Before You Spend on Ads, Do the Math
Before you dive into performance marketing, consider: Can your business truly afford to scale using paid advertising?
When your product is ready, you're naturally eager to showcase it to the world. You've built something remarkable, and you're excited to fuel growth and momentum through performance marketing.
Performance marketing can be a powerful growth lever, but it has significant upfront costs, and optimizations take time to yield results. While you will see a rise in your user count, your ad costs will be due immediately, even before users can generate any revenue.
Are you prepared to fund the gap between your initial investment (fixed and variable) and cohort break-even? And for how long? Today, let’s explore what that amount might look like for you.
Understanding the Math
Let’s use one of my favorite apps, Todoist, to walk through this exercise.
Just a heads-up: this is a completely made-up example for illustrative purposes only - I don’t have access to their actual data, and this isn’t affiliated with Todoist in any way.
Todoist, as the name suggests, is a to-do list app, and beloved by productivity enthusiasts. Users signup for a free account and can upgrade to a paid PRO plan, which costs $4/month, billed yearly. For simplicity, we'll assume that users convert to the paid plan within the same month they sign up.
Let’s use Todoist’s organic performance to calculate our baseline numbers:
Organic Installs: 600
Install to Signup Conversion: 50%
Signup to Paid Subscription Conversion: 10%
Total Paid Subscribers: 30
Revenue per Subscriber: $48/year
Total Cohort Revenue: 30 x $48 = $1,440
Revenue per Signup: $1,440/300 = $4.8
To break even Todoist has to ensure their Cost per Signup (CAC) is below $4.8, or their Cost per Install (CPI) is below $2.4.
Now let’s run a baseline performance marketing test:
Spend: $10,000
Installs: 2500 (Cost per Install: $4)
Signups : 1250 (Cost per Signup = $8)
Paid Subscribers: 125 (Cost per Subscriber: $80)
Total Revenue: $6,000
Loss: ($4,000)
Assume that we have a 100% retention and renewal rate. A user needs to be subscriber for 20 months at $4/month for Todoist to break even on the ad costs alone.
Cumulatively, this is what you will need to fund performance marketing yearly:
Year 1:
Monthly ad spend: $10,000
Annual Spend: $120,000
Paid Subscribers per month: 125
Revenue Per Paid Subscriber per year: $48
Revenue Year 1: $72,000
Year 1 loss: ($48,000)
Cumulative loss so far: ($48,000)
Year 2:
Annual spend: $120,000
New Paid Subscribers per month: 125
Revenue Existing Users: $72,000
Revenue New Users: $72,000
Year 2 profit: $ 24,000
Cumulative loss: ($24,000)
Year 3:
Total spend: $120,000
New Paid Subscribers per month: 125
Revenue Existing Users: $144,000
Revenue New Users: $72,000
Year 2 profit: $ 96,000
Cumulative profit: $72,000
In this scenario, Todoist’s Performance Marketing efforts result in negative returns for 2.3 years before breaking even.
What do these calculations not account for
The funnel metrics may look worse, potentially reducing revenue.
Retention rates can often range from 30-90%, and your time to break even can be pushed even further.
Ad costs (CPMs/CPSs) fluctuate based on several factors, and your CPI costs may rise with no corresponding revenue growth.
Costs to no include other performance marketing costs that I have highlighted here.
When running on small budgets, many ad networks require payments once you reach minimum spend thresholds or even expect prepayments, meaning you’ll need to fund these accounts before acquiring any users.
Launching performance marketing requires more than just a product, a good story and tracking. You need to do a realistic assessment of your ability to absorb upfront costs, and the delayed revenue. The lag between initial investment and profitability can be longer and costlier than anticipated, particularly as user acquisition expenses fluctuate and user behavior varies.
Need a gut check before spending on paid ads?
Book a free 30-minute consultation with me to walk through your funnel, talk expectations, and make sure you're financially set up to scale sustainably.
Remember: we are not scaling a campaign, we are scaling a system. Systems require long term commitment and funding.
