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Return On Effort: Can This Formula Help Your SaaS Company?

Ajay Jay
March 22, 2024
5 min read

As a SaaS (Software as a Service) business owner, your driving goal is to achieve maximum returns with minimal effort. But, navigating this course might feel like trying to find a needle in a digital haystack. You are not alone in this.

That's why the concept of 'Return on Effort' (RoE) has become the compass many SaaS companies are turning to - a scale on which to measure their strategic moves, and a formula to unlock higher productivity. The question on everyone's lips, then, is: Can RoE really revamp your SaaS company?

Let's break it down.

"Return on Effort looks at the relationship between the results achieved by a company and the effort expended in making them. It's an approach aimed at maximizing productivity and economic outcome."

How about I introduce you to the nitty-gritty of this influential metric and how you can make the most of it to scale your SaaS venture? Ready to delve in? Let's get started then.

What is "return on effort"?

Return on effort”, also known as ROE, is a measure often used by SaaS (Software as a Service) companies to understand the effectiveness of their strategies and activities, particularly in the areas of marketing and customer acquisition. Working from the principle that it's not sensible to spend more money to acquire a customer than the value that customer brings to the company, ROE seeks to balance expenses against gains.

How is "return on effort" calculated?

The calculation of ROE involves looking at the costs of acquiring a customer and the value that customer brings over their time with the company, which is often referred to as the "customer lifetime value". To give a concrete example, if a company spends $200 to bring a new customer on board, and that customer ends up purchasing $500 worth of services over their time with the company, the ROE is positive. On the other hand, if the customer only spends $150, the ROE is negative – the cost of acquisition was more than the value the customer brought in.

How To Estimate "Effort" 

When discussing "Effort" in the context of your SaaS business, we are essentially talking about the resources committed to generating customer interest, engagement, and eventual conversion-- such as time, cash, and manpower.

1. Laying the ground

Laying the groundwork for assessing your SaaS company's Return on Effort (RoE™) involves much more than mere mathematics - it also requires a comprehensive understanding of key business metrics and startup viability indicators such as Customer Acquisition Cost (CAC) and Lifetime Value (LTV). Inclusivity of these variables gives precision to your RoE™ evaluation and aids in the strategic allocation of resources like cash and manpower, the structuring of marketing campaigns, and planning hiring processes among others.

CAC, a crucial element in the payback period calculus, surfaces as a fundamental component in formulating RoE™. It's paramount that you have a clear idea of your customer acquisition costs, the primary factor determining the level of effort in acquiring a customer. Its measurement and tracking have been shown to be vital not only for businesses aiming to optimize their processes, but also for investors seeking viable investment opportunities. Indeed, in venture capital and startups context, the balance between the CAC and LTV ratios can be decisive in assessing your product's or service's market viability.

2. Calculating RoE™? Bring complexity down to simplicity

Calculating RoE™ might seem daunting, but the process can be simplified. Begin by taking into account your LTV and CAC, you assess the profitability of each customer, considering what you earn from them versus the cost of acquiring them. From this, you can begin to determine the return on the effort invested in customer acquisition. Incorporate your payback period into your calculations, to provide a more comprehensive analysis.

3. Adjust for risk, strategic fit, and skills transfer

When evaluating your RoE™, it's important to keep in mind that calculation figures can be affected by factors such as risks, strategic fit, and skills transfer. A complete RoE™ assessment entails evaluating the effort in terms of resources spent, but also in terms of risk-bearing and the strategic fit of certain initiatives. Also consider the extent to which certain projects can help your team acquire new skills that can be transferred to future contingencies. This allows not just for an assessment of what you have put in, but also what your business and team may gain from invested efforts.

4. Inputs needed to calculate RoE™

To calculate RoE™, various inputs are needed. Definite figures like revenue and financial costs are a must, but don't forget to include the payback period too. Alongside these, consider metrics like your business growth rate, churn rate, gross margin, customer lifespan, and revenue per user. With these data at your fingertips, you can craft a more accurate analysis of your Return on Effort, putting your SaaS company on a path to more efficient operations and brighter growth prospects.

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Learnings for SaaS

In the rapidly evolving world of SaaS businesses, it's crucial to understand and apply the concept of RoE efficiently.

Success in the SaaS realm isn't just about offering exceptional software solutions. It also entails the precision of your resource allocation, the robustness of your strategies, and the amount of grit, heart, and intellect you pour into your endeavors—all factors contained within the RoE metric.

