Companies that offer Software as a Service (SaaS) are constantly trying to figure out a way to increase the Return on Investment (ROI) for money allocated to the budget for sales and marketing expenses. Inbound marketing is an effective tool to increase the marketing ROI for SaaS. Inbound marketing increases the quality of leads. Marketing automation tools make it easy to show analytics. Sales are encouraged by using incentives. Management of sales is achieved by comparing sales results with performance metrics.
An example of inbound marketing used to increase ROI is when customer service requests are handled promptly, questions are answered politely, problems are solved quickly, and as part of the customer service process new products or upgrades are offered to the customer at a discount as a reward for continued customer loyalty.
Calculation of Return on Investment
In order to calculate the marketing ROI for SaaS products, it is necessary to determine the customer acquisition costs ratio (CAC).
When the payment for SaaS products occurs as a monthly subscription, there is a need to calculate the present value of the future revenue stream.
Here are the steps:
1. Convert sales to an annualized amount. If the SaaS sales are on a monthly subscription basis, use the revenue stream paid by a customer for a twelve-month period discounted to present value. For annual subscriptions paid at once, in advance, use that amount.
2. Multiply the annualized sales by the gross margin percentage.
3. Divide the amount from step two by the sales and marketing expenses required to make those sales.
Here is the formula:
CAC Ratio = (Annualized Sales x Gross Margin %) / Sales and Marketing Costs
The CAC Ratio shows the ROI on the investment in sales and marketing costs. For example if the CAC ratio is 0.50, it means half the investment is recouped in one year or that it takes two years to fully recoup the investment. Higher CAC ratios are better.
When CAC ratio values fall below 0.50 a company’s investment in sales and marketing is not effective and needs improvement. A CAC ratio between 0.50 and 1.0 is healthy. When the ratio is higher than 1.0 this warrants increased investment in sales and marketing to expand growth.
Understanding how to calculate the marketing ROI for SaaS helps determine the budget allocations for inbound marketing to generate qualified B2B leads.
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