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How to Calculate Customer Acquisition Cost for a SaaS Startup

Before analytics tools allowed companies to see exactly where their customers were coming from, understanding advertising investments and how they performed was more or less a guessing game.

Customer acquisition cost (CAC) explained for SaaS startups

Did a new buyer come in through a particular promotion? No way to tell! Was an expensive ad buy really worth it in terms of ROI? Who knows! Let’s throw more money at our ideas and hope they work.

Tracking and analytics help all types of businesses answer the age-old question: What am I getting back from what I'm putting in?

SaaS companies that make the majority of their connections with customers in digital channels can get even more detailed data on sales and marketing initiatives, and that's a big advantage for scaling a business. When you know which marketing and sales efforts are attracting customers, you can figure out precisely how much you're spending to drive new business. That insight lets you put the right resources towards your most cost-effective campaigns to hit your growth targets.

Looking at marketing and sales expenses in aggregate is critical for growing a sustainable and scalable startup. In a SaaS business, customer acquisition cost, or CAC, helps assess the effectiveness of sales and marketing spend, and the overall health of the business.

What is customer acquisition cost (CAC)?

Customer acquisition cost (CAC) measures how much your business spends to win a new customer. It's a metric that is calculated within a specific time period, and it can be compared to historical results that span the same time frame, such as a quarter or one year.

SaaS CAC Calculation

CAC is calculated by dividing your total marketing and sales expenses (including personnel costs) in a given time period by the number of customers who bought your product during that same period.

CAC = (Total Marketing & Sales Expenses) / (Total New Customers)

For example, if you spent $5,000 on ad campaigns and acquired 50 new customers during a given year, your CAC for that year is $100.

Note that the maturity of your product and market will influence your CAC, which is a factor that you may want to take into account when analyzing this number. Companies that have just launched or have just expanded marketing into an area where people are less familiar with their industry or type of product will likely see higher CAC, though it should decrease over time.

What's a good CAC?

CAC tells you very little without context. Usually, reducing your CAC or achieving a CAC that's lower than competitors and industry benchmarks is a positive business marker — for a SaaS startup, it helps steer the business towards profitability and success. There are also scenarios where a SaaS business can benefit by increasing CAC.

To really understand what CAC says about your SaaS business, you also need to know how much a customer spends on average with your company once they're acquired, or their lifetime value (LTV).

Let's compare similar CAC results for two different SaaS businesses:

SaaS Business 1

An enterprise B2B SaaS solution costs a new customer a minimum of $45,000 a year. Business 1 will probably be quite happy with a CAC of $100, if on average customers stick around for 5 years.

SaaS Business 2

A different B2B SaaS product mainly serves small and medium businesses who pay a monthly subscription of $10. While they serve a much larger customer base than Business 1, a customer usually cancels after a year. A $100 CAC for $120 of annual revenue could easily put Business 2 in financial trouble.

The impact of LTV on CAC

If Business 2 is acquiring more customers who are extremely loyal, then that $100 CAC starts to look better and better actually. A customer who starts with a $10 a month subscription, but increases services over time and remains a customer for years has a much higher lifetime value, and that can justify $100 to acquire them.

Another metric for analyzing sales and marketing spend in a SaaS startup is CAC payback, which will tell you if you're growing fast enough to justify your sales and marketing spend.

3 Ways to Optimize SaaS CAC

1. Don't "spray and pray"

Even in a cookieless world, your B2B SaaS startup can get a good understanding of the marketing efforts and channels that are reaching the right people and influencing new business deals. Knowing this data allows you to double down on your most effective initiatives and when you target your highest value audiences in your best performing channels, you stand to improve your CAC significantly. Additionally, getting your lower-cost channels to do the heavy-lifting in your marketing and sales funnel will effectively optimize your overall CAC.

2. Reduce funnel friction

Another way to improve your CAC is to optimize for conversions on your website. Perform A/B testing on your landing pages, make conversions as easy as possible, mind your site speed, optimize for mobile, and obsess over everything that influences your visitors' experiences. You want prospective buyers who come to your website to trust your business and to accomplish whatever they want to do without any effort. Get creative with how you engage potential customers and make them feel better while they're there. For example, inspire shoppers to take action through well-designed product pages that speak their language, lead with the why not the what, and feature video to convince them they can't live another day without your solution.

3. Improve customer retention and upsell business

As mentioned earlier, when you increase customer LTV, your CAC can look more reasonable in context. So, you may also want to implement strategies for retaining loyal customers and expanding existing business to further reduce SaaS CAC. While this is rarely accomplished without some form of customer relationship management (CRM), you don't need a multi-person sales team armed with an expensive cloud-based system and all the licenses that go with it. Consider a simpler contact tracking system paired with email automation, or some variation that works for your team.

Ultimately, a keen understanding of your best customers and where they spend time online can put you ahead in the customer acquisition game — aim to use the right messages at the right time to not only win new customers as cheaply as you can but also get as much value from them as long as you can.

 SaaS Startup Growth Metrics: 8 KPIs to Show Investors Your Business is Primed for Success.

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