The payback period also does not require stakeholders to predict future revenue as it focuses on current cashflow. This gives access to the entire revenue development curve (actual and predicted) for the purposes of P&L reporting at any moment. It allows break-even analysis by segments such as date, country, platform, or even network, and can include how much realised profit was made up to a given point.
In an ideal world, we would break even on ad spend within a week or so of install right after our initial spend. Then the standard goals of growth and profits become attainable, and we face less pressure from cashflow. But in practice, payback times range between a month and a year. This implies significant costs of financing capital in advance, not to mention the risks of surviving until another round of funding, or indeed without any funding.
So, return on ad spend does not differ that much from payback. All we do is replace the vague LTV with a timeframe that accounts for the full gamut of profit-investment dynamics and not just the break-even moment. In the region’s current competitive climate, ROAS needs to be specific (ROAS-day 7 or ROAS-month 6, for example). Such exactitude extends to metrics like ARPU and LTV.
More than a timestamp
If you limit yourself to optimising only acquisition costs, you are likely to miss the larger picture. Payback period analysis tells you more than just the timestamp of the break-even point. It lets you know how much revenue is being generated at any given point in time. Organisations will need to become more sophisticated in data gathering, skills, and innovation if they are to survive longer-term payback periods. To quote Thomas Petit once again — Improving your payback time is an effort shared across acquisition & monetisation. It’s the only way to please your CFO when they shout, "show me the money!".