Optimizing Customer Acquisition Cost (CAC)

One key learning derived from the RoE framework is the utmost significance of professionalizing your Customer Acquisition Cost (CAC). This quantifies how much your company spends to acquire a new customer - a crucial element in calculating your return on effort. Paying excessive amounts to win customers implies a lowered RoE, while a reduced CAC ups your RoE.

Utilizing Sales Analytics Tools

Proper use of sales analytics tools, such as HockeyStack, can shed valuable insights into your sales processes. With this data, strive to optimize each stage of your sales funnel - ultimately, reducing your CAC and improving your overall RoE.

Understanding the Relationship between CAC and Lifetime Value (LTV)

The close association between CAC and Lifetime Value (LTV) of customers is another key lesson. While it's essential to bring down your CAC, it shouldn't be at the expense of the customer lifespan. Ensure your efforts are balanced—geared towards reducing costs but not compromising the value and satisfaction of your customers.

Thus, essentially, the RoE concept emphasizes the importance of driving value with every bit of effort in your SaaS venture. Grasping how each element contributes to increase or decrease your RoE is a step towards a more profitable and sustainable SaaS enterprise.

Actionable Insights

Lastly, reflect on your RoE achievements periodically. Use these learnings to obtain insights that can make your strategies more fruitful down the road. Continual learning and adapting to insights obtained is a significant part of the RoE philosophy.

Examples to Understand Better

Example 1: A Thriving E-commerce Company

Consider an e-commerce company that boasts an impressively low CAC of just $10. They achieve an average order value of $25 on each product, taking into account a 100% markup. More impressively, they meticulously take the Customer Lifetime Value (CLV) into account while optimizing their business strategies.

Relying on RoE, they have: Balanced their effort between acquiring new clients and nurturing existing ones towards higher LTV, leading to larger profits. In addition, with a low CAC, they have efficiently enhanced the output of their marketing team, improving RoE tremendously.

Example 2: An Online CRM Software Company

The second example to note is an online Customer Relationship Management (CRM) software company. With their expert sales support team and an astute distribution strategy that keeps distribution costs low, they have carved a niche for themselves in the SaaS world. In essence, their strength lies in their unparalleled customer relationships and smooth software deployment.

Applying RoE enabled them to: Deploy efforts precisely in areas rendering high returns. Focused efforts on sales support, customer interactions, and efficient distribution strategy led to a low CAC, high customer retention and therefore a high RoE. Their commitment to 'return on effort' led to repeated successes in their strategy planning.

Both cases deliver a clear message: when a SaaS company strategically applies its resources with a clear understanding and estimation of 'effort', guided by RoE, the road to success becomes considerably easier to navigate. So, are you ready to harness the power of 'Return on Effort'?

Frequently Asked Questions

Now that we have a clear understanding of return on effort (RoE) and its deep-seated importance in the SaaS industry, let's resolve some common queries that could come to mind.

Q1: How does return on effort differ from return on investment (ROI)?

ROI is a traditional financial measure based on the net profit and cost of investment. On the other hand, RoE measures the value generated relative to the amount of effort put in. While ROI revolves around numeric value, RoE looks at the non-monetary aspects like time spent or skills deployed, etc.

Q2: Can I apply RoE to other business types outside of SaaS?

Yes. While we've explored RoE primarily in the context of a SaaS company, its basic principles are universal and can be adapted to other types of businesses. Any operation that involves time, cost, and effort can use RoE to gauge the value generated from different activities and make more informed strategic decisions.

Q3: Can I use RoE to assess marketing efforts like SEO and advertising?

Absolutely. In fact, RoE is ideal for assessing the value generated from activities like SEO, Google Ads, Facebook advertising, and so on. By comparing the results achieved with the effort put in, you can gain eye-opening insights into the efficiency and effectiveness of your marketing strategies.

Q4: Does RoE factor in the concept of customer lifetime value (LTV)?

While RoE focuses on inputs like effort and cost, it can be effectively combined with concepts like LTV to give a more holistic view of your business performance. LTV refers to the total revenue you can expect from a customer over the course of your relationship. By calculating LTV and comparing it with your customer acquisition cost (CAC), you can better understand the real return on your marketing efforts.

Q5: Can RoE help with optimizing costs in my business?

Yes, indeed! RoE is a powerful tool for identifying areas where costs might be out of proportion to the value being generated. By streamlining these areas and focusing on activities with high RoE, you can improve your overall efficiency and profitability.

Remember that understanding and implementing RoE effectively is a journey, not a destination. As with any metric, the key is to use it as part of a broader strategy and regularly review and adjust based on your learnings.

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