CPAAS: A Core Metric at Volition

Introduction

In today’s macro-environment, the landscape that founders have to navigate through is complex, to say the least. While investors are demanding a drive toward profitability, the reality is that continuing to invest in growth responsibly is often the correct course of action. The question then becomes, what metrics should be used to analyze the health of a business while continuing to invest in growth? Below, I look forward to sharing a metric that has become standard at Volition – CPAAS. 

CPAAS

Contribution Profit After Advertising Spend (CPAAS) is the profit remaining after deducting advertising spend from contribution margin. Contribution margin is defined as revenue minus variable costs (costs associated with the production and fulfillment of an individual unit). 

Notably, contribution margin excludes fixed costs (equipment rent, executive salaries, etc.), enabling companies and investors to look at the unit-level profitability of a business. 

One of the shortcomings of contribution margin is that it does not take into account marketing expenses, as this historically is viewed as a fixed cost. At Volition, however, we view direct customer acquisition expenses as a critical component of the unit economics of a business. CPAAS allows us to go one step further by subtracting ad spend from contribution margin, thereby recategorizing certain aspects of marketing spend (typically direct customer acquisition expenses) as a variable cost. 

Here is a quick visual displaying the difference between contribution margin and CPAAS. 

• Contribution Margin = Revenue – Variable Costs 
• CPAAS = Revenue – Variable Costs – Advertising Spend 

Why CPAAS?

Often when businesses attempt a pivot to profitability, it can lead to flat or declining revenues. While this transition is occurring, companies still need to be accountable to their board and investors and show progress. Founders often lack the metrics to demonstrate the improvements being made in terms of revenue efficiency. CPAAS is a way to illustrate to stakeholders that even while revenue might be down, the underlying fundamentals of the business can be improving quite dramatically – even if the business has yet to achieve bottom-line, or EBITDA, profit.

Example

Company A is a direct-to-consumer e-commerce company that was previously operating with a “grow at all costs” mentality. Recently, management and the board aligned on a more sustainable growth strategy, one that balances growth and profitability. As a result, the Company pulled back meaningfully on total advertising spend, focusing only on its most efficient acquisition channels, which resulted in a 10% year-over-year decline in revenue.