Before online tools allowed companies to see exactly where their customers were coming from, advertising was a big old guessing game.
Was a new buyer drawn in by 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 at the wall and hope that it sticks.
Tracking tools helped all types of businesses in the modern era avoid groping for answers in the dark, and they’re especially effective for SaaS companies that operate almost entirely online. When you can see which marketing and sales efforts are drawing in your new customers, you can figure out precisely how much you're spending to drive new business. That insight lets you put more resources towards your most cost-effective efforts to grow.
Looking at marketing and sales expenses in aggregate is critical for growing a sustainable SaaS businesses. Customer acquisition cost, or CAC, is used to assess the health of the business and helps startups attract financial investors.
Customer Acquisition Cost (CAC) Formula
You can calculate your CAC by dividing all your marketing and sales expenses in a given time period by the number of customers who bought your product during that time.
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.
Analyzing SaaS 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 help 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 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 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.
Breaking down 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.
3 Ways to Improve SaaS Customer Acquisition Costs
1. Don't "spray and pray"
SaaS companies have the advantage of acquiring most of their customers through digital channels, enabling them to closely track which marketing efforts or channels are drawing buyers in most effectively and affordably. Knowing this data allows you to double down on those initiatives with lower acquisition costs, thereby lowering your overall CAC. By targeting the highest value audiences in the best performing channels, you stand to improve your CAC significantly.
2. Reduce funnel friction
Another way of improving your CAC is making conversion on your website more effective. Perform A/B testing on various alternatives for your landing page, checkout system, site speed, mobile optimization, and any other factors that influence your visitors' experiences. You want to make it as easy as possible for those who come to your site to become paying customers. Get creative with ways to make potential customers happy or engaged, such as informative, well-designed product pages with video, or limited free trial offers.
3. Improve customer retention and upsell business
Increasing your LTV, which will make your CAC more reasonable in context, is another way to effectively reduce your CAC. This is rarely accomplished without some form of customer relationship management (CRM), but that doesn't mean you need a multi-person sales team armed with an expensive cloud-based system. Consider a simpler contact-tracking system paired with email automation, or some variation that works for your team.
To further promote customer retention and loyalty, use engaging blogs, podcasts, educational content, customer events, or other techniques that keep customers coming back.
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.
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