Understanding unit economics in PPC is like having a blueprint for every euro, pound, or dollar you invest. When you truly grasp these metrics, you’re not only driving traffic—you’re ensuring that every campaign contributes to sustainable growth. Let’s break it down in an engaging, insightful way, starting with the essentials for different business models and then moving into more advanced analysis.
Unit Economics Essentials Across Business Models
Every business model has its own set of key metrics. Instead of listing them one by one, think of these as the building blocks of your PPC strategy. Here’s a concise overview, peppered with examples to bring each concept to life.
For B2C Campaigns
- Average Order Value (AOV):
Imagine your online store sells fashion items. If the average customer spends £50, that’s your AOV. This figure helps you determine how much you can afford to spend on acquiring a new customer. - Gross Margin:
If your product costs £20 to make and sells for £50, your gross margin is the difference, which is crucial for understanding profitability. - Break-Even ROAS (Return on Ad Spend):
Suppose your break-even point is a ROAS of 3:1—every £1 spent must generate at least £3 in revenue to cover costs. This metric keeps your campaigns profitable. - Maximum Customer Acquisition Cost (CAC):
Knowing that your AOV and margins allow you to spend, say, up to £15 per customer helps set a firm limit on your ad spend. - Profit on Ad Spend (POAS):
While ROAS tells you about revenue, POAS reveals actual profit. For example, if you earn £100 from a campaign but your profit margin leaves you with £20 profit on a £10 spend, your POAS is a clear indicator of campaign efficiency.
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For B2B Campaigns
- Deal Value and Profit Margin:
In B2B, deals often involve larger sums. If a single contract is worth £5,000 and nets a 25% profit margin, these figures become critical in deciding how much to invest per lead. - Lead-to-Sale Rate:
Consider that out of 100 qualified leads, 10 convert into actual deals. Knowing this rate helps forecast revenue and adjust targeting strategies. - Target Cost Per Lead (CPL) and Target CAC:
With a high-value contract, you might afford to spend more per lead. Setting clear targets ensures you’re not overspending while maintaining quality. - POAS in B2B Context:
Evaluating POAS in B2B means looking at the profit generated per campaign relative to ad spend. It’s a practical measure that helps fine-tune budgets, especially when each lead has a high potential return.
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For SaaS Companies
- Average Revenue Per User (ARPU):
If your subscription service earns an average of £30 per month per user, ARPU is your starting point for understanding revenue per customer. - Gross Margin and Customer Lifetime:
High gross margins are common in SaaS, but pairing this with customer lifetime—say, an average of 24 months—gives insight into long-term profitability. - Lifetime Value (LTV):
Multiply ARPU by the number of months a customer stays subscribed. A £30 monthly ARPU over 24 months equals a £720 LTV. - Maximum CAC:
This metric sets your limit on how much you should spend to acquire a customer relative to their LTV. - POAS for SaaS:
Given the recurring revenue model, POAS helps ensure that even with a higher initial CAC, the ongoing revenue generates enough profit over time.
Advanced Analysis: Beyond the Basics
Once you’ve nailed the core metrics, it’s time to delve deeper. Advanced metrics help you understand trends, customer behaviour, and long-term campaign performance.
Key Advanced Metrics and Their Impact
- Cohort Analysis:
Group your customers by acquisition date to observe trends. For example, compare how users acquired in January behave compared to those from March. This can reveal seasonal patterns or the impact of specific campaigns. - Churn Rate and Customer Lifetime Value (CLTV):
Monitoring churn helps you see how many customers drop off. When churn is low, your CLTV improves, justifying higher CAC if the long-term return is robust. - Monthly Recurring Revenue (MRR) and Annual Recurring Revenue (ARR):
For subscription models, tracking MRR and ARR offers a clear picture of consistent revenue flow. This is particularly useful when forecasting and planning for growth. - CLTV:CAC Ratio:
A balanced ratio indicates that the profit you earn from a customer exceeds the cost to acquire them. For instance, a ratio of 3:1 is generally seen as healthy, meaning you earn three times what you spend on acquisition. - Gross Margin and Break-Even ROAS Revisited:
These metrics aren’t just for initial assessments—they should be monitored continuously. Fine-tuning your break-even ROAS helps ensure that even if market conditions shift, your campaigns remain profitable. - Marketing Efficiency Ratio (MER):
MER looks at overall marketing spend relative to total revenue. A lower MER indicates that your campaigns are operating efficiently. - Profit on Ad Spend (POAS) Revisited:
POAS becomes especially important when comparing the profitability of different channels or campaigns. It tells you not just if you’re reaching your revenue targets, but if you’re truly generating profit after all costs.
Bringing It All Together
Unit economics is the secret sauce behind every successful PPC campaign. By understanding and actively managing these metrics, you can ensure that your advertising spend not only drives traffic but also contributes to sustainable growth. From the straightforward metrics in B2C, B2B, and SaaS models to advanced analysis like cohort analysis and CLTV:CAC ratios, every data point offers a pathway to optimisation.
At HOC, we’re passionate about transforming complex numbers into actionable strategies. Our approach is both creative and data-driven, ensuring every campaign is fine-tuned for maximum impact. Ready to delve deeper into your unit economics and see your PPC campaigns deliver real profit? Let’s chat and turn your metrics into meaningful growth.
