In the ‘NOW’ Era, Marketers Should Prioritise Payback Periods and Cashflow
In the current business climate, marketers should focus on payback periods and cash flow instead of traditional KPIs like LTV and CAC. This is because CFOs, CMOs, and investors are now focused on the bottom line and expect ROI windows to shrink.
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In the current business climate in the GCC, immediate gratification has become something of the norm. CFOs, CMOs, and investors have focused 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 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 must get their hands on large data samples or reliable analyst resources.
Despite all this, assuming perfect access to optimum sources, LTV remains 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 cash flow 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 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. However, LTV occurs over time and is speculative. 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 cash flow. The shorter the payback period, the sooner the business can move to reinvestment mode and pull ahead of competitors 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 cash flow. This gives access to the entire revenue development curve (actual and predicted) for 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.
Ideally, we would break even on ad spend within a week or so of installation right after our initial spend. Then, the standard goals of growth and profits become attainable, and we face less pressure from cash flow. 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 without any funding.
So, the return on ad spend is similar to payback. We 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 will likely 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 must become more sophisticated in data gathering, skills, and innovation to survive longer-term payback periods. To quote Thomas Petit 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!”.
